February 1, 2010 / 5:27 PM / 7 years ago

FACTBOX-Five political risks to watch in Vietnam

7 Min Read

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)



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