Vietnam: Risk Assessment
Country Risk Rating
Business Climate Rating
- Dynamic economy featuring one of the fastest growth rates in the region
- Development strategy based upon production upscaling and diversification from footwear, apparel, and furniture into electronics: manufacturing accounts for 17% of GDP
- Development of fish and crustacean production
- Large labor pool and low labor costs
- Strong agricultural potential and good endowment of natural resources
- Beneficiary of the U.S.-China trade war
- Shortcomings in the business climate, led by concerns surrounding data transparency and corruption perceptions
- Incomplete reforms of the public sector, with a high level of indebtedness amongst SOEs and diminishing ROAs.
- Inadequate infrastructure levels
- Increasing inequalities
- Fragile banking system
- Dependent on China’s supply chains
Growth will converge to pre-pandemic levels
Growth is expected to gain momentum in 2022, driven by ongoing recoveries in trading partners and domestic demand, but pandemic headwinds could linger at domestic and international levels. The government might extend restrictions if outbreaks persist. Consequently, this would continue to weigh on the manufacturing industry (17% of GDP) and agriculture supply chains through labor shortages. However, external demand should remain buoyant in 2022, primarily for textiles, garments, and electronics, as its key trading partners, China, the EU, and the U.S., recovered, and Vietnam is no longer threatened by punitive tariffs from the latter, who labeled Vietnam as a currency manipulator in 2020. Foreign Direct Investment (FDI) inflows barely recovered in the first nine months of 2021, as factories reduced production due to restrictions. However, it should bounce back as Vietnam remains attractive among foreign investors seeking diversification and moving out businesses from China. Tourism, which accounted for nearly 10% of GDP in 2019, has been hard-hit by the closure of international borders since March 2020. The sector should recover slowly in 2022 due to persisting travel restrictions in China (Zero COVID strategy) and cautiousness among Koreans. Domestic tourism should continue to partly offset the impact thanks to government incentives. Household consumption (69% of GDP in 2019) should gradually recover provided the restrictions are eased, especially on factories and workers: the unemployment rate reached records in the second part of 2021, standing at 2.9% in September 2021, and time would be needed to reabsorb it. While domestic demand recovers, inflation should reach the 4% target in 2022. Therefore, the SBV (the central bank) should maintain its policy rate or raise it back to pre-pandemic levels. Credit demand should bounce back in 2022 and will continue to benefit from credit relief measures until June 2022 through debt restructuring or lowering interest rates on existing loans. In contrast, non-performing loans are expected to rise in 2022.
Fiscal deficit still high, current account strengthened
The fiscal deficit is likely to remain relatively high as the impact of the COVID-19 outbreaks that developed in late 2021 could linger in 2022. Moreover, expenditures will increase as the government seeks to accelerate ongoing public infrastructure projects, impeded by containment measures in the construction sites. However, revenues, supported by growth momentum, should balance out a rise in expenditures. The public debt-to-GDP ratio is set to dip. However, the debt is still exposed to currency fluctuations as 40% is denominated in foreign currency.
The current account surplus is set to rebound, driven by a higher trade surplus and robust external demand. The country has benefited from foreign manufacturing relocations and should continue strengthening its export-driven economy, hence its trade balance. Imports should continue to enhance with the revival in consumption and investment demand. Furthermore, Vietnam is among the world’s top 10 remittance recipient countries. Its current account should also benefit from sustained remittance inflows (6% of GDP as of 2019) with the recovery in the primary sources (the U.S., Australia, and Canada). Foreign exchange reserves remain adequate, equalling 3.5 months of imports as of July 2021.
Towards further cooperation with China
The Communist Party of Vietnam (CPV) has maintained a unitary government and centralized control over the state, media, and military. The CPV re-elected Nguyen Phu Trong for a rare third five-year term as general secretary of the ruling Communist Party in early 2021. He will continue his current domestic agenda focusing on the anti-corruption campaign. He should also prioritize developing a new leader to be elected at the next party congress for a smooth transition, as the leader’s health has deteriorated since 2019. Externally, relations with China improved recently through trade facilitation between both socialist economies and a bilateral cooperation plan for the 2021-2025 period. The pandemic has also allowed Beijing to strengthen ties through its vaccine diplomacy amid pandemic-induced disruptions in Vietnam. China has pressured Vietnam to drop oil and gas projects from international oil companies in the South China Sea dispute. While the U.S. offered Vietnam its support to counter Beijing in the South China Sea, it is unlikely to accept it to maintain close relations with China.