Political Risk

Political Risk Services
31-Oct-2011
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Vietnam
Country Forecast
Highlights
MOST LIKELY REGIMES AND THEIR PROBABILITIES 18-Month: CPV Mainstream 55% Five-Year: CPV Mainstream 55% FORECASTS OF RISK TO INTERNATIONAL BUSINESS Financial Direct Turmoil Transfer Investment 18-Month: Low C+ BFive-Year: Low B (B-) B
( ) Indicates change in rating.
Export Market B B-
* Indicates forecast of a new regime.
KEY ECONOMIC FORECASTS Real GDP Years Growth % 2006-2010(AVG) 7.0 2011(F) 5.5 2012-2016(F) 7.1
Inflation % 11.0 18.2 8.7
Current Account ($bn) -5.61 -2.90 -6.60
Reformists Put on Notice

Key Points To Watch
Leadership changes approved by the ruling CPV at its quinquennial congress in early 2011 were confirmed by the 500-member National Assembly in July. The personnel shuffle has enhanced the influence of the CPVs conservative faction, which now claims both the national presidency and the post of party general-secretary Prime Minister Nguyen Tan Dung, an advocate of liberal economic policies, won election to a second five-year term, but his freedom of movement will be more limited going forward, and any serious setbacks for the economy that pose a threat to stability will carry a greater risk of triggering an abrupt change in policy course High on the prime ministers immediate list of priorities is a state-sector wage reform program aimed at addressing distortions that have contributed to reduced productivity and a brain drain in the state sector. The objective is to replace a system in which higher pay levels are closely tied to seniority and wage hikes are awarded without regard to productivity with a model that relies more on merit-based remuneration. The reform is seen as an essential first step toward the partial privatization of some of the largest remaining SOEs
Highlights
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31-Oct-2011
Vietnam Country Forecast

A key medium-term goal is building out the domestic infrastructure, including urban transportation and communication networks deemed essential to creating a solid foundation for a transition to a knowledge-based economy. Success on this front will require not only increased investment spending, but also improvement in the execution of the capital budget. To ensure adequate revenues for higher levels of investment, the government has proposed tighter tax enforcement in the foreign-owned sector of the economy, more careful management of natural resources, and adjustments in tariff levels, all of which have implications for international firms doing business in Vietnam
Inflation Concerns Persist

The governments five-year development plan for 2011-2015 marks a continuation of a long-term program to achieve industrialized-country status by 2020. However, the new plan focuses on ensuring sustainable development, which will entail closer attention to addressing the social strains that have emerged as a result of a decade of rapid growth Evidence that economic liberalization is contributing to social instability, either by failing to deliver as promised or by encouraging unrealistic expectations among the population, will generate pressure from conservatives, resulting in occasional unanticipated (and politically motivated) setbacks that will frustrate international investors A combination of less favorable external conditions and the dampening affect of monetary tightening and other anti-inflation measures will hold the annual growth rate to 5.5% this year. Consumer price increases have edged downward since topping 23% (year-on-year) in August, a three-year high, but inflation will remain quite high, at 18.5%, in 2011 Exports grew by nearly 34% (year-on-year) over the first 10 months of 2011, boosted by the devaluation of the dong early in the year. Multilateral agencies have advised Hanoi to take steps to eliminate uncertainty by adopting a more predictable exchange-rate policy, but the competing pressures created by high inflation and below-target growth will discourage action that might limit the flexibility of monetary authorities Inflation will ease in the second half of the forecast period as reduced global uncertainty eases pressure on the currency. A sustained reduction of inflation will require aggressive steps by the government to redirect the flow of credit away from state enterprises toward private-sector businesses. Given the likely lack of political will to impose such a policy, inflation is forecast to average 8.7% per year through 2016 An analysis of the banking sector conducted by the Moodys rating agency concluded that the quality of assets held by state-owned lenders is much worse than implied by official data on non-performing loans. Although the states majority ownership of all major banks, an implicit guarantee of deposits, will provide protection against a systemic crisis, the governments failure to intervene to prevent a loan default by a large SOE in late 2010 highlights the risks inherent in making such an assumption.
Economic Forecasts for the Three Alternative Regimes

CPV Mainstream
Growth (%) Inflation (%) CACC ($bn)
Orthodox CPV
Growth (%) Inflation (%) CACC ($bn) Growth (%)
CPV Liberals
Inflation (%) CACC ($bn)
2011 2012-2016
5.5 7.1
18.2 8.7
-2.90 -6.60
4.8 4.0
19.1 7.2
-3.70 -4.20
5.2 5.4
17.3 9.6
-2.60 -5.30
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Highlights

