Worldbox Country Risk Climate – July 2024
Vietnam
Summary
| Overall Risk Score 22 (Stable)
Political risk: Stable 7/10 Economic risk: Stable 8/10 Commercial risk: Stable 7/10 The risk assessment of a country is made up of 3 components, being Political, Economic and Commercial. Each component is scored out of 10 with 1 being the highest risk and 10 the lowest. |
ESG Risk: 6/10 (Stable)*
*Environmental, social and governance (ESG) issues are becoming increasingly important to companies, investors and consumers in Southeast Asia. That is why we are now preparing a separate ESG score and section with our quarterly country risk reports. We explain how each country rates, looking at the E, S and G individually, and outline recent developments. |
Political Risk – Downgraded from 8 to 7
Vietnam is a one-party state ruled by the Communist Party of Vietnam (CPV). The CPV provides strategic direction and decides all major policy issues which the government then implements. The four most important positions in the country are CPV General Secretary, the most powerful position in Vietnam, State President, Prime Minister and National Assembly Chair.
General Party Secretary Nguyen Phu Trong is the most powerful man in the country. He was re-elected to the position of general-secretary of the Communist Party in January 2021, at the age of 76, for a rare third five-year term. Since taking office in 2011, Trong has built up a strong power base in the Communist Party.
Trong launched an anti-corruption campaign in 2016, known as “blazing furnace” that has claimed many politicians and businessmen. Some analysts argue that the corruption drive has simply been used by Trong to eliminate political opponents and consolidate his grip on power.
In March 2024, President Vo Van Thuong, once considered to be a close ally of Trong, became the latest high-profile victim of the “blazing furnace” campaign. He had held the position of president for just over a year, having replaced President Nguyen Xuan Phuc, who resigned (or more probably was forced from office) in January 2023. President Nguyen Xuan Phuc was also allegedly tainted by association with corruption scandals.
In the case of Vo Van Thuong, the BBC has reported that the allegations against him relate to corruption dating back more than a decade, “raising suspicions that there may be political motives behind the investigation”. The BBC speculated that the Minister of Public Security, To Lam, may have been behind the drive to oust Vo Van Thuong. To Lam stood against Thuong and lost the vote to become president. If it is true that To Lam was behind the ousting of Vo Van Thuong, Trong’s position is also likely weakened. The prospect of an internecine battle for supremacy within the CPV raises questions about the country’s long-term political stability, which is why we have downgraded the rating from 8 to 7.
Economic Risk – Stable at 8
Vietnam’s shift from a centrally planned to a market economy has transformed the country from one of the poorest in the world into one of its most dynamic. Between 2002 and 2022, GDP per capita increased 3.6 times, reaching almost US$3,700, according to the World Bank. It adds that poverty rates (US$3.65/day, 2017 PPP) declined from 14% in 2010 to 3.8% in 2020.
The country’s economic model has been built on attracting foreign investment to drive the transformation from agriculture to a modern economy based on manufacturing. Strong foreign investment and current-account surpluses have strengthened the external position.
An October 2023 report by the S&P rating agency identified five key drivers that are expected to continue to make Vietnam one of the fastest growing emerging markets in the Asian region.
Firstly, S&P said that Vietnam will continue to benefit from its relatively lower manufacturing wage costs relative to coastal Chinese provinces, where manufacturing wages have been rising rapidly over the past decade.
Secondly, the agency added that Vietnam has a relatively large, well-educated labour force compared to many other regional competitors in Southeast Asia, making it an attractive hub for manufacturing production by multinationals.
Thirdly, rapid growth in capital expenditure is expected, which the agency says reflects continued strong foreign direct investment (FDI) by foreign multinationals. Domestic infrastructure spending will also support growth. The government estimates that US$133 billion of new power infrastructure spending alone is required by 2030. The country has already been affected by severe power shortages as supply struggles to cope with surging demand. See our article for further insight.
S&P adds that fourthly Vietnam is benefiting from the fallout of the US-China trade war, as higher US tariffs on a wide range of Chinese exports have driven manufacturers to switch production of manufacturing exports away from China towards alternative manufacturing hubs in Asia.
The agency says that many multinationals have been diversifying their manufacturing supply chains during the past decade to reduce vulnerability to supply disruptions and geopolitical events. The COVID-19 pandemic reinforced this trend.
The importance of the trend among global tech firms to look beyond China to secure their supply chains, cut costs and open up new markets was highlighted in April during a visit to Vietnam by Apple CEO Tim Cook. Cook announced that Apple is planning to buy more components from Vietnam, having already spent almost US$16 billion through its supply chain in the country since 2019. Around 200,000 jobs have been created as a result.
Vietnam pulled in more than US$4.29 billion in FDI during the first two months of the year, up almost 39% from the same period in 2023, according to official data. Most of the new investment went into the processing and manufacturing sector.
