Risks and Vulnerabilities Vietnam

RISKS AND VULNERABILITIES: VIETNAM

Euromonitor International

April 2015

R I S K S A N D V U L N E R A B I L I T I E S : V I E T N A M P a s s p o r t I

E u r o m o n i t o r I n t e r n a t i o n a l

LIST OF CONTENTS AND TABLES

Chart 1 SWOT Analysis: Vietnam ............................................................................. 1 Chart 2 An Overview of Economy, Finance and Trade in Vietnam: 2014 ................. 1

Major Components of the Economy ............................................................................................. 2

Economy Faces Downside Risks From Slow Banking Reforms and Weakening Exports ........ 2

Chart 3 Annual Real GDP growth in Vietnam vs Asia Pacific: 2009-2016 ................ 2 Chart 4 Gross Value Added by Sector in Vietnam: 2014 .......................................... 3

Socio-political Risk ....................................................................................................................... 4

Business Environment Is Plagued by Corruption, Protests and International Conflicts ............ 4

Chart 5 Total Unemployment Rate vs. Youth Unemployment Rate in Vietnam: 2009-2014 .................................................................................................... 5

External Sector ............................................................................................................................. 5

Vietnam Firmly Maintains Its Current Account Surplus ............................................................. 5

Chart 6 Vietnams Top 10 Export Destinations: 2014 ............................................... 6 Chart 7 Vietnams Imports by Commodity: 2014 ....................................................... 6 Chart 8 Vietnams External Balance: 2009-2014 ...................................................... 7

Government Finance .................................................................................................................... 8

Oil Price Weaknesses and Tax Cuts Hurt Government Revenue Generation .......................... 8

Chart 9 Public Debt vs. General Government Budget Deficit in Vietnam: 2009-2014 ............................................................................................................. 8

Financial Stability ......................................................................................................................... 9

Banks Still Remain Fragile ........................................................................................................ 9

Chart 10 Chart 10 Vietnams Bank Nonperforming Loans to Total Gross Loans: 2009-2014 .................................................................................................... 9

Chart 11 Inflation and Annual Lending Rates in Vietnam: 2009-2014....................... 10

Real Estate ................................................................................................................................. 11

Property Market Makes A Cautious Recovery ........................................................................ 11

Chart 12 Gross Fixed Capital Formation in Vietnam: 2009-2014 .............................. 11 Chart 13 Construction Sector in Vietnam: 2009-2014 ............................................... 12

Energy and Environment ............................................................................................................ 13

Country Faces Widespread Energy and Water Shortages ..................................................... 13

Chart 14 Vietnams Primary Energy Consumption: 2014 .......................................... 13 Chart 15 Total and Per Capita CO2 Emissions in Vietnam: 20092014 ................... 14

Definitions ................................................................................................................................... 15

R I S K S A N D V U L N E R A B I L I T I E S : V I E T N A M P a s s p o r t 1


RISKS AND VULNERABILITIES: VIETNAM

Although Vietnams economy continues to benefit from strong growth in goods exports, its

business environment remains plagued by corruption; weak regulations; and uncertainties

brought about by international conflicts. Meanwhile, its banking sector and the property market

are staging a cautious recovery from the 2011-2012 housing bust. Additionally, the government

is spending heavily on infrastructure development and adopting policies favourable for foreign

investors.

Chart 1 SWOT Analysis: Vietnam

Source: Euromonitor International

Chart 2 An Overview of Economy, Finance and Trade in Vietnam: 2014



Source: Euromonitor International from national statistics/IMF/UN Note: Data for 2015 to 2030 are forecasts.

