Vietnam Economist Country Briefing

Vietnam: Five-year forecast summaryReal GDP growth % The Economist Intelligence Unit expects the political scene to be broadly stable during the forecast period 2010-14.. Although Viet

Vietnam:

Five-year forecast summary

Vietnam: Five-year forecast summary

Real GDP growth

(%)

The Economist Intelligence Unit expects the political scene to be broadly stable during the

forecast period (2010-14) The Communist Party will stay firmly in control, but there are pockets of organised opposition, and, although still rare, political dissidence will become more common Political effectiveness will remain fairly poor during the forecast period

Vietnam’s business environment rankings will see solid improvements in the forecast period

There will be progress in nearly all areas of the business environment, underpinned largely by the ruling party’s efforts to push ahead with its economic reform programme

Although Vietnam's long-term economic growth prospects remain positive, the early part of the

forecast period will be challenging In 2010-11 annual real GDP growth is forecast to average 6.7% Growth will accelerate to around 7.4% a year on average in 2012-14

Vietnam: Five-year forecast summary

Household consumption per head

(US$)

The forecast for market opportunities is broadly positive However, in most parts of the country

opportunities will still be limited mainly to the lower end of the market, while opportunities at the higher end will be restricted to the main urban areas Rising disposable income per head will contribute to strong growth in demand for consumer goods

The prospects for long-term economic growth are bright The economy will remain strong,

supported by an expanding private sector Our central forecast indicates that annual growth in GDP per head will average 5.8% in 2011-30

Vietnam: Business environment rankings

Vietnam:

The political environment

Vietnam: Political outlook

Highlights

The ruling Communist Party of Vietnam will maintain its firm grip on power and will continue to dictate the political agenda in the forecast period (2010-14) However, political stability is not assured Ongoing economic troubles, combined with the government's continued harsh crackdown on dissenters and disputes with various religious groups, could lead to public protests

The party is due to hold its next national congress in January 2011, and this means that until then there will be considerable jockeying for position within the current leadership, although it will be largely invisible from the outside There will be major personnel changes in higher echelons of the party, but the organisation's central tenets will remain unchanged and its overriding objective will be to maintain its position of dominance

The leadership will claim to be committed to maintaining the momentum of economic and administrative reforms, but actual progress could be limited A widening gap between competing factions within the party means that consensus on key reforms could become increasingly difficult to establish

Vietnam will continue to make strides in strengthening its ties with the West, particularly the US, but it will also maintain close relations with China The government will continue to pursue bilateral and multilateral free-trade agreements

Vietnam:

Demographics

Vietnam: Demographic outlook

Vietnam's population is forecast to continue to grow steadily, by around 1% a year, during the forecast period (2010-14), and as a result the population will reach 92.2m by 2014, up from 87.1m in 2009

According to the General Statistics Office (the national data provider), the total fertility rate, at 2.03 children per woman, is below the replacement level of 2.33 children per woman

A large workforce and a low dependency ratio will prove advantageous in the forecast period and beyond as new employment opportunities are generated

There are growing concerns over the country's sex ratio at birth The preference for male

Vietnam:

The business environment forecast

Vietnam: Business environment outlook

The Economist Intelligence Unit’s business environment rankings assess a country’s relative attractiveness as an investment location, both globally and regionally

Vietnam's business environment will improve during the forecast period (2010-14), with the country's overall score rising to 5.66, from 4.94 in the historical period (2005-09) Political stability will remain a relative strong point Political effectiveness will improve, although the score for this category will continue to be undermined by corruption, an inefficient bureaucracy

Vietnam: Macroeconomic environment

The macroeconomic environment will improve in 2010-14, increasing Vietnam’s attractiveness

as a place in which to do business

Policymakers will face tough challenges during the early part of the forecast period in terms of striking a balance between stimulating the economy and maintaining price stability

