Country Risk Analysis - Vietnam

8/8/2019 Country Risk Analysis - Vietnam

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Vietnam Risk Summary2010 -


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Phase I - The structural environment

General background

Vietnam, is a one-party Communist state. It has one of south-east Asia's fastest-growing

economies.

Full name: Socialist Republic of Vietnam Population: 88.1 million (Source : UN, 2009) Capital: Hano Largest city: Ho Chi Minh City (formerly Saigon) Major language: Vietnamese Major religion & ethnic groups: Buddhism (major religion, with ten million followers),

Atheists, Catholics (5 million followers).

Life expectancy: 72 years (men), 76 years (women) (Source: UN, 2009) Monetary unit: Dong (VND) - $1 = 18.000 dong (Source: Xe.comApril, 2010)Geographical location

Vietnam is located in Southeast Asia. It is approximately331,688 km2.

Vietnam is a country of tropical lowlands, hills, and denselyforested highlands, with level land covering no more than 20

% of the area.

The area is subject to frequent tropical monsoon and flooding.

Global political and economic facts

Vietnam is a one party system. Based on constitutional revisions in 1992, the president iselected by and from the National Assembly.

A program of liberal economic reforms dating back to the mid-1980s has led to a stronggrowth performance during the 1990s.

On the other hand, political reform has been slower to materialize, with the communistsmonopoly on power still firmly in place.

Corruption is perceived as widespread in the country: Transparency Internationals 2008Corruption Perceptions Index ranked Vietnam in the 123rd position out of 180 nations.


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International relations

Vietnam has reached out to the world since the early 1990s after decades of isolation. By

1995, the country joined the ASEAN.

Vietnam joined the WTO (World Trade Organization) in January 2007. The country became

a member of the UN (United Nation) Security Council in January 2008.

China: Vietnam was subjected to one thousand years of Chinese domination in what is now

northern Vietnam, ending in the 10th century. Since then, the relationships between those two

nations have been troubled by regional rivalry and border issues despite their common

communist background and association during the Vietnam War. The two nations fought a

brief border war in 1979, but have since worked to improve their economic cooperation

(China is now Vietnam's second-largest trading partner).

Cambodia: Bilateral relations between those two countries were for long deteriorated due to

the Cambodian-Vietnamese War (which occurred between 1976 and1990). Both nations have

since begun to increase their economic cooperation (Today Vietnam is Cambodia's third-

largest export market).

France: France ruled Vietnam as a colony from 1887 to 1954. Vietnam is now an active

member of French OIF (French speaking international organization) and French

government keep providing scientific and medical support to Vietnam.

United States of America: U.S. relations with Vietnam have become increasingly

cooperative and broad-based in the years since political normalization which begun in 1994.

Japan : Modern relations between the two countries are based on Vietnam's developing

economy and Japan's role as an investor and foreign aid donor. Japan is the single biggest

country donor to Vietnam. It has pledged $US890 million in aid for the country in 2007, or

6.5 percent higher than the 2006 level of $US835.6 million.

Key economic indicators:(Source: APEC, Asia Pacific Economic Cooperation, 2008)

GDP (2008): US $258.1 billion. Real growth rate: 6.23% (2008); 3.9% (the first 6 months of 2009 year-on-year). Per capita income (2008): $1,024. Inflation rate (January 2009): 17.48% year-on-year. (Has felt to 8.2% by 2010). External debt (2008): 29.8% of GDP, $21.8 billion. Natural resources: Coal, crude oil, zinc, copper, silver, gold, manganese, iron.


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Agriculture, forestry, and fisheries (21.99% of GDP, 2008): Principal products--rice, coffee,

cashews, maize, pepper (spice), sweet potato, pork, peanut, cotton, plus extensive aquaculture

of both fish and shellfish species.

Industry and construction (39.86% of GDP, 2008): Principal types: mining andquarrying, manufacturing, electricity, gas, water supply, cement, phosphate, and steel.

Services: (38.10% of GDP, 2008): Principal types--tourism, wholesale and retail, repair ofvehicles and personal goods, hotel and restaurant, transport storage, telecommunications.

Exports: $62.9 billion (2008) /Imports: $80.4 billion (2008)

Phase IIThe human environment

Demographic data

Vietnams population experienced rapid growth in the decade following reunification in 1975.

During the 1980s, roughly two-fifths of the population was under age 15. Toward the end of

the decade, however, birth rates started to decline, dropping from well above to notably below

the world average over the next 20 years. While life expectancy simultaneously increased by

nearly 15 years over that period. As a consequence, the median age of Vietnams population

has been rising steadily. (Source : Encyclopedia Britannica).

The rate of growth of

Vietnam's population

has been slowing

dramatically. On the

other hand, a youngage structure and future

increases in the number

of women of

reproductive age will

result in significant

potential for population

growth, which remains

far from being over.


