Coface Group
Viet Nam

Viet Nam

Population 90.388 million
GDP per capita 137.681 US$ billion
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2010 2011 2012(e) 2013(f)
GDP growth (%) 6.8 5.9 5.1 5.7
Inflation (yearly average) (%) 9.2 18.7 9.1 8.6
Budget balance (% GDP) -5.2 -2.6 -3.4 -2.6
Current account balance (% GDP) -6.5 -4,0 -0.5 -0.8
Public debt (% GDP) 51.2 54.1 50.4 50.4

(e) Estimate (f) Forecast

STRENGTHS

  • Skilled, low wage workforce
  • Strong agricultural potential and natural resources
  • Development strategy based on economic openness and diversification

WEAKNESSES

  • Country’s specialisation too concentrated on competitiveness of low value-added products
  • Persistent business environment shortcomings
  • Lack of infrastructure
  • Unfinished public sector reform
  • Widening inequalities
  • Weak banking system

RISK ASSESSMENT

 

Following the sharp slowdown in 2011-2012 linked to macro-financial stabilisation measures, activity is expected to recover in 2013

Growth slowed in 2011 and early 2012 due to a slowing domestic demand linked to the implementation of Resolution11, aset of measures aimed at re-establishing macroeconomic stability. The impact of these measures was significant: economic slowdown, fall in inflation (5% in August 2012 after peaking at 23% in August 2011) and credit contraction. Industrial production and especially the construction, mining and retail sales sectors slowed. In this context, the authorities moved to rapidly ease monetary policy (refinancing rate cut by 500 basis points between March and June 2012). In addition, fiscal stimulus measures were put in place.

 

In 2013, activity could rebound in response to increased domestic demand sustained by an expansionary economic policy. Private consumption will benefit from the fall in inflation, which will boost retail sales. Furthermore, FDI inflows are expected to hold steady, in connection with the trend among Asian companies to relocate production units toVietnam. The exporting sectors (textile, shoes, electronics and tourism) are expected to perform well due to the dynamism of Emerging Asia (which qui captures 21% of Vietnamese exports). The primary sector – which accounts for 74% of rural employment – is expected to recover due to the expected improvement in weather conditions. Nonetheless, continuation of the aggressive monetary policy easing could affect business and consumer confidence and destabilise the anchoring of inflation expectations. An inflationary cycle and mistrust of the dong could again affect the country.

 

 

Stabilisation of the dong after successive devaluations

The dong came under substantial pressure between 2008 and 2011 due to capital flight linked to mistrust of the currency by residents and non-residents alike. After the Central Bank devalued the dong six times between 2008 and 2011 and introduced capital controls, the gap between the official exchange rate and the exchange rate on the black market narrowed.

 

With macroeconomic stabilisation and the implementation of capital controls, capital flight is expected to cease in 2013. Moreover, stable FDI inflows are expected to support the dong. Therefore exchange risk is likely to fall. Nonetheless, foreign exchange reserves – although slightly higher – remain very low (2 months of imports) making the country vulnerable to sudden capital flight.

 

 

High public debt and lack of transparency

Public debt is likely to fall due to fiscal reforms aimed at widening the tax base to deal with the drop in oil revenues and customs duties. Sovereign risk remains high, however. Apart from the lack of transparency in public accounts, public debt is still very vulnerable to exchange risk as over 60% is denominated in foreign currencies. Furthermore, the sustainability of public debt could suffer from contingent liabilities to big businesses and public banks if defaults by these bodies multiply.

 

 

The banking system remains weak because it is poorly capitalised and highly dollarized

Banks are very vulnerable to exchange risk due to their high dollarization. In addition, credit has grown sharply, rising from 48% of GDP in 2003 to 115% in 2011. This results in increased credit risk due to weak bank capitalisation, a rise in non-performing loans and lack of transparency and supervision. A defeasance vehicle with 100 trillion dong could be set up to deal with the non-performing loans. But even by taking into account substantial discounts on the buying up of non-performing loans at commercial banks, the allocation is still too low in relation to the volume of assets to be hived off. Further, there are numerous political obstacles in terms of implementation and effectiveness, while the high exposure of public banks to state owned enterprises with little transparency is an additional weakness factor.

 

 

Persistent business environment shortcomings

The Communist Party continues to exercise total control over the country’s political, economic and social life. However,Vietnam’s Achilles heel remains its problems of governance and especially corruption, which perpetuates corporate credit risk, as evidenced by the partial default of the state-owned Vinashin shipbuilding group.

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