HANOI, Nov 3 (Reuters) - Vietnam has weathered the global economic crisis relatively well, but the country is still seen as a risky and relatively opaque investment destination.
Following is a summary of key risks to watch in Vietnam:
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 corruption scandals. Progress on corruption will remain a key determinant of investment attractiveness.
Key issues to watch:
-- Vietnam's rank in corruption perceptions rankings. A strong improvement or decline would influence investors. Major scandals could also make waves.
EXCHANGE RATE POLICY
Vietnam's fixed exchange rate policy frequently causes economic pressures to build. The dong VND= has been at or beyond the weak end of its trading band for a year now, and last week it dipped to a low for this year.
The central bank is likely to continue to slowly weaken the currency to try to ease pressures by edging the reference rate down, but many economists expect that it may have to eventually take the more drastic move of widening the dong's trading band or doing a one-off devaluation. The bank itself has said it will not devalue, despite a recent fall in foreign exchange reserves.
The dong's chronic weakness and the expectation of further weakening has led to dollar hoarding, which in turn creates more weakness and stokes expectations of further weakening. The central bank has responded with FX rationing, which has been mildly successful at keeping the exchange rate relatively stable.
In late October, demand for dollars rose suddenly as gold smugglers circumventing a ban on imports sought the currency to buy gold abroad and sell it in Vietnam, taking advantage of a spread of several percentage points between onshore and international market gold prices.
For now, the risk of a balance of payments crisis is not high, economists say. As the economy turns, the inflow of foreign currency is likely to increase which could change the picture.
Key issues to watch:
-- Markets are closely watching for any clues to the likelihood and timing of changes to the exchange rate.
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 will take place at the congress, which takes place once in five years.
Key issues 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 in government, and investors 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 the corruption of local officials. But there remains no evidence for now that wider unrest is likely, or that there is any imminent risk of the regime being challenged from below.
Key issues 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 quite 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.
Key issues 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. ()
(Source: Compiled by Andrew Marshall and John Ruwitch http://www.reuters.com/article/latestCrisis/idUSSP542361)
Following is a summary of key risks to watch in Vietnam:
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 corruption scandals. Progress on corruption will remain a key determinant of investment attractiveness.
Key issues to watch:
-- Vietnam's rank in corruption perceptions rankings. A strong improvement or decline would influence investors. Major scandals could also make waves.
EXCHANGE RATE POLICY
Vietnam's fixed exchange rate policy frequently causes economic pressures to build. The dong VND= has been at or beyond the weak end of its trading band for a year now, and last week it dipped to a low for this year.
The central bank is likely to continue to slowly weaken the currency to try to ease pressures by edging the reference rate down, but many economists expect that it may have to eventually take the more drastic move of widening the dong's trading band or doing a one-off devaluation. The bank itself has said it will not devalue, despite a recent fall in foreign exchange reserves.
The dong's chronic weakness and the expectation of further weakening has led to dollar hoarding, which in turn creates more weakness and stokes expectations of further weakening. The central bank has responded with FX rationing, which has been mildly successful at keeping the exchange rate relatively stable.
In late October, demand for dollars rose suddenly as gold smugglers circumventing a ban on imports sought the currency to buy gold abroad and sell it in Vietnam, taking advantage of a spread of several percentage points between onshore and international market gold prices.
For now, the risk of a balance of payments crisis is not high, economists say. As the economy turns, the inflow of foreign currency is likely to increase which could change the picture.
Key issues to watch:
-- Markets are closely watching for any clues to the likelihood and timing of changes to the exchange rate.
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 will take place at the congress, which takes place once in five years.
Key issues 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 in government, and investors 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 the corruption of local officials. But there remains no evidence for now that wider unrest is likely, or that there is any imminent risk of the regime being challenged from below.
Key issues 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 quite 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.
Key issues 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. ()
(Source: Compiled by Andrew Marshall and John Ruwitch http://www.reuters.com/article/latestCrisis/idUSSP542361)