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Some detailed data :

- Median age : 27 years old. It still has a young population compared to a country likeJapan which currently equals to 44.2 years.

- Fertility rate : 1.98 children born/woman (worldwide rank is 142, Source:Indexmundi.com). The population growth tends to decrease : It was around 3.3

between 1990-1995 (Source: Human development report, 2009).

Urbanization

Vietnam is at the early stages of a historic transition from a primarily rural economy to a

primarily urban economy. But Vietnams cities already account for about 70% of total

national economic production. And Halong city is reported to be growing at about 12 % per

year, Ho Chi Min City and Hanoi about 7 % per year. (Source : Worldbank.org, 2007).

Vietnams main concerns about

recent urbanization phenomenon are :

- A poor urban infrastructure has not

satisfy urban development standard.

- An imbalance of spatial structure of

population distribution.

- An incomprehensive perception in

regard to urbanization.

- And weak skills of labor force

within cities.

Labor force

Unemployment grew during the 1990s to an estimated 25% in 1995 (Source: Encyclopedia of

the Nations). This unemployed workforce could be turned into a resource for growth in labor-

intensive manufacturing and also helped to strengthen wages competitiveness.

- Total work force: 43.87 million (Source : CIA world fact Book, 2009) - Worldwide rank: 13.

- By sectors : Agriculture: 51.8%, Industry: 15.4%, Services: 32.7% (Source: CIA, 2009)

- Unemployment rate : 2.9% (Source: CIA, 2009).


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Education

Nearly 94% of the population aged 15 years and over is literate. English study is obligatory in

most schools and school enrollment is among the highest in the world. However, a huge gap

still exists in primary school enrollment between the cities and rural parts (Source:

Vietnamese Ministry of Education and Training, 2007).

Wealth, inequality and redistribution

The recent tremendous growth has generated increases in income inequality which, by some

measures, give to Vietnam one of the most unequal income distributions (highest income

GINI 1 coefficients) in Southeast Asia within 10 years. (Source: Is the Distribution of

Education in Vietnam a Significant Policy Tool for Self Reliance? B. Holsinger 2007).

Nonetheless, income gaps are widening because Vietnam is transiting from being an

agricultural economy to a manufacturing and services based one.

Human Development Index of Vietnam is 0.725. Between 1985 and 2009 Viet Nam's HDI

rose by 1.16%. (Source: UNDP, 2010)

Phase IIIThe political risk

Since 1976, Vietnam is dominated by Communist Party which is today led by Nguyn Minh

Trit2.

(Source of the image: AMB Country Risk Report, 2009).

- High degree of corruption. In 2009, Transparency

International has ranked Vietnam 120 of 180 countries.

- Vietnam has one of the most complicated tax-system

among ASEAN countries. (Source: Center of the Study of

Emerging Market, 2009). Unpredictable taxes and

governments policy is seen as a threat for long-term investment in Vietnam.

1GINI coefficient is commonly used as a measure of inequality of income or wealth. GINI index for Vietnam

between 1992 and 2007 is 37.8 which means that gap in income is wide between the richest and poorest in

Vietnam.2He was elected by the National Assembly of Vietnam with 464 votes (94.12%) on June 27, 2006. He was

formerly the head of the Communist Party of Vietnam.


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However, according to the Global Peace Index ranking, Vietnam is experiencing a

sustainable stability since the end of the Vietnam War in 1976. And the country is currently

ranked 39. In addition, the Doi Moi (which could be translated into Renewal) process,

which was initiated by the Communist Party of Vietnam (CPV) in 1986, has brought more

political openness and helped Vietnam to obtain its membership to the World Trade

Organization (WTO) in 2007.

Phase IVMacroeconomicThe real sector

(Source: General

Statistic of Vietnam,2008).

Over the past 20 years,

the country has

experienced a rapid

growth of its GDP. It

now equals to $258.1

billion in PPP3.

The 1997 Asian financial crisis highlighted the volatility of Vietnam's export-oriented

economy and the recent financial crisis has affected the countrys GDP and increased

unemployment from 2.3% in 2007 to 4.7% in 2008.

Supply Side

According to a survey conducted by the Asian Business Council, Vietnam ranked third for

Foreign Direct Investment (FDI) attraction among Asian nations in the 2007-2009 period,

after China and India. In 2009, total attracted FDI had reached $21.5 billion. The United

States led 43 countries and territories that invested in Vietnam. Tourism and service sectors

of Vietnam have become the most attractive fields for foreign investors with investment of

3PPP : Purchasing Power Parity. PPP takes into account the relative cost of living and the inflation rates of the

countries, rather than using just exchange rates which may distort the real differences in income.


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about 8.7 billion U.S. dollars. The real estate sector ranks second. The third is the

manufacturing sector. (Source : Xinhua, Nov. 2009).