MAJOR COMPONENTS OF THE ECONOMY

Economy Faces Downside Risks From Slow Banking Reforms and Weakening Exports

Vietnams total GDP of VND3,938 trillion (US$186 billion) in 2014 made it the 14th largest

economy in Asia Pacific. Between 2009 and 2014, it posted an average annual real growth rate

of 5.9%, underperforming the Asia Pacific average of 6.4% in constant terms during the same

period, owing to the downward pressures arising from the 2011-2012 housing bust and the

increase in bad debts in banks. The deterioration in the asset quality of Vietnamese banks has

significantly reduced credit growth and consumer spending in the country:

Annual real GDP growth in Vietnam increased from 5.4% in 2013 to 6.0% in 2014, mostly led

by continued strong growth in exports;

Annual real economic growth is expected to slow down to 5.6% in 2015 and 5.7% in 2016;

Chart 3 Annual Real GDP growth in Vietnam vs Asia Pacific: 2009-2016



Source: Euromonitor International from national statistics/OECD/UN/International Monetary Fund (IMF)/World Economic Outlook (WEO)

Note: Data for 2015 and 2016 are forecasts.

Agriculture, Hunting, Forestry and Fishing was the largest sector in Vietnam, accounting for

19.7% of total gross value added (GVA) in 2014, owing to large supplies of raw materials for

its processing industries. Manufacturing was the second largest sector, accounting for 18.5%

of total GVA in 2014, reflecting its cost competitiveness in the sector;

Education, Health, Social Work and Other Community, Social, Personal Service Activities

was the fastest growing sector in Vietnam, posting an average annual real growth of 10.0%

between 2009 and 2014, led by increased government spending on public services.

Meanwhile, Mining and Quarrying was the sector with the second biggest average annual

real growth of 9.9% between 2009 and 2014, owing to sustained government investment in

the sector.

In 2015, the economy is expected to face downward pressures from the slowdown in Chinese

economic growth its major trade partner and the slow progress with banking sector reforms,

which in turn will diminish Vietnams attractiveness to foreign investors. On the more positive

side, the government is expected to continue its focus on carrying out several structural reforms,

such as infrastructure development; improving market institutions; and human resource

development, as a part of its broader Socio-Economic Development Strategy (SEDS) running

between 2011 and 2020.

Chart 4 Gross Value Added by Sector in Vietnam: 2014

% of total GVA



Source: Euromonitor International from national statistics Notes: (1) Wholesale & Retail Trade includes Repair of Motor Vehicles, Motorcycles and Personal and

Household Goods. (2) Financial Intermediation includes Real Estate, Renting and Business Activities. (3) Public Administration includes Defence and Compulsory Social Security. (4) Education, Health & Social Work includes Other Community, Social & Personal Service Activities.

SOCIO-POLITICAL RISK

Business Environment Is Plagued by Corruption, Protests and International Conflicts

Vietnams geographical proximity to global supply chains; its growing consumer market; and

the governments intention on carrying out key structural reforms have strengthened its business

environment:

The country ranked 178th out of 203 countries in the World Banks Voice and Accountability

Index in 2013 (latest data available), as the government continues to exercise great control

over all print and broadcast media and has also enforced stronger Internet and social media

censorship. Meanwhile, its 87th ranking out of 203 countries in the World Banks Political

Stability and Absence of Violence Index 2013 (latest data available) is a reflection of the

stability brought about by its single-party regime. However, international conflicts, such as

those with China, can lead to political instability in the country. For instance, several naval

skirmishes took place between Vietnam and China, after a Chinese oil rig tried to relocate in

the disputed waters of South China Sea in May 2014;

Vietnam ranked 119th globally out of 175 countries in Transparency Internationals Corruption

Perceptions Index 2014, as the large presence of state-owned enterprises reduces

transparency at government level. Furthermore, enforcement of its anti-corruption laws

remains weak;

Social protests are fairly common in Vietnam, although the government steps in to clamp

down upon protestors. Anti-Chinese sentiments following the May 2014 incident triggered

widespread labour riots in the country. In addition to this, protestors have also being

organised against government seizures of lands and harsh working conditions.



Vietnams labour market is relatively rigid, owing to high redundancy costs and difficulties

involved in hiring foreign labour:

The unemployment rate in Vietnam is low, although it increased slightly from 1.9% in 2013 to

2.1% in 2014. There is little optimism in the job market, as growth in wages has been

relatively flat. Meanwhile, Vietnams youth unemployment rate increased from 5.8% in 2013 to

6.4% in 2014, as job opportunities for the youth primarily exist in low-income and low-

productivity sectors.

