FACTBOX-Five political risks to watch in Vietnam
Mon Feb 1, 2010 12:11pm EST
By John Ruwitch
HANOI, Feb 1 (Reuters) - Vietnam has weathered the global
economic crisis relatively well, but the country is still seen
as a risky and relatively opaque investment destination.
Sovereign 5-year credit default swaps for Vietnam
VNGV5YUSAC=R are trading at a spread of around 242.50,
implying the second-highest level of risk in the Thomson
Reuters Emerging Asia Index after Pakistan. The weighted
average spread for emerging Asian countries in the index is
134.40.
Following is a summary of key risks to watch in Vietnam:
* EXCHANGE RATE POLICY
Vietnam's fixed exchange rate policy frequently causes
economic pressures to build. The central bank devalued the dong
VND= in November for the third time since the start of 2008
to relieve pressure on the currency. The bank later said it was
prepared to intervene on a "very big scale" to stabilise the
dong, but many economists say the central bank does not have
enough reserves to allow sustained intervention.
The dong's chronic weakness and the expectation of further
weakening led to dollar hoarding, which in turn created more
weakness. After devaluing, the government has pressed major
state-owned exporters to sell dollars, and persuaded state-run
banks to ensure the dollar supply meets demand. It also vowed
again to impose penalties for trading the currency outisde the
official band. But the November devaluation damaged government
policy credibility, as it had repeatedly said it would not
allow another devaluation.
Analysts say the currency remains overvalued and structural
problems have not been solved. However, the risk of a balance
of payments crisis is declining. As the economy turns, the
inflow of foreign currency is likely to increase, supporting
the dong. What to watch:
-- Markets will be watching to see whether the central
bank matches its promise to support the currency with effective
action. November's devaluation dented Vietnam's policy
credibility and this may take some time to restore. Most
analysts expect an orderly weakening of the currency in 2010.
-- A key gauge of pressure on the currency is the gap
between black market dollar/dong rates and interbank rates.
* CORRUPTION
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
investment attractiveness.
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.
* GOVERNMENT EFFECTIVENESS
Corruption, lack of accountability and transparency, and
burdensome bureaucracy all 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.
Political analysts say there could be a degree of policy
paralysis, or at least conservatism, in the coming year as
factions and players jockey for position ahead of the Communist
Party's 11th national congress in early 2011. Important
leadership and policy changes generally only happen at the
congress, which takes place once every five years.
What to watch:
-- While the government stimulus package has boosted the
economy, there are questions over how the budget deficit can be
financed, how inflationary pressure can be contained, and how
the crowding out of private investment can be avoided. Hanoi
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 is a key
issue.
* 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.
There is no evidence for now 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.
-- The role of the Catholic church. Catholics have been
engaging 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.
-- 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
demonstrations.
* THE ENVIRONMENT
Vietnam has great potential as a source of tradeable carbon
credits under the Kyoto Protocol, but issues of expertise,
transparency and financing have hindered progress.
Environmental issues may also become a growing source of
popular unrest, as in China. With its huge coastline, Vietnam
is recognised as one of the countries that will be hardest hit
by rising sea levels, particularly in the rice-growing Mekong
Delta.
What to watch:
-- The extent to which the government manages to limit the
environmental damage from Vietnam's economic growth.
-- Any evidence that extreme weather affecting Vietnam is
becoming more frequent as a result of climate change.
(Compiled by Andrew Marshall and John Ruwitch)
Mon Feb 1, 2010 12:11pm EST
By John Ruwitch
HANOI, Feb 1 (Reuters) - Vietnam has weathered the global
economic crisis relatively well, but the country is still seen
as a risky and relatively opaque investment destination.
Sovereign 5-year credit default swaps for Vietnam
VNGV5YUSAC=R are trading at a spread of around 242.50,
implying the second-highest level of risk in the Thomson
Reuters Emerging Asia Index after Pakistan. The weighted
average spread for emerging Asian countries in the index is
134.40.
Following is a summary of key risks to watch in Vietnam:
* EXCHANGE RATE POLICY
Vietnam's fixed exchange rate policy frequently causes
economic pressures to build. The central bank devalued the dong
VND= in November for the third time since the start of 2008
to relieve pressure on the currency. The bank later said it was
prepared to intervene on a "very big scale" to stabilise the
dong, but many economists say the central bank does not have
enough reserves to allow sustained intervention.
The dong's chronic weakness and the expectation of further
weakening led to dollar hoarding, which in turn created more
weakness. After devaluing, the government has pressed major
state-owned exporters to sell dollars, and persuaded state-run
banks to ensure the dollar supply meets demand. It also vowed
again to impose penalties for trading the currency outisde the
official band. But the November devaluation damaged government
policy credibility, as it had repeatedly said it would not
allow another devaluation.
Analysts say the currency remains overvalued and structural
problems have not been solved. However, the risk of a balance
of payments crisis is declining. As the economy turns, the
inflow of foreign currency is likely to increase, supporting
the dong. What to watch:
-- Markets will be watching to see whether the central
bank matches its promise to support the currency with effective
action. November's devaluation dented Vietnam's policy
credibility and this may take some time to restore. Most
analysts expect an orderly weakening of the currency in 2010.
-- A key gauge of pressure on the currency is the gap
between black market dollar/dong rates and interbank rates.
* CORRUPTION
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
investment attractiveness.
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.
* GOVERNMENT EFFECTIVENESS
Corruption, lack of accountability and transparency, and
burdensome bureaucracy all 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.
Political analysts say there could be a degree of policy
paralysis, or at least conservatism, in the coming year as
factions and players jockey for position ahead of the Communist
Party's 11th national congress in early 2011. Important
leadership and policy changes generally only happen at the
congress, which takes place once every five years.
What to watch:
-- While the government stimulus package has boosted the
economy, there are questions over how the budget deficit can be
financed, how inflationary pressure can be contained, and how
the crowding out of private investment can be avoided. Hanoi
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 is a key
issue.
* 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.
There is no evidence for now 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.
-- The role of the Catholic church. Catholics have been
engaging 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.
-- 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
demonstrations.
* THE ENVIRONMENT
Vietnam has great potential as a source of tradeable carbon
credits under the Kyoto Protocol, but issues of expertise,
transparency and financing have hindered progress.
Environmental issues may also become a growing source of
popular unrest, as in China. With its huge coastline, Vietnam
is recognised as one of the countries that will be hardest hit
by rising sea levels, particularly in the rice-growing Mekong
Delta.
What to watch:
-- The extent to which the government manages to limit the
environmental damage from Vietnam's economic growth.
-- Any evidence that extreme weather affecting Vietnam is
becoming more frequent as a result of climate change.
(Compiled by Andrew Marshall and John Ruwitch)