We forecast that there will continue to be institutional weaknesses in policymaking, most notably with regard to the lack of independence of the State Bank of Vietnam (SBV, the central bank)

Vietnam: Fiscal policy

Central government budget balance

(% of GDP) After expanding to an estimated 9% of

GDP in 2009, the budget deficit (excluding on-lending) will remain wide in 2010-14.There are serious concerns about how the government will fund its deficit, particularly in view of the fact that it is already borrowing heavily to finance its off-budget spending programmes

The budget deficit is forecast to narrow gradually in the forecast period, to stand

at 4.9% of GDP in 2014, but this will not allay fears regarding fiscal sustainability The government's tax base remains narrow, and tax evasion is still a serious problem

Vietnam: Monetary policy

Money market interest rate

(%)

The SBV will continue to take a short-term view with regard to monetary policy It will take adequate steps to adjust policy when this is made necessary by rising inflation or excessively tight financing conditions, but will do so on an ad hoc basis

There will be no clear medium- or long-term policy stance on inflation or the maintenance of a stable exchange rate

The mainstay of the SBV's policy approach will be to ensure that the cost of financing does not undermine economic growth

Vietnam: Policy towards private enterprise & competition

More SOEs undertake reforms and are equitised (part-privatised) Progress is made on removing market distortions in terms of access to opportunities and resources

The government makes an effort to reform state-owned enterprises (SOEs), but progress is slow There are signs that the competition law will be applied more forcefully The government considers price controls on certain goods

2010-11:

2012-14:

Vietnam: Policy towards foreign investment

The government further loosens restrictions on foreign investment and seeks to promote such investment in listed firms Uncertainty persists regarding the implementation of the unified legal system for foreign and domestic firms

Red tape remains a hindrance The government opens up more service sectors to foreign investment Restrictions remain in place on foreign ownership of housing

2010-11:

2012-14:

Vietnam: Foreign trade and exchange controls

Trade barriers and tariffs continue to be lowered Negotiations begin towards a trade agreement (FTA) with the EU Vietnam becomes a negotiating member of the Trans-Pacific Strategic Economic Partnership (TPP) on a financial services and investment agreement

free-Trade barriers are lowered further Vietnam pursues additional FTAs The agreements with the EU and the TPP are concluded

2010-11:

2012-14:

2012-14:

Vietnam: Financing

State-owned commercial banks undertake reforms The government directs lending towards high-priority sectors The authorities attempt to influence banks' interest rate policies

The availability of financing improves as limits on the activities of foreign banks are relaxed further As the regulatory environment is strengthened, the stockmarket emerges

2010-11:

2012-14:

Vietnam: The labour market

Wages for unskilled employees remain low, and there are shortages of skilled labour Worker unrest becomes more common

Wages stay low relative to other countries in the region The education system remains poorly equipped to train the next generation of young professionals to meet the needs of foreign-invested enterprises

2010-11:

2012-14:

Vietnam: Infrastructure

Work continues on three major ports The government improves the energy supply, in part by buying electricity from neighbouring countries Demand for telecommunications services rises sharply

New ports become operational, increasing capacity significantly Ongoing investment in electricity-generating plants improves the reliability of the power supply Telecoms

2010-11:

2012-14:

Vietnam:

The economic forecast

Vietnam: International assumptions

Economic growth (%)

The Economist Intelligence Unit forecasts that growth in world GDP measured at market exchange rates will average nearly 3% a year in the forecast period (2010-14) At purchasing power parity exchange rates, growth will average 4.1% annually, compared with 3.3% in the historical period (2005-09)

Growth in global trade flows in 2010-14 will average 7.1% a year, slower than before the 2008-09 global financial crisis This will cloud prospects for Vietnam's export sector, which could also face difficulties as a result of the expected slowdown in the US economy in 2011 and the ongoing

Vietnam: Economic outlook

Economic outlook

(% real change)