Chart 5 Total Unemployment Rate vs. Youth Unemployment Rate in Vietnam: 2009-2014

Source: Euromonitor International from International Labour Organisation (ILO)/national statistics Note: Youth unemployment rate refers to the unemployed population aged 15-24 as a percentage of

economically active population aged 15-24.

Vietnam has a young population, which will support its competitiveness and also boost

consumer demand over the long term:

The proportion of those aged 65+ accounted for 6.2% of the total population in 2014 and their

share is expected to increase to only 12.8% by 2030. The old-age dependency ratio will

accordingly rise from 8.7% in 2014 to 18.3% by 2030;

Brain drain is a problem in Vietnam, as a sizeable proportion of its workforce graduating from

overseas does not return to Vietnam for work each year. Net migration in Vietnam, therefore,

stood at a negative figure of 35,300 in 2014 and is expected to increase further to negative

40,100 in 2020, as improved economic conditions in advanced countries will attract more

migrants from Vietnam to these countries.

EXTERNAL SECTOR

Vietnam Firmly Maintains Its Current Account Surplus

Vietnam is a very open economy, with total exports of goods accounting for 80.6% total GDP

in 2014. In US$ terms, its total goods exports posted a 12.6% year-on-year growth in 2014,



following a 16.5% year-on-year growth in 2013. The growth reflects strong investments and

increased demand from foreign companies, such as Samsung Electronics and LG Electronics:

Machinery and Transport Equipment was Vietnams largest export sector, representing

28.2% of total goods exports in 2014, reflecting large investments and cost competitiveness in

equipment manufacturing. For similar reasons, Miscellaneous Manufactured Goods

accounted for 27.9% of total goods exports in the same year, standing as its second biggest

export sector. The country is, therefore, highly vulnerable to demand variations in its export

markets;

Vietnams export destinations are fairly well diversified. It relied on Asia Pacific for 45.2% of its

total goods exports in 2014, while Europe came second, with 22.6% of the total goods exports

in the same year. However, in terms of individual trade partners, the USA stood as its biggest

export destination, consuming 18.7% of its total goods exports, mainly facilitated by the US-

Vietnam Bilateral Trade Agreement, which was signed in December 2001.

Chart 6 Vietnams Top 10 Export Destinations: 2014

Source: Euromonitor International from International Monetary Fund (IMF)/Direction of Trade Statistics

The share of total goods imports to total GDP increased from 65.0% in 2009 to 80.2% in

2014, mainly as demand for manufacturing imports grew in order to meet its export demand. In

US$ terms, its total goods imports increased by 117% between 2009 and 2014:

Machinery and Transport Equipment stood as Vietnams largest imports, accounting for

34.6% of total goods imports in 2014, followed by Basic Manufactures, which accounted for

22.8%;

Asia Pacific was Vietnams biggest import region, accounting for 78.9% of total goods imports

in 2014, with China being its biggest import partner by country, accounting for 33.9% of the

total goods imports. South Korea came second, accounting for 12.8% of its total goods

imports respectively in 2014.

Chart 7 Vietnams Imports by Commodity: 2014

% of total goods imports



Source: Euromonitor International from International Monetary Fund (IMF)/Direction of Trade Statistics

The continued growth in Vietnams exports, tourism revenue and private remittances ensured

that the countrys current account remained firmly in surplus, at US$6.6 billion in 2014:

As a percentage of total GDP, its current account surplus, however, narrowed from 5.5% in

2013 to 3.6% in 2014, mainly as growth in remittance inflows in US$ terms slowed down from

10.0% year-on-year in 2013 to 6.9% year-on-year in 2014;

Thanks to continued current account surpluses, Vietnams foreign exchange reserves

increased from US$25.5 billion in 2013 to US$38.0 billion in 2014. Since this is enough to

more than cover 3.0 months of total goods imports in 2014, the country is reasonably

cushioned from sudden shocks to its trade or any meaningful exchange rate changes.

