Vietnam Risk Summary –2010 -

Vietnam Risk Summary –2010 -

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: Hanoï
 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.com – April, 2010)

Geographical location
 Vietnam is located in Southeast Asia. It is approximately
331,688 km2.
 Vietnam is a country of tropical lowlands, hills, and densely
forested 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 is
elected by and from the National Assembly.
 A program of liberal economic reforms dating back to the mid-1980s has led to a strong
growth performance during the 1990s.
 On the other hand, political reform has been slower to materialize, with the communist‟s
monopoly on power still firmly in place.
 Corruption is perceived as widespread in the country: Transparency International‟s 2008
Corruption Perceptions Index ranked Vietnam in the 123rd position out of 180 nations.
Vietnam Risk Summary –2010 -

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.
Vietnam Risk Summary –2010 -

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 and
quarrying, manufacturing, electricity, gas, water supply, cement, phosphate, and steel.
 Services: (38.10% of GDP, 2008): Principal types--tourism, wholesale and retail, repair of
vehicles and personal goods, hotel and restaurant, transport storage, telecommunications.
 Exports: $62.9 billion (2008) / Imports: $80.4 billion (2008)

Phase II – The human environment

Demographic data
Vietnam‟s 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 Vietnam‟s 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 young
age 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.
Vietnam Risk Summary –2010 -

Some detailed data :

- Median age : 27 years old. It still has a young population compared to a country like
Japan 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 Vietnam‟s 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).

Vietnam’s 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).
Vietnam Risk Summary –2010 -

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 III – The political risk

Since 1976, Vietnam is dominated by Communist Party which is today led by Nguyễn Minh
Triết2.
(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
government‟s policy is seen as a threat for long-term investment in Vietnam.

1
GINI 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.
2
He 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.
Vietnam Risk Summary –2010 -

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 IV – Macroeconomic – The 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 country‟s 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

3
PPP : 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.
Vietnam Risk Summary –2010 -

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 country‟s GDP. Agriculture
contributes 19% of the country‟s 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.

4
Half of the labor force is effectively working for agricultural sector. (Source: CIA – World fact Book, 2009).
Vietnam Risk Summary –2010 -

Phase V – Economic 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
5
the Soviet Union and the
Asian financial crisis which
aroused during the 1990s.

The Government budget

Vietnam‟s 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).

5
After 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.
Vietnam Risk Summary –2010 -

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 Vietnam‟s 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 & Poor‟s gives a rate of BB+/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 Vietnam8 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).

6
A 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 international
financial system from the types of problems that might arise such as series of banks collapse
8
The State Bank of Vietnam is the central bank of Vietnam.
Vietnam Risk Summary –2010 -

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).
Vietnam’s 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 country‟s 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.

9
This exchange rate regime usually seen as a part of fixed exchange rate regimes which allows depreciation or
appreciation in an exchange rate gradually.
Vietnam Risk Summary –2010 -

Risk Summary

Categorization Details Occurrence

Political Arrest of dissent, Pro-democracy movements, Land seizures could lead to LOW
civil unrest.
Social More strikes than before. The rising power of the labor unions is going to MODERATE
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.
Legal Absence of the rule of law. Foreign investors and SMEs are at the mercy HIGH
of party officials. This encourages corruption. Respect of the IPR are not
guaranteed. Globally, there is a weak freedom of investment and financial.
Economic FDI could gradually shift from Vietnam to lower-wages destinations (ex: MODERATE
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.
Financial & Banking The lending spree could soar bad debt problems in the banking sector. It HIGH
system could also bring-back inflation. These measures could led into an
increasing current account deficit. Vietnamese banks are very vulnerable
to exchange rate risk as a result of their extensive dollarization.
Environmental Flood risk which can severely hit harvests and agricultural sector as well LOW
(Geography) as poor urban areas.
Demographic Despite a lower birth rate there is still a large number of young people who MODERATE
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
country‟s fiscal position.
Vietnam Risk Summary –2010 -

Scenarios
1. Worst scenario
Firstly, 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
nation‟s 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 scenario
We can estimate that a going-strong Vietnamese economy would result as China‟s. 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 scenario
Thailand 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.
Vietnam Risk Summary –2010 -

Main Sources
- Rating agencies: Standard & Poor‟s, Fitch, Moody‟s, AMB, Goldman Sachs and
COFACE.
- 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. Holsinger – 2007, /“Climate Change
and Human Development in Viet Nam” - Peter Chaudhry and Greet Ruysschaert –
2008.
- General websites: Xe.com.