31-Oct-2011

Political Fact Sheet
CAPITAL: Hanoi CONSTITUTION: April 1992 ADMINISTRATIVE SUBDIVISIONS: 64 provinces, 6 municipalities POPULATION: 2010: 89.03 million AREA: 329,707 sq. km. OFFICIAL LANGUAGE: Vietnamese STATUS OF PRESS: completely controlled SECTORS OF GOVERNMENT PARTICIPATION: All major sectors of the economy are controlled by the central government. CURRENCY EXCHANGE SYSTEM: crawling peg EXCHANGE RATE: 9/23/2011 $1=20970.30 dong ELECTIONS: The president is elected by the National Assembly for a five-year term; last, July 25, 2011; next, scheduled July 2016. National Assembly elections are held every five years; last, May 20, 2007; next, scheduled May 2012.
HEAD OF STATE: President Truong Tan Sang (2011) HEAD OF GOVERNMENT: Prime Minister Nguyen Tan Dung (2006) OFFICIALS: Nguyen Phu Trong, Secretary-General, CPV Hoang Trung Hai, Deputy Prime Minister Nguyen Thien Nhan, Deputy Prime Minister Vu Van Ninh, Deputy Prime Minister Nguyen Xuan Phuc, Deputy Prime Minister Cao Duc Phat, Agriculture Trinh Dinh Dung, Construction Vuong Dinh Hue, Finance Pham Binh Minh, Foreign Affairs Nguyen Thi Kim Tien, Health Vu Huy Hoang, Industry & Trade Nguyen Bac Son, Information & Communications Nguyen Thai Binh, Internal Affairs Pham Thi Hai Chuyen, Labor & Social Welfare Phung Quang Thanh, National Defense Bui Quang Vinh, Planning & Investment Tran Dai Quang, Public Security Dinh La Thang, Transport LEGISLATURE: Unicameral: 493-member National Assembly. The National Assembly elects the Council of Ministers and the president. Seat distribution: Vietnamese Communist Party (CPV), 450; other, 42; independent, 1.
Current Data
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31-Oct-2011
Vietnam Databank
2001-2005 Average 2006-2010 Average
85.33 977 7.0 11.0 30.08 35.3 22.87 26.9 27.83 32.6 -4.96 -5.7 27.72 1.2 4.6
2001
32.69 410 6.9 -0.4 9.53 29.2 7.00 21.4 7.96 24.3 -0.96 -2.9 7.63 2.1 6.3
2002
35.06 434 7.1 3.8 10.92 31.1 6.99 19.9 7.91 22.6 -0.92 -2.6 8.20 2.0 6.0
2003
39.55 483 7.4 3.3 13.19 33.4 8.43 21.3 9.28 23.5 -0.85 -2.2 10.12 2.1 5.8
2004
45.43 547 7.7 7.8 15.11 33.3 10.60 23.3 11.31 24.9 -0.71 -1.6 12.24 2.1 5.6
2005
52.92 629 8.5 8.2 17.39 32.9 14.13 26.7 16.70 31.6 -2.57 -4.9 15.26 2.1 5.3
Domestic Economic Indicators GDP (Nominal, $bn) Per Capita GDP ($) Real GDP Growth Rate (%) Inflation Rate (%) Capital Investment ($bn) Capital Investment/GDP (%) Budget Revenues ($bn) Budget Revenues/GDP (%) Budget Expenditures ($bn) Budget Expenditures/GDP (%) Budget Balance ($bn) Budget Balance/GDP (%) Money Supply (M1, $bn) Change in Real Wages (%) Unemployment Rate (%) International Economic Indicators Foreign Direct Investment ($bn) Forex Reserves ($bn) Gross Reserves (ex gold, $bn) Gold Reserves ($bn) Gross reserves (inc gold, $bn) Total Foreign Debt ($bn) Total Foreign Debt/GDP (%) Debt Service ($bn) Debt Service/XGS (%) Current Account ($bn) Current Account/GDP (%) Current Account/XGS (%) Exports ($bn) Imports ($bn) Trade Balance ($bn) Exports of Services ($bn ) Income, credit ($bn) Transfers, credit ($bn) Exports G&S ($bn) Liabilities ($bn) Net Reserves ($bn) Liquidity (months import cover) Currency Exchange Rate Currency Change (%) Social Indicators Population (million) Population Growth (%) Infant Deaths/1000 Persons under Age 15 (%) Urban Population (%) Urban Growth (%) Literacy % pop. Agricultural Work Force (%) Industry-Commerce Work Force (%) Services Work Force (%) Unionized Work Force (%) Energy - total consumption (1015 Btu) Energy - consumption/head (109 Btu)
41.13 501 7.5 4.5 13.23 32.0 9.43 22.5 10.63 25.4 -1.20 -2.8 10.69 2.1 5.8 1.54 6.02 6.02 0.13 6.15 14.04 34.3 0.74 2.9 -0.67 -1.5 -2.2 22.17 23.74 -1.57 3.42 0.23 2.38 28.19 0.56 5.59 2.8 15424.000 -2.3 81.94 1.3 31 32 25 5.5 94 64 12 24 0 1.02 0.01