Globally, the industrial sector contributes the most to the countrys GDP. Agriculture

contributes 19% of the countrys GDP, while industry brings in around 42.6%. However,

Vietnam remains a predominantly rural country4.

Small- and medium-sized enterprises (SMEs) have experienced exceptional growth,

especially since 2000 to date when the Enterprise Law was promulgated. Nonetheless,

SMEs remain weak in terms of internal and external networking, competitiveness,

innovativeness, human resource, and readiness to globalization. Indeed, in industries such as

electricity, aviation and telecommunications, state-owned companies still have powerful

monopolies, with a market share of at least 80%. (Source: The Entrepreneurial Role of the

State and SME Growth in Vietnam, 2009).

Demand side

Even if private consumption has decreased and (foreign) investment will be paused due to

lack of capital and negative expectations Furthermore, Vietnam's economy remain more

driven by private consumption than China.

(Source :

Economist

Intelligence

Unit, 2009)

Public investment will accelerate as the government spends heavily on infrastructure

development.

4Half of the labor force is effectively working for agricultural sector. (Source: CIA World fact Book, 2009).


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Phase VEconomic policies

A long-term wave of economic reform started in 1986, when the government approved the

Doi Moi. It introduced a transition from a centrally planned economy to a "market economy

with socialist direction" that is often referred as market socialism.

(Source: Goldman Sachs, 2009)

This opening up to

globalization helps Vietnam to

stabilize its growth at a high

level despite the collapse of

the Soviet Union 5 and the

Asian financial crisis which

aroused during the 1990s.

The Government budget

Vietnams fiscal deficit amounted 8.7 % of its 2009 GDP. (Source: Forbes.com, 2009).

Revenues fell, in line with the slowdown in economic activity, lower oil prices and various

tax breaks. Meanwhile, spending increased substantially because of stimulus expenditure

measures (to compensate collapse of its exports) and government commitments to implement

a viable social welfare system. (Source: Vietnam Chamber of Commerce and industry, 2009).

This budget deficit is relatively high compared to other countries in the region and this is

reducing the room for the fiscal stimulus that is needed nowadays.

(Source: Asian Development Bank, 2007).

5After years of covering 25 to 30 % of its state budget with foreign aid, Vietnam, in 1991, had to make do with

only 5 % from this source.


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The Asian Development Bank has already given Vietnam a preferential loan worth US $500

million and also an additional US $500 million loan is expected from the Government of

Japan to support the Vietnams State budget.

The banking system

Even if the Vietnamese banking sector has remained relatively isolated from the global

financial tumult and is still relatively closed to foreign participation, it is fairly weak.

Vietnamese banks suffer from low public confidence, regulatory and managerial weakness,

high levels of non-performing loans6, non-compliance with the Basel capital standards7, and

the absence of international auditing. (Source: Country report Vietnam - Rabobank, 2009)

The Standard & Poors gives a rate ofBB+/Negative/B to the Vietnamese banking industry,

while the Economist Intelligence Unit rates CCC the Vietnam banking sector risk.

On the positive side, the State Bank of Vietnam 8 will keep reforming the banking sector, with

the aim of creating a banking sector dominated by a small number of strong banks, while it

will continue to support the liquidity and solvency of the system.

Inflation

Nonetheless, there is still an excess of liquidity in the banking system and the government

continue to fueled the economy with a lot of credits.

This can be a good strategy to maintain high

growth rate reckoned accordingly to the five-

years Plan set by the VCP, but with so much

money being funneled into the economy, many

investors fear a return of inflation, which

reached 28% in mid-2008.

Vietnam inflation rate is likely to amount 10% this year (Source: Bloomberg.com, 2010).

6A non-performing loan is a loan that is in default or close to being in default. But Vietnam doesn't calculate

bad-debt rates according to international standards. Fitch Ratings recently estimated that NPL may have been

as high as 13% of total loans at the end of 2008.7

The purpose of Basel II, is to create an international standard which can help protect the internationalfinancial system from the types of problems that might arise such as series of banks collapse8

The State Bank of Vietnam is the central bank of Vietnam.


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Exchange rate

Vietnam allow its currency to adjust in value in foreign exchange (Forex) markets so long as

the fluctuations in value do not violate some other economic policy goals (such as inflation

limits). The government has adopted a type of managed float known as a crawling peg9.

(Source: Congressional Research Service, 2009).But Vietnam has a de facto currency peg to

the Dollar.

Phase VI : External accounts and foreign debt

(Source: Economist Intelligence Unit,

2009).

Vietnams major exports include oil,

marine products, rice, coffee, tea and

shoes. Its major imports include

machinery and equipment, petroleum

products, fertilizer, steel products,cotton, grain, cement and motorcycles

Despite its healthy growth in exports, Vietnam consistently recorded a trade deficit since

2000. In fact, the current account deficit mainly result from a trade deficit. However it

remains manageable, with strong inflows of remittances and tourism receipts.

