Vietnam: Risk Assessment
Country Risk Rating
Business Climate Rating
- Quality and inexpensive labor
- Strong agricultural potential and natural resources
- Development strategy based on openness, upscaling and diversification of the economy
- Economy not affected by Chinese slowdown
- Shortcomings in the business climate
- Lack of infrastructure
- Reform of the incomplete public sector
- Increased inequality
- Fragile banking system
- Publicly inefficient and heavily indebted enterprises
Growth Will Remain Solid
Growth is likely to remain robust in 2018, supported by domestic demand and exports of manufactured goods. Export sectors will likely continue to benefit from FDI, the country’s participation in a growing number of free trade agreements, and offshoring from China. The country is also moving its exports upmarket, including electronics, with the production of some parts for smartphones and tablets (16% of total exports). In addition, the textile sector is set to remain dynamic due to low labor costs, despite an expected increase in wages. The good health of the manufacturing sector will benefit the construction sector, as well as the increasing urbanization of the population and the rapid development of tourism. The latter should also benefit from the implementation of an electronic visa system in 2017 but will remain limited by infrastructure deficiencies. Private investment will largely depend on FDI inflows, while public investment is still constrained by funding limitations. The agricultural and oil sectors are likely to be less dynamic, due to the reorientation of the economy and workers towards the manufacturing and service sectors.
Household consumption is expected to continue to grow, predominantly thanks to inflation control, wage growth, and expatriate remittances. In addition, the development of the middle class and the growth of household credit will support domestic demand.
Public Accounts Remain Poor
The budget deficit will likely remain high in 2018, and the public debt is set to continue to grow slightly, approaching the ceiling set by Vietnam’s parliament (65% of the GDP). It will remain vulnerable to currency risk, as it is largely denominated in foreign currencies (around 40%) – although this share is starting to decrease. Nevertheless, the privatization programme of public enterprises would gradually make it possible to clear margins of budgetary flexibility. The government is also counting on the influx of FDI to finance part of their infrastructure projects (notably in transport and energy), which are necessary for the country’s development. In addition, in July 2017, Prime Minister Nguyễn Xuân Phúc announced his desire to speed up the liberalization of the services, telecommunications, and finance sectors, by easing restrictions on foreign capital. New tax reforms are also envisaged, including the increase of VAT (from 10% to 12%) and tobacco taxes, as well as the reduction of corporate tax.
The current account surplus will probably remain steady in 2018. The dynamism of exports of manufactured goods should contribute to improving the trade balance, despite the concomitant rise in imports of intermediate goods. The income balance would remain heavily in deficit but offset, in part, by the increase in expatriate transfers, mainly from the United States. In addition, the services surplus would benefit from the growing influx of tourists.
Despite the growth in foreign exchange reserves, resulting from the current account surplus and FDI, they remain insufficient (two months of imports). The Vietnamese đông, whose exchange rate against the US dollar is managed by the central bank, will remain exposed to fluctuations in global risk aversion, particularly related to the tightening of US monetary policy. The banking system will likely remain fragile because it is not capitalized and heavily dollarised. The monetary policy should, therefore, be more restrictive in 2018, in order to contain inflation and credit risk, which still seems high (especially in construction), despite the creation of a defeasance structure. In addition, the high exposure of public banks to public companies constitutes an additional factor of fragility.
Growing Geopolitical Tensions
The sovereignty dispute between Vietnam and China over the China Sea will likely continue to weigh on diplomatic relations between the two countries. Since 2014, Vietnam has made multiple attempts at oil exploration in the region, before falling back under the pressure – sometimes military – of China. In July 2017, Vietnam began drilling in disputed waters in partnership with a Spanish company. China warned that it was ready to attack the facilities if they were not dismantled, leading to the end of the explorations. While military escalation seems unlikely, tensions between the two countries seem to have been revived. Vietnam will likely continue to strengthen its bonds with the United States, as well as with the main regional forces (Japan, India, and Australia). In addition, despite the withdrawal of the United States from the TPP (Trans-Pacific Partnership), the country should continue to strengthen its trade integration at both the multilateral and bilateral levels.
The Communist Party continues to control the entire political, economic and social life of the country. Governance constitutes a risk in terms of attractiveness for foreign investors, given the high level of corruption.