Commercial Risk – Stable at 7
Businesses operating in Vietnam faces some significant challenges according to the US State Department’s 2023 Investment Climate report. These include widespread corruption, the entrenched position of state-owned enterprises (SOEs) in certain sectors, regulatory uncertainty in key sectors, a weak and opaque legal regime, poor enforcement of intellectual property rights, a shortage of skilled labour, restrictive labour practices, and slow government decision-making processes.
The report adds that due to a high reliance on inputs from China, Vietnamese manufacturing is vulnerable to forced labour risks in supply chains, though the government and industry are actively working to address these concerns.
Corruption is a significant challenge. However, progress does seem to be being made. Vietnam ranked in 83rd place out of 180 countries in Transparency International’s 2023 Corruption Perceptions Index, up from joint 104th in 2021.
The country ranks as the 59th freest in the 2024 Index of Economic Freedom from the Heritage Foundation. Its rating has increased by one point from last year, and Vietnam is ranked 11th out of 39 countries in the Asia-Pacific region.
The lack of adequate infrastructure provides significant challenges to operating in Vietnam. The country is making a huge investment in infrastructure: approximately 6% of GDP, compared with an ASEAN average of 2.3%, highlighting its commitment to growth. However, a significant gap remains between the current infrastructure and the requirements for sustained economic development. In March 2024, Prime Minister Pham Minh Chinh reassured foreign investors that there would be no repeat of last year’s power shortages for their factories, as Vietnam increases coal imports.
July Bulletin
Political Risk – Stable at 7
A leaked document from the CPV suggests the country’s leaders feel far from secure in their position. The document, known as Directive 24, was obtained by Project88, a Bangkok-based human rights organization focused on Vietnam, in February. References to the document in several CPV media outlets suggest that it is genuine.
Directive 24 was issued by the Politburo last July, and contains dire warnings about the threat posed to national security from “hostile and reactionary forces” brought to Vietnam through its growing international ties. It warns against allowing the appearance of “‘civil society’ alliances and networks, ‘independent trade unions,’ … [and] creating the premise for the formation of domestic political opposition groups”. The document also warns against allowing political organizations to mobilize people for “color revolutions” and “street revolutions” against the state, according to the Washington Post.
Directive 24 urges party officials at all levels to be rigorous in countering these influences. It warns that, for all Vietnam’s apparent economic successes, “security in the economy, finance, currency, foreign investment, energy, labour is not firm, there is a latent risk of foreign dependence, manipulation, and seizures of certain ‘sensitive areas’”.
While some analysts suggest the document heralds a new crackdown on opposition to the CPV, others believe the strong language used is simply intended to reassure hardliners that the CPV will not relax its grip on power anytime soon. In particular, those hardliners worry that Vietnam’s increased openness to foreign trade and investment will usher in political liberalization.
Directive 24, according to some, is simply intended to show that Vietnam’s leaders can maintain “the strict control they have long held over the political lives of their people, while at the same time exposing them to all the ideas and inspirations that may come from overseas, in the hope that these will keep the economic fires burning bright”, as the BBC says.
Economic Risk – Stable at 8
The economy grew by 5.66% in the first quarter of 2024 on an annual basis as exports boomed, despite higher shipping costs due to turmoil in the Red Sea. Growth in the January–March quarter was faster than the expansion of 3.41% in the corresponding period last year, but slower than the fourth-quarter growth of 6.72%. First-quarter numbers are generally lower because of festival holidays.
In its April 2024 Asian Development Outlook (ADO) report, the Asian Development Bank (ADB) maintained its earlier forecast for Vietnam’s economic growth this year. Vietnam’s economy is expected to achieve a growth rate of 6.0% in 2024 and 6.2% in 2025.
In December 2023, the Fitch ratings agency forecast medium-term growth of around 7%, citing Vietnam’s cost-competitiveness and educated workforce relative to peers. It added that entry into regional and global free-trade agreements bodes well for continued strong FDI inflows amid global supply-chain diversification.
In April 2024, the central bank said it was ready to immediately intervene in the foreign-exchange market in case of an adverse impact on the economy from currency moves. At the time of the remarks, the dong had weakened by 4.9% against the US dollar over the course of the year. The central bank is clearly worried about the impact on inflation of a weakening currency. Inflation picked up to 3.98% on an annual basis in February, spurred by rising prices for everyday items such as fuel and rice.
It is important to add a note on recent official economic figures. Nikkei Asia reported in June that skepticism about the statistics released by Vietnam’s central and local governments is spreading, “as gross domestic product and tourism figures show marked improvement despite poor business sentiment”.
The report added that:
“The country’s structural steel industry has been hit hard by plummeting demand from lack of investment and an economic slowdown. Production facilities have seen operating rates fall to about 30%, and steelmakers are in the red. In the capital Hanoi, new buildings that have been abandoned mid-construction are becoming a more common eyesore.”
