Vietnam: Risk Assessment
Country Risk Rating
Business Climate Rating
- Dynamic economy featuring one of the fastest growth rates of the region
- Development strategy based upon production upscaling and diversification
- Large labor pool and low labor costs
- Strong agricultural potential and good endowment of natural resources
- Potential benefactor of US-China trade war
- Shortcomings in the business climate, led by concerns surrounding data transparency and corruption perceptions
- Incomplete reforms of the public sector, with high level of indebtedness amongst SOEs and diminishing ROAs.
- Inadequate infrastructure levels
- Increasing inequalities
- Fragile banking system
Solid growth supported by trade diversion and strong FDI
Growth is expected to remain resilient in 2020, despite the global economic downturn and escalating trade tensions, thanks to accelerating supply-chain shifts into Vietnam and strong foreign direct investment. The economy has seen its labor force shift from agriculture to productive sectors (especially the manufacturing sector) in recent years, with rapid influx of factories relocating from China where labor costs are now higher as a result of a reduced demographic dividend. The burgeoning manufacturing sector has diversified beyond shoes, apparel, furniture and agriproducts to higher-value products like electronics in the recent decade. Moreover, government’s efforts to improve the investment environment, relatively low corporate tax regime (20%) and participation in multiple international trade agreements (ASEAN membership as well as FTAs with the EU, South Korea, and the CPTPP) have made the economy more attractive to foreign investors.
The escalating US-China trade war in 2019 will accelerate relocations of export-oriented manufacturing, notably electronics, from China to Vietnam, in order to circumvent tariffs and benefit from lower manufacturing costs. This will partly offset the negative impact of weakened demand from China and rising global trade protectionism. Foreign direct investment (FDI) dropped in 2019, but this was mainly due to the high base from 2018 when several major FDI projects were certified. FDI stay strong compared to other Asian countries in terms of GDP and are expected to remain solid in 2020. Domestic demand remains strong, thanks to the growing middle class, increasing wages and rising urbanization rates. Tourism remains robust, with Asians (mostly Koreans) making up the majority of foreign visitors despite declining Chinese arrivals due to their slowing economy.
Current account surplus to stabilize
The budget balance will likely continue to face some pressures in 2020, as progress on the SOE reform front – a big drain on public finances – has been slow. At the time of writing, only 30 out of a total of 127 SOEs were privatized, meaning this target for 2020 will most likely be missed. Nonetheless, it is expected that the government’s budget deficit target of 3.6% of GDP will be achieved, as for previous years. Public debt (% GDP) is expected to decline slightly, favored by robust economic growth and a contained budget deficit. While most of the public debt has medium or long-term maturity, around 40% of it is denominated in foreign currency, which exposes it to currency risk. That said, foreign exchange reserves hit a record high in 2019, doubling the level recorded three years ago.
The trade balance surplus is likely to narrow modestly, as weaker global demand on the back of trade tensions have put downward pressure on exports, partially offset by a shift in global value chains out of China and into Vietnam. However, this will take many years, which means the net impact may be negative in the short-term. On the other hand, imports are expected to remain robust, due to solid domestic investment and consumption demand. Vietnam enjoys a trade surplus, but its income account will remain in deficit in 2020 despite steady remittance inflows. Some risks going forward, in case Trump targets Vietnamese exports, as these are the key driver of the current account surplus. Vietnam’s trade surplus with the US widened by 43% in the first half of 2019 compared with a year ago. Vietnam has responded by pledging to import more US products.
Domestic stability, but geopolitical tensions
The Communist Party of Vietnam (CPV) maintains a unitary government that has centralized control over the state, media, and military. This stability can benefit the promotion of opening and reform policies that have enabled Vietnam to move up the ranks of the World Bank’s “Ease of Doing Business” Index, placing 69 out of 190 countries in 2019. Foreign investors are keen on measures that reduce corruption and improve the business environment, as the country still lags behind other regional peers in terms of corruption perceptions and data transparency. Geopolitical tensions are back on the table and could escalate further in 2020. In addition to global protectionism, tensions between Vietnam and China in the South China Sea have intensified. Further violations of Vietnam’s territorial waters under the UN Convention of Law On the Sea (UNCLOS) took place in August and September 2019. China has also restarted military exercises near the disputed Paracel Islands. Finally, Vietnam became part of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) that came into force in January 2019, adding to Vietnam’s already extensive list of FTAs.