By John Ruwitch
HANOI, May 3 (Reuters) – Vietnam reported economic growth
of 5.83 percent in the first quarter, but the southeast Asian
frontier market is seen as risky and opaque for investors.
Sovereign 5-year credit default swaps are trading at a
spread of around 245 basis points, or about 80 basis points
higher than those of Indonesia and the Philippines.
Following is a summary of key risks to watch in Vietnam:
* EXCHANGE RATE POLICY
Vietnam’s fixed exchange rate frequently causes economic
pressures to build. The central bank devalued the dong in
February for the fourth time since mid-2008 to relieve pressure
on the currency, and pumped money into the banking system
through open market operations. Since then, the gap between
unofficial and domestic interbank rates has remained narrow and
stable, a sign some pressure has been relieved and risk is
The government has taken a series of other steps to try to
regain control over the currency market, but in March Fitch put
Vietnam’s long-term foreign and local currency ratings on
negative watch. Fitch argued confidence in the currency was
weakening and there was a lack of transparency on economic
Some economists were puzzled by the timing of the Fitch
move, given that currency problems seemed to be abating. But
several risk areas remain, such as inflation and the trade
What to watch:
— Steps taken by the central bank to curb inflation and
bring the trade deficit under control. Most analysts expect an
orderly weakening of the currency in 2010.
— The gap between black market dollar/dong rates and
interbank rates — a key gauge of pressure on the currency.
* GOVERNMENT EFFECTIVENESS AND TRANSPARENCY
Lack of accountability and burdensome bureaucracy impact
the effectiveness of the government in formulating and
implementing policy. Economic reform and the restructuring of
inefficient state enterprises are vulnerable to being
undermined by entrenched interests and conservative elements in
a government more focused on security, particularly in the
months leading up to the Communist Party’s 11th National
Congress next January.
Analysts say there may be a degree of policy paralysis, or
at least conservatism, in the coming months as factions and
players jockey for position ahead of the congress in early
2011. Important leadership and policy changes generally only
happen at the congress, held every five years. Local party
branches hold individual congresses this year.
Another problem related to transparency is the quality and
quantity of economic data that the government makes public.
Economists say this could lead to miscalculations about the
health of the economy, and damage investor sentiment.
What to watch:
— Prime Minister Nguyen Tan Dung has embarked on a plan to
trim bureaucratic procedures, and foreign direct investors in
particular will watch how that plays out.
— Investors often list poor infrastructure as one of
Vietnam’s major barriers. The government’s ability to
coordinate swift, efficient development in this area after
pledges of record official development assistance is a key
— A crackdown on dissent led to a spike in what Western
diplomats and analysts saw as politically motivated court
convictions in recent months. This has reinvigorated talk in
Washington that Vietnam should be put back on the State
Department’s list of countries of particular concern over
religious freedom, which could carry sanctions, although such a
move is unlikely. Also, the U.S. Congress may adopt a human
rights resolution on Vietnam. These developments could hit
Corruption is endemic in Vietnam at all levels of
government, and acts as a major barrier to foreign investment.
The authorities had announced aggressive plans to fight
corruption, and encouraged the media to act as a watchdog, but
these efforts lost steam after several journalists were
detained for reporting on major scandals. Progress on
corruption will remain a key determinant of long-term
What to watch:
— Vietnam’s rank in corruption perceptions rankings. A
strong improvement or decline would influence long-term
investment. In Transparency International’s 2009 Corruption
Perceptions Index, Vietnam’s score was unchanged from the
previous year, giving it a ranking of 120 out of 180 countries.
* SOCIAL UNREST
Vietnam has seen a rising number of strikes, protests and
land disputes in recent years, periodically affecting foreign
businesses. Disturbances have erupted in rural areas due to
state expropriations of land and corruption by local officials.
A state newspaper quoted a planning ministry official as
saying in January that tough economic conditions this year
could lead to more strikes. There is no evidence for now,
though, that wider unrest is likely, or that there is any
imminent risk of the regime being challenged from below.
What to watch:
— Any sign that a broader national protest movement is
emerging out of local disputes. So far, this seems unlikely.
— Volatile coffee prices. This could lead to trouble in
the Central Highlands coffee belt where local sourcing agents
and exporters have defaulted or delayed shipments of 200,000
tonnes or so of beans. Unpaid farmers have attacked the home of
at least one buying agent.
— Territorial disputes in the South China Sea. This issue
is highly charged in Vietnam, where suspicion of China runs
high. Any move by China to assert sovereignty over disputed
islands in the South China Sea, or perceived weakness by
Vietnam on this issue, could galvanise broad-based support for
— The role of the Catholic church. Catholics have engaged
in periodic protests over church land taken over by the
government after 1954. The Catholic Church, while officially
shunning involvement in politics, has 6-7 million followers in
Vietnam and is well organised. Some priests have been outspoken
about human rights and democracy.