Nikkei Asia also quoted a source at a Japanese trading house as saying, “business sentiment is worse than during the global financial crisis.”
Nikkei Asia cited official GDP figures for the second quarter showing the economy expanding by an annual 4.14%, surpassing 3.28% growth in the January to March period. The news agency quoted business sources as saying the figures seemed “odd”. Just before the government released the numbers, Standard Chartered forecast GDP growth of 1.5% for the April-June quarter.
Commercial Risk – Stable at 7
US officials are considering a request from Vietnam to be removed from a list of “nonmarket” economies, according to a report on the Voice of America (VoA). A removal would result in an upgrade of diplomatic relations between the two countries. Vietnam is on the list of 12 nations identified by the US as nonmarket economies because their economies are subject to strong state intervention. Other countries on the list include China and Russia.
Vietnam is believed to be keen to be removed from the list before the November US election, which could mean a return to power for Donald Trump. The former president threatened during his previous term as president to boost tariffs on Vietnam because of its large trade surplus with the United States. The US Department of Commerce is to issue a final decision by 26 July, 270 days after initiating the review.
The US is Vietnam’s most important export market, with two-way trade totalling more than US$125 billion in 2023. But according to the VoA, Washington has initiated more trade defence investigations – mainly anti-dumping investigations – with Vietnam than with any other country. Vietnam recorded 58 cases subject to US trade remedies as of August 2023, in which 26 were anti-dumping, according to the Vietnam Trade Office in the US.
However, last September, the two countries formally upgraded their diplomatic ties to a “comprehensive strategic partnership”, a symbolic yet highly important move that positions Vietnam as a destination for more US investment, including for critical technologies such as semiconductor chips.
Environmental, Social and Governance (ESG) – Stable at 6
The United Nations’ Sustainable Development Goals (SDGs) are recognised as a beneficial framework for responsible investment. The Sustainable Development Report from Cambridge University Press assesses the progress of all 193 UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Vietnam is ranked 55 out of 166 in the 2023 report with a score of 73.3.
Environment: According to the Intergovernmental Panel on Climate change, Vietnam is one of several countries most vulnerable to climate change. With 3,260 km of coastline, 2,860 rivers and 4,000 islands, Vietnam is dangerously exposed to flooding, typhoons, tsunamis and tropical storms. A recent catastrophe, ‘The 2020 Central Vietnam floods’ saw a death toll of 189 people and damage worth $1.57 billion. The floods were the result of seasonal monsoons and tropical cyclones.
Attempting to combat climate change, the Vietnamese Government has released plans to reach a net-zero emissions target by 2050. It hopes to increase the country’s renewable energy usage by 67.5%, and pledges to build no new coal-fired power stations post 2030. English-language newspaper, Viêt Nam News claims ‘Coal and gas thermal powers reach 42.7 per cent of energy provided, while turbines are 11.2 per cent and hydroelectric 27.4 per cent’, as of February 2023.
Social: The US State Department Human Rights report for 2022 outlines a number of human rights abuses. The Vietnamese government responded by saying the report contained “unobjective comments based on inaccurate information about the actual situation in Vietnam.”
In terms of worker’ rights, Vietnam adopted an amended Labour Code in January 2021. It is aimed at aligning labour rules with international labour standards asset out by the International Labour Organization.
Governance: Corporate governance is a relatively new concept in Vietnam. The government has taken important measures to improve its ownership and corporate governance frameworks for state-owned enterprises (SOEs), according to an OECD report published in 2022. SOEs account for one-third of GDP and dominate many of the sectors such as energy, transport, telecommunications and finance. The country’s SEC launched the Vietnam Corporate Governance Code of Best Practices in 2019 for the private sector. It draws upon the draws upon the G20/OECD Principles of Corporate Governance, the 2017 ASEAN Corporate Governance Scorecard, as well as the most recent corporate governance codes of countries around the world.
July Bulletin
Environmental, Social and Governance (ESG) – Stable at 6
According to a study by the Vietnam Business Forum (VBF), a policy dialogue platform between the Vietnamese government and the business community, more than half of all businesses in Vietnam are actively addressing the importance of employee well-being and social equity. The findings were published by Vietnam Briefing. The study also found that effective corporate governance structures are recognized as pivotal in ensuring ethical business practices, transparency, and accountability. Overall, around 80% of businesses already have an ESG strategy in place. These strategies are either developed by global headquarters or tailored locally.
Latest economic data
f – forecasts
* State Bank of Vietnam
** Statista
*** Worldbox Intelligence
**** Asian Development Bank
Source: International Monetary Fund, except where stated
Useful Links
https://www.transparency.org/en
https://www.imf.org/en/Countries/VNM
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