7.46 1.30 1.40 1.45 1.61 1.95 17.76 3.66 4.12 6.22 7.04 9.05 17.93 3.67 4.12 6.22 7.04 9.05 0.32 0.09 0.11 0.14 0.14 0.17 18.25 3.76 4.23 6.36 7.18 9.22 30.43 12.59 12.27 11.38 16.90 17.04 35.0 38.5 35.0 28.8 37.2 32.2 1.12 0.80 0.85 0.77 0.61 0.69 1.6 4.1 3.9 3.0 1.8 1.7 -5.61 0.68 -0.60 -1.93 -0.96 -0.56 -6.4 2.1 -1.7 -4.9 -2.1 -1.1 -7.7 3.5 -2.8 -7.5 -2.9 -1.4 56.07 15.03 16.71 20.15 26.49 32.45 65.45 14.55 17.76 22.73 28.77 34.89 -9.38 0.48 -1.05 -2.58 -2.28 -2.44 6.26 2.81 2.95 3.27 3.87 4.18 0.96 0.32 0.17 0.13 0.19 0.36 6.07 1.25 1.92 2.24 3.09 3.38 69.36 19.41 21.75 25.79 33.64 40.37 0.75 0.55 0.63 0.61 0.56 0.46 17.50 3.21 3.60 5.75 6.62 8.76 3.4 2.6 2.4 3.0 2.8 3.0 16815.800 14725.000 15280.000 15510.000 15746.000 15859.000 -3.3 -3.9 -3.8 -1.5 -1.5 -0.7 87.08 1.2 24 26 28 3.3 91 56 17 27 0 1.57 0.02 79.81 1.3 34 33 23 5.9 94 65 10 25 0 0.85 0.01 80.86 1.3 30 32 24 5.7 94 67 10 23 0 0.95 0.01 81.95 1.3 29 32 25 5.6 94 67 10 23 0 0.98 0.01 83.02 1.3 31 32 26 5.4 94 63 12 25 0 1.13 0.01 84.07 1.3 30 32 27 5.1 94 57 18 25 0 1.20 0.01
Current Data
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31-Oct-2011
Vietnam Databank
2001-2005 Average 2006-2010 Average
85.33 977 7.0 11.0 30.08 35.3 22.87 26.9 27.83 32.6 -4.96 -5.7 27.72 1.2 4.6 7.46 17.76 17.93 0.32 18.25 30.43 35.0 1.12 1.6 -5.61 -6.4 -7.7 56.07 65.45 -9.38 6.26 0.96 6.07 69.36 0.75 17.50 3.4 16815.800 -3.3 87.08 1.2 24 26 28 3.3 91 56 17 27 0 1.57 0.02
2006
60.91 716 8.2 7.4 20.32 33.4 17.06 28.0 20.09 33.0 -3.03 -5.0 18.27 2.0 4.8
2007
71.02 825 8.5 8.3 27.18 38.3 19.27 27.1 22.76 32.1 -3.49 -4.9 27.02 2.0 4.6
2008
91.10 1046 6.3 23.1 31.53 34.6 25.03 27.5 29.09 31.9 -4.06 -4.5 26.58 -3.1 4.7
2009
97.18 1103 5.3 7.1 33.55 34.5 22.89 23.6 31.23 32.1 -8.34 -8.6 33.12 6.0 4.7
2010
106.43 1195 6.8 8.9 37.84 35.6 30.10 28.3 35.98 33.8 -5.88 -5.5 33.60 -0.9 4.3
Domestic Economic Indicators GDP (Nominal, $bn) Per Capita GDP ($) Real GDP Growth Rate (%) Inflation Rate (%) Capital Investment ($bn) Capital Investment/GDP (%) Budget Revenues ($bn) Budget Revenues/GDP (%) Budget Expenditures ($bn) Budget Expenditures/GDP (%) Budget Balance ($bn) Budget Balance/GDP (%) Money Supply (M1, $bn) Change in Real Wages (%) Unemployment Rate (%) International Economic Indicators Foreign Direct Investment ($bn) Forex Reserves ($bn) Gross Reserves (ex gold, $bn) Gold Reserves ($bn) Gross reserves (inc gold, $bn) Total Foreign Debt ($bn) Total Foreign Debt/GDP (%) Debt Service ($bn) Debt Service/XGS (%) Current Account ($bn) Current Account/GDP (%) Current Account/XGS (%) Exports ($bn) Imports ($bn) Trade Balance ($bn) Exports of Services ($bn ) Income, credit ($bn) Transfers, credit ($bn) Exports G&S ($bn) Liabilities ($bn) Net Reserves ($bn) Liquidity (months import cover) Currency Exchange Rate Currency Change (%) Social Indicators Population (million) Population Growth (%) Infant Deaths/1000 Persons under Age 15 (%) Urban Population (%) Urban Growth (%) Literacy % pop. Agricultural Work Force (%) Industry-Commerce Work Force (%) Services Work Force (%) Unionized Work Force (%) Energy - total consumption (1015 Btu) Energy - consumption/head (109 Btu)
41.13 501 7.5 4.5 13.23 32.0 9.43 22.5 10.63 25.4 -1.20 -2.8 10.69 2.1 5.8 1.54 6.02 6.02 0.13 6.15 14.04 34.3 0.74 2.9 -0.67 -1.5 -2.2 22.17 23.74 -1.57 3.42 0.23 2.38 28.19 0.56 5.59 2.8 15424.000 -2.3 81.94 1.3 31 32 25 5.5 94 64 12 24 0 1.02 0.01
2.40 6.70 9.58 7.60 11.00 13.38 23.47 23.88 16.03 12.05 13.38 23.48 23.89 16.45 12.47 0.21 0.27 0.29 0.36 0.46 13.59 23.75 24.18 16.81 12.93 19.13 23.08 27.15 37.90 44.91 31.4 32.5 29.8 39.0 42.2 0.74 0.87 1.10 1.26 1.65 1.5 1.4 1.4 1.8 1.9 -0.16 -6.95 -10.79 -6.12 -4.04 -0.3 -9.8 -11.8 -6.3 -3.8 -0.3 -11.2 -13.8 -8.7 -4.7 39.83 48.56 62.69 57.10 72.19 42.60 59.00 75.47 65.40 84.80 -2.77 -10.44 -12.78 -8.30 -12.61 5.10 6.03 7.04 5.66 7.46 0.67 1.17 1.36 0.75 0.83 4.05 6.43 7.31 6.45 6.13 49.65 62.19 78.40 69.96 86.61 0.46 0.45 0.42 1.26 1.18 13.13 23.30 23.76 15.55 11.75 3.7 4.7 3.8 2.9 1.7 15994.000 16105.000 16302.000 17065.000 18613.000 -0.9 -0.7 -1.2 -4.7 -9.1 85.10 1.2 26 28 27 1.2 90 57 18 25 0 1.30 0.02 86.11 1.2 24 26 28 4.9 90 57 18 25 0 1.39 0.02 87.10 1.1 24 26 28 1.2 90 57 18 25 0 1.61 0.02 88.07 1.1 24 25 29 4.7 90 56 18 26 0 1.71 0.02 89.03 1.1 22 26 30 4.6 93 52 15 33 0 1.83 0.02
Current Data
31-Oct-2011 ~ Page 6-7

