Key political risks to watch in Vietnam

Posted on May 3, 2011

0


A shopper buys a vegetable in a market in Hanoi, Vietnam, Tuesday, May 27, 2008. Rising food and construction costs drove Vietnam's inflation rate to 25 percent in May, the highest rate in more than a decade. (AP Photo/Chitose Suzuki)

HANOI, May 3 (Reuters) – Vietnamese policymakers drove the economy to a robust 6.8 percent growth rate in 2010, but the cost was macroeconomic stability.

Since February they have been struggling to contain double-digit inflation and have had limited success in preventing the dong from depreciating further, but it will be several months before the economy gets back on an even keel.

All three major ratings agencies — Fitch, Moody’s and Standard & Poor’s — cut Vietnam’s credit ratings in 2010, highlighting economic risks and underscoring the problems in the southeast Asian country’s economy, once a favoured frontier investment. To a large extent, analysts say, policy is to blame.

Following is a summary of key risks to watch in Vietnam:

MACROECONOMIC POLICYMAKING

Vietnam’s economic policymaking is far from transparent and a big concern for many economists and investors.

After letting prices soar with little action other than anti-inflation rhetoric, and allowing the dong to languish outside its official trading band for more than four months, the authorities took their first step towards fixing the economy on Feb. 11 by devaluing the currency.

On Feb. 17 the State Bank of Vietnam raised the refinance rate by 200 basis points and, a few days later, it hiked another key interest rate. Some days after that, the prime minister officially endorsed a package of monetary and fiscal tightening measures to bring inflation down and right the listing economy.

Analysts say policy is now headed in the right direction.

What to watch:

— Follow-through on the raft of measures to bring down inflation and stabilise the economy.

— Credit default swap spreads. They peaked in late January and have come down significantly since, while remaining higher than those of regional peers like the Philippines and Indonesia.

— The gap between black market dollar/dong rates and interbank rates, which are a key gauge of pressure on the currency. After a crackdown on the black market and the imposition of a cap on dollar deposit rates, the gap has been largely eliminated for the time being.

— Steps taken by the authorities to cut the trade deficit.

GOVERNMENT EFFECTIVENESS ON KEY REFORMS

The Vietnamese leadership must move forward on certain key reforms to remain attractive to investors in the long term and boost the health of the economy, analysts say.

Bureaucratic red tape has been seen as Vietnam’s biggest non-tariff barrier because it stalls projects and hinders trade. An ambitious government initiative to cut a third of all administrative procedures has catalogued thousands upon thousands of them. It remains to be seen how the slash and burn stage of the campaign plays out.

The near-bankruptcy of state shipbuilder Vinashin cast a spotlight on reform of state-owned enterprises, and its heavy debt load triggered ratings downgrades for some banks.

Officials have called on state-owned companies to focus on their core activities; the “equitisation”, or partial privatisation, of such firms will also help put some space between government and businesses.

What to watch:

— Concrete measures to cut red tape.

— Further divestments by state firms from non-core businesses.

— Stepped-up “equitisation” of state firms via IPOs and strategic partnerships.

CORRUPTION AND INTERNATIONAL PERCEPTIONS

Corruption, endemic in Vietnam, is a major barrier to foreign investment. The authorities regularly reiterate a commitment to fighting graft and had encouraged the media to act as a watchdog, but journalists were arrested in 2008 for reporting on major scandals.

In Transparency International’s 2010 Corruption Perceptions Index, Vietnam rose slightly to 116 from 120 in the previous two years, suggesting little change in corruption levels.

In addition, U.S.-based Human Rights Watch accused the Vietnamese government in a report at the end of March of intensifying repression of indigenous minority Christians in the Central Highlands provinces.

More than 70 people were detained in 2010 and it said more than 250 are in prison on national security charges. Human Rights Watch wants the U.S. government to put Vietnam back on its list of ‘countries of particular concern’ for religious freedom, from which it was removed in 2006.

What to watch:

— Vietnam’s corruption perceptions rankings. A strong improvement or decline might influence long-term investment, although there would have to be fundamental underlying change.

— Whether Vietnam is reinstated on the religious freedom concerns list. If it is, the blossoming economic and trade relationship between it and the United States could be harmed. The U.S. State Department’s International Religious Freedom report for 2010 noted improvements in the situation in Vietnam but said significant problems remained.

SOCIAL UNREST

Reports of social unrest periodically surface in Vietnam, mostly over labour and land disputes.

Recent protests included a demonstration in Ha Nam province, near Hanoi, against land requisitions for an investment park, following a handful of protests elsewhere last year.

There is no evidence for now that widespread unrest is likely, or that there is any imminent risk of Communist Party rule 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.

— Territorial disputes in the South China Sea. This issue is highly charged in Vietnam, where suspicion of China runs deep.

— The role of the Catholic church. Catholics have engaged in periodic protests over church land taken over by the government after 1954. The Church, while officially shunning politics, has 6-7 million followers in Vietnam and is well organised.

— Volatile commodity prices. Reports have emerged of coffee farmers who made losses when bean distributors went broke ransacking their buying agents’ homes and businesses. High world commodity prices will also fuel inflation. (Editing by Alan Raybould and Daniel Magnowski)

Advertisements