The countrys external debt came down from $21.9 billion in 2006 to $21.8 billion in 2007.

(Source: US Department of State, 2008). It represents 45% of GDP and the government is

willing to keep it below 50 % in the medium term.

9This exchange rate regime usually seen as a part of fixed exchange rate regimes which allows depreciation or

appreciation in an exchange rate gradually.


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Risk Summary

Categorization DetailsOccurrence

Political Arrest of dissent, Pro-democracy movements, Land seizures could lead to

civil unrest.

LOW

Social More strikes than before. The rising power of the labor unions is going to

dent the credibility of the country as a viable destination for the FDI.

Income inequalities are increasing and there is huge gap between urban

and rural areas.

MODERATE

Legal Absence of the rule of law. Foreign investors and SMEs are at the mercy

of party officials. This encourages corruption. Respect of the IPR are not

guaranteed. Globally, there is a weak freedom of investment and financial.

HIGH

Economic FDI could gradually shift from Vietnam to lower-wages destinations (ex:

Laos). Vietnam is easily affected by crisis. The public debt is likely to

grow and half of it is denominated in foreign currency, which makes it

vulnerable to exchange rate risk. Sovereign default risk increases in

consequence.

MODERATE

Financial & Banking

system

The lending spree could soar bad debt problems in the banking sector. It

could also bring-back inflation. These measures could led into an

increasing current account deficit. Vietnamese banks are very vulnerableto exchange rate risk as a result of their extensive dollarization.

HIGH

Environmental

(Geography)

Flood risk which can severely hit harvests and agricultural sector as well

as poor urban areas.

LOW

Demographic Despite a lower birth rate there is still a large number of young people who

will need education and employment. Over the same period, the population

ages 60 and older will increase dramatically, creating greater needs for

social security and health care services. That could deteriorate the

countrys fiscal position.

MODERATE


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Scenarios

1. Worst scenarioFirstly, we can imagine an important social crises due to the increasing gap between riches

and poor. The rural part will intensely suffer from climate change (floods for instance) which

may particularly affect low-lying areas such as Mekong Delta, the first producer of the

nations rice crop. Secondly, a too expansionist macro-economic policies will significantly

weaken the public finance already severely hit by inflation and unemployment.

Thirdly, highly necessary banking industry will failed due to an endemic corruption and

opacity in this sector. All in all, this elements will shift FDI from Vietnam to more attractive

spot.

1. Positive scenarioWe can estimate that a going-strong Vietnamese economy would result as Chinas. The

economical policy will be continuously launching stimulus packages in order to develop on a

further extend the infrastructure such as telecom and 3G network. That will strengthen

domestic consumption which is important to have a gradual relay for an economy which relies

strongly on exportations and maintain a high level of FDI. This will guarantee the stability of

the political regime and add further liberal features in a government. The Vietnamese

currency pegged to the dollar will have to become unfixed to the dollar in order to adjust the

economy more easily to the level of inflation. A more rigorous economical policy will have to

be implemented in order to mitigate the effect the level of inflation.

2. Moderated scenarioThailand economical features could best describe how Vietnam could become. The Thai

economy is forecasted to grow at the range of 4 - 5 % per year. Private consumption is

projected to increase by 3-4 % per year as a result of higher real income of households due to

decreasing inflationary pressure.

Globally, we can say that the main risk in a moderate scenario will be that in the medium term,

the level of inflation will impact the economical growth the country as no serious regulations

would have been taken from the Vietnamese government. The result of this will be the

launching of aftermath policy designed to decrease inflation by raising the level of interest

rate.


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Main Sources

- Rating agencies: Standard & Poors, Fitch, Moodys, AMB, Goldman Sachs andCOFACE.

- Analysis & Comments : Encyclopaedia Britannica, Encyclopaedia of the Nations,Wikipedia, Xinhua, Forbes, Bloomberg, World bank, United Nations Development

Program, Congressional Research Service of United States of America, US

Department of State.

- General Statistics & Data: Vietnam Chamber of Commerce and industry,Indexmundi.com, Centre of the Study of Emerging Market, CIA World fact Book,

General Statistic of Vietnam, The State Bank of Vietnam, Asian Development Bank,

Vietnamese Ministry of Education and Training, Economist Intelligence Unit, Asia

Pacific Economic Cooperation.

- Specific articles: The Entrepreneurial Role of the State and SME Growth in Vietnam- Thanh Hai Nguyen 2009,/ Is the Distribution of Education in Vietnam a

Significant Policy Tool for Self Reliance? B. Holsinger2007, /Climate Change

and Human Development in Viet Nam - Peter Chaudhry and Greet Ruysschaert

2008.

- General websites: Xe.com.

Country Risk Analysis - Vietnam

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