Chart 8 Vietnams External Balance: 2009-2014



Source: Euromonitor International from national statistics/OECD/International Monetary Fund (IMF)/International Financial Statistics (IFS)/World Economic Outlook (WEO)

Vietnams foreign direct investment (FDI) inflows stood at VND186 trillion (US$8.9 billion) in

2013 (latest data available), up only by a marginal 0.1% year-on-year in real terms:

As a proportion of its total GDP, however, Vietnams FDI intensity decreased from 5.4% in

2012 to 5.2% in 2013 (latest data available), as the standoff with China and the country-wide

anti-Chinese protests in May 2014 dampened investors enthusiasm towards the country;

The Vietnamese governments intention to carry out structural reforms; easing access to

major regional markets; abundant labour resources; improving political and economic stability;

and favourable policies for foreign investors are the key attraction for foreign investors.

However, rampant corruption; a weak legal setup; and restrictions on foreign investments in

sectors (such as telecommunications, finance and banking, public health, entertainment

services, real estate, exploration and exploitation of natural resources, and education and

training) stand as big discouragements for businesses.

The Vietnamese dong is a managed floating currency, with the exchange rate being typically

monitored by the central bank from time to time:

The political and economic instability caused by the May 2014 Chinese oil rig standoff led to

the depreciation of the dong from VND20,932 in 2013 to VND21,148 in 2014.

GOVERNMENT FINANCE

Oil Price Weaknesses and Tax Cuts Hurt Government Revenue Generation

Vietnams general government net budget deficit worsened from 5.6% of total GDP in 2013 to

6.7% in 2014, mainly as a result of the drop in oil prices, which weakened the governments oil

revenue streams, and the cut in corporate income tax from 25.0% in 2013 to 22.0% in 2014:

Total government revenue decreased from VND821 trillion (US$39.2 billion) in 2013 to

VND819 trillion (US$38.7 billion) in 2014, marking a 4.3% year-on-year real contraction. The

proportion of government revenue to total GDP accordingly decreased from 22.9% in 2013 to

20.8% in 2014;

Vietnams total government expenditure grew by 1.8% year-on-year in real terms to reach

VND1,083 trillion (US$51.2 billion) in 2014. However, as a proportion of total GDP, total

government expenditure decreased from 28.5% in 2013 to 27.5% in 2014, as the government

restrained spending in an attempt to narrow its budget deficit;

Vietnams continued budget deficit increased its public debt from 51.6% of total GDP in 2013

to 56.0% in 2014;

Standard & Poor has maintained its BB- credit rating for Vietnam and in July 2014 reaffirmed

its stable outlook for the country due to benign inflation; improved foreign exchange reserves;

and greater confidence in the local currency. Meanwhile, Moodys upgraded Vietnams rating

one notch to B1 from B2 in July 2014 and confirmed its stable outlook for the country, citing a

stronger external payments position; stable economic growth; and a reduction in risks arising

from its banking sector. On similar grounds, Fitch Ratings upgraded Vietnam from B+ to BB-

in November 2014, but changed its outlook from positive to stable.

Chart 9 Public Debt vs. General Government Budget Deficit in Vietnam: 2009-2014



Source: Euromonitor International from National Statistics Offices/International Monetary Fund/OECD

FINANCIAL STABILITY

Banks Still Remain Fragile

The banking sector in Vietnam is financially weak, amid piling troubled loans. Strong credit

growth over the last decade; the bursting of the property bubble in 2010; and poor management

of state-owned banks have made its banking sector particularly fragile. However, the Vietnam

Asset Management Company (VAMC), established by the government in July 2013, is working

on cleaning up the balance sheets of banks by absorbing bad loans by 2015:

Bank claims on the private sector increased from VND3,470 trillion (US$166 billion) in 2013 to

VND3,956 trillion (US$187 billion) in 2014. In terms of year-on-year real growth terms, bank

claims on the private sector increased from 5.6% year-on-year in 2013 to 9.5% year-on-year

in 2014, as the bank boosted lending to bolster economic growth in the country;

The proportion of nonperforming loans to total gross loans in Vietnam rose slightly from 3.1%

in 2013 to 3.5% in 2014, mainly owing to the introduction of stricter lending terms for small

business, which resulted in many loans being reclassified as bad debt.