Economic growth in Vietnam is expected to be strong in 2010-14, averaging over 7% a year However, this will be below the rates of real GDP growth that were recorded in the years prior to the 2008-09 global economic downturn

Growth in economic activity in Vietnam will be underpinned by strong recoveries in consumption, investment and exports The latter component of GDP will be boosted by solid growth in global trade throughout the forecast period Demand for Vietnamese goods, particularly from the US, Chinese and European markets, will help to sustain buoyant growth in exports

Vietnam: Wage and price inflation

Consumer price inflation

Strong demand-side pressures and the depreciation of the dong against the US dollar (making imports more expensive) will push up the general price level

Assuming that the authorities continue to maintain a policy bias in favour of supporting growth rather than stabilising prices, we forecast that the outstanding stock of domestic credit will rise by an

Vietnam: Exchange rates

Exchange rates

Until there are clear signs that the trade deficit is narrowing, inflationary pressures are receding and foreign direct investment is picking up markedly, it is unlikely that downward pressure on the dong will ease

The State Bank of Vietnam (the central bank) may try to engineer a controlled and gradual fall in the value of the local currency in the forecast period, but it will probably have to opt for further devaluations, a widening of the currency’s trading band, or both

The dong is forecast to depreciate from an average of D19,107:US$1 in 2010 to D20,822:US$1

Vietnam: External sector

External sector

(US$ bn unless otherwise indicated)

Although the current account will remain in deficit throughout the forecast period, the deficit will narrow markedly as a percentage of GDP, shrinking from 9.6% in 2010 to 6.3% in 2014

The performance of the current account will largely track that of the trade account The trade account will post a huge deficit in 2010 as growth in the value of imports outpaces that in exports, before shrinking gradually in 2011-14 as these trends reverse

Vietnam:

Foreign direct investment

Vietnam: Foreign direct investment

Stocks and flows

Inward foreign direct investment stock, 2010

(% of GDP)

According to the IMF, FDI inflows totalled US$7.6bn in 2009 and US$9.6bn in 2008, compared with just under US$2bn in 2005 Commitments for new projects (excluding additional investment in existing projects) reached US$10.8bn in the first eight months of 2010, growing by 41% year on year However, realised FDI reached only US$7.3bn in the same period, up by just 3.6% year on year

A large proportion of FDI commitments are not disbursed in the year in which they are promised, if at all

FDI has flowed into Vietnam from a wide range of countries, although nations in the Asia and Australasia region are particularly prominent investors

Vietnam has received less FDI than most of its South-east Asian neighbours, and the impact of FDI has been less marked, with little technology transfer between foreign firms and their local partners

Vietnam: Foreign direct investment

Inward foreign direct investment stock per head, 2010

However, investment from abroad is still discouraged by pervasive red tape, relatively poor-quality human capital and problems obtaining access to land and capital The government is aware of these difficulties and is taking steps to tackle them, but progress is likely to be slow

Vietnam: Foreign direct investment

Annual inflows of foreign direct investment

However, given that the Vietnamese economy is forecast to continue to expand rapidly, foreign investors will remain keen to tap into the fast-growing domestic market, and particularly the market for services

Vietnam:

Market opportunities

Vietnam: Market opportunities

GDP per head

(US$ at PPP)

Market opportunities in Vietnam will expand in line with population growth and rising incomes, although the country's low level of GDP per head by regional standards will limit the extent of potential opportunities

The prospects for the retail sector are promising, owing to rising disposable income per head (which will contribute to strong growth in demand for consumer goods) and continued growth in the number and size of retail outlets

Vietnam:

The long-term forecast

Vietnam: Long-term outlook

Real GDP growth

(% annual change)

Vietnam is one of the poorest members of the ten-country Association of South-East Asian Nations (ASEAN), but it has enjoyed relatively rapid rates of economic growth in the past few years

Vietnam's favourable demographic profile will help to facilitate continued economic expansion Wide-ranging economic reforms will bolster foreign investor confidence in the country, paving the