Chart 10 Chart 10 Vietnams Bank Nonperforming Loans to Total Gross Loans: 2009-2014



Source: Euromonitor International from World Bank

The State Bank of Vietnam (SBV), the countrys central bank, is responsible for aligning its

monetary policy in line with the governments growth and inflation targets:

Annual inflation in Vietnam fell from 6.7% in 2013 to 4.1% in 2014, as the drop in global

commodity prices led to a sharp fall in transportation costs in the country;

In 2015, Vietnams annual inflation is expected to bounce back to 5.3%. However, with the

view to contain inflationary pressures in the economy, the SBV, in January 2015, devalued

the dong by 1.0% against the dollar on interbank transactions;

Annual lending rates in Vietnam fell from 10.4% in 2013 to 8.8% in 2014. In March 2014, the

SBV cut the refinancing rate from 7.0% to 6.5% with the view to support lending to

businesses;

Money supply reached VND1,268 billion (US$59.9 billion) in 2014, marking a 17.4% year-on-

year real growth during the year.

Chart 11 Inflation and Annual Lending Rates in Vietnam: 2009-2014



Source: Euromonitor International from national statistics/OECD/UN/IMF

REAL ESTATE

Property Market Makes A Cautious Recovery

Vietnams construction sector continues to recover from the 2011-2012 housing market crash,

mainly on the back of large government-financed infrastructure development projects. The real

growth in the sector, therefore, increased from 0.5% year-on-year in 2013 to 6.0% year-on-year

in 2014:

As a proportion of total GVA, the share of the construction sector remained unchanged at

5.8% in both 2013 and 2014;

Gross fixed capital formation grew by 2.7% year-on-year in real terms in 2014, following 0.7%

year-on-year real growth in 2013, as the government remained committed to capital spending

in view of its development goals.

Chart 12 Gross Fixed Capital Formation in Vietnam: 2009-2014



Source: Euromonitor International from national statistics/OECD/UN/International Monetary Fund (IMF)/International Financial Statistics (IFS)

Note: Gross fixed capital formation is measured in constant 2014 prices, fixed exchange rates.

The property market in Vietnam continues to recover cautiously, as demand for residential

construction is improving. However, foreign investors optimism in the sector is muted, following

the May 2014 anti-Chinese riots in the country:

According to estimates from Savills Vietnam, the residential property index in Vietnam posted

an 11.5% year-on-year nominal growth in the first quarter of 2015, helped by increased

financing by banks. Meanwhile, the VND30.0 trillion housing stimulus package unveiled by the

government and the SBV also helped increase demand for social housing during 2014. The

scheme continues to attract buyers in 2015, particularly from low-income groups.

Chart 13 Construction Sector in Vietnam: 2009-2014

Source: Euromonitor International from national statistics/OECD/UN/International Monetary Fund (IMF)/International Financial Statistics (IFS)



Note: Construction is measured in constant 2014 prices, fixed exchange rates.

ENERGY AND ENVIRONMENT

Country Faces Widespread Energy and Water Shortages

Owing to increased oil and natural gas production over the past few decades, Vietnam has

managed to step up its mineral fuel exports. However, in 2014, the country stood as a net

energy importer, as energy demand outstrips supply:

The mineral fuels import bill stood at US$14.9 billion, which accounted for 10.0% of Vietnams

total goods imports in 2014, down from 10.7% in 2009. Meanwhile, its exports of mineral fuels

reached US$13.7 billion in 2014, accounting for 9.1% of the total goods exports during the

year;

Vietnams total primary energy consumption increased from 42.6 million tonnes of oil

equivalent in 2009 to 57.8 million tonnes of oil equivalent in 2014, fuelled by increased

industrialisation; rapid economic growth; and expansion in exports;

The country obtained 31.3% of its total primary energy consumption from crude oil in 2014,

followed by coal, at 28.7% in the same year. However, as a part of the National Energy

Development Strategy of Vietnam, running between 2007 and 2020, the government is

looking to increase the share of renewable energy for commercial purposes from 3.0% in

2010 (according to government estimates) to 5.0% in 2020 and is targeting to increase this to

11.0% in 2050. Meanwhile, it also targets to raise the share of energy generation from

renewable resources from 3.5% in 2010 (according to government estimates) to 4.5% by

2020 and 6.0% by 2030;

Energy shortage is a major issue in Vietnam, mainly as a result of its fast-growing energy

demand. In the medium to long term, the government is looking to narrow the supply shortfall

by building 57 new coal-fired power plants by 2020. Plans are also underway for the

construction of two nuclear plants by 2025.

Chart 14 Vietnams Primary Energy Consumption: 2014

% of Total Primary Energy Consumption



Source: Euromonitor International from BP Statistical Review of World Energy

Vietnams CO2 emissions per unit of output stood at 759 grams per US$ in 2014, down from

1,036 grams per US$ in 2009:

The countrys energy efficiency improved from US$2,489 per tonne of energy consumed in

2009 to US$3,222 in 2014;

As a part of its National Strategy on Green Growth (2011-2020), Vietnam is targeting a 10.0-

15.0% reduction in greenhouse gasses by 2020, compared with Business-as-Usual levels.

Chart 15 Total and Per Capita CO2 Emissions in Vietnam: 20092014

Source: Energy Information Administration of the US Government, International Energy Annual



Note: CO2 emissions encompass the consumption and flaring of fossil fuels.

Vietnam is vulnerable to natural disasters, such as tropical cyclones, landslides, floods and

droughts:

According to EM-DAT estimates, floods affected 2.2 million between 2013 and 2014 alone

and brought economic damages of US$78.5 million. Meanwhile, storms affected 2.0 million

people and caused economic damages of US$1.5 billion during 2013 and 2014;

Despite having a dense network of rivers, Vietnam experiences water shortages in some

parts of the country. Although the problem is aggravated during the dry season, Vietnams

inadequate physical infrastructure and financial constraints have led to inefficient utilisation of

its water resources.

DEFINITIONS Corruption Perceptions Index relates to perceptions of the degree of corruption as seen by

business people and country analysts.

Energy Efficiency indicates the value of gross domestic product produced per tonne of oil

equivalent of energy consumed.

Foreign Direct Investment (FDI) is investment made to acquire a lasting interest in or effective

control over an enterprise operating outside of the economy of the investor.

FDI Inflows are the net value of inward direct investment made by non-resident investors in

the reporting economy, including reinvested earnings and intra-company loans, net of

repatriation of capital and repayment of loans.

FDI intensity measures FDI inflows as percentage of total gross domestic product (GDP).

Gross Fixed Capital Formation (GFCF) equals acquisition less disposals of fixed assets,

improvement of land, change in inventories and acquisitions less disposals of valuables.

Gross Value Added (GVA) is the value of output less the value of intermediate consumption. It

is calculated without making deductions for depreciation of fabricated assets or for depletion and

degradation of natural resources.

House-Price-Income Ratio is the ratio of the cost of a typical upscale housing unit of 100

square metres compared to the countrys GDP per capita.

Net Migration is the difference between the number of immigrants into and emigrants from the

area during the year.

Old-Age Dependency Ratio is the percentage of the population aged 65+ (retired) per

population aged 15-64 (of working age).

Openness of the Economy is reflected by exports as a percentage of total GDP. More than

50.0% is very open; 25.0%-49.0% is open; 6.0%-24.0% is relatively open; and 0.0%-5.0% is

relatively closed, high barriers to trade.

Political Stability and Absence of Violence Index reflects a better score in a higher position

and measures the perceptions of the likelihood that the government will be destabilised or

overthrown by unconstitutional or violent means (including domestic violence and terrorism).

Public Debt is total gross debt owed by any level of government (central government, local

government, social security funds). Debt is reported at values outstanding at the end of the year

and is consolidated between and within the sectors of general government - a loan from one

level of government to another represents both an asset and an equal liability for the

government as a whole and so it cancels out (is "consolidated) for the general government

sector.

Unemployment Rate represents unemployed population as a percentage of the economically

active population, also known as the labour force (the total number of people employed plus

unemployed).



Voice and Accountability Index captures perceptions of the extent to which a country's

citizens are able to participate in selecting their government, as well as freedom of expression,

freedom of association, and a free media. A high ranking reflects a high score in the index.

Youth Unemployment Rate refers to the unemployed population aged 15-24 as a percentage

of economically active population aged 15-24.

Risks and Vulnerabilities Vietnam

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