31-Oct-2011 Comparison: Vietnam
Regional Real GDP Growth (2010): East Asia/Pacific
Singapore Taiwan China Thailand Philippines Malaysia Papua New Guinea Vietnam Hong Kong South Korea Indonesia Japan Myanmar Australia New Zealand 0 2 4 6 8 (percent) 10 12 14 16
Regional Inflation Rates (2010): East Asia/Pacific

Vietnam Myanmar Papua New Guinea Indonesia Philippines China Thailand South Korea Singapore Australia Hong Kong New Zealand Malaysia Taiwan Japan -2.0 0.0 2.0 4.0 (percent) 6.0 8.0 10.0
Page 8 31-Oct-2011
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Current Data

31-Oct-2011 Comparison: Vietnam
Regional Current Account/GDP (2010): East Asia/Pacific
Singapore Malaysia Taiwan Hong Kong China Thailand Philippines Japan South Korea Myanmar Indonesia Australia Vietnam New Zealand Papua New Guinea -30.0 -20.0 -10.0 0.0 (percent) 10.0 20.0 30.0
Economic Performance Profile Country's Ranking Relative to All Countries Covered by Political Risk Services 2006-2010
GDP Per Capita ($) Real GDP Growth (%) Inflation (%) Unemployment (%) Capital Investment (% of GDP) Budget Balance (% of GDP) Current Account (% of GDP) Debt Service Ratio Currency Change (%)
977 7.0 11.0 4.6 35.3 -5.7 -6.4
1.6 -3.3
NEXT 25%
BEST 25%
NEXT 25%
WORST 25%
Current Data
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Social Indicators
Primary Energy Energy Consumption (1015 Btu): 9 Per Capita Consumption (10 Btu): 1.83 0.02
as of 2010
Population Annual Growth Infant Deaths per 1,000 Persons Under Age 15 Urban Population Urban Growth Literacy 1.1% 22 26% 30% 4.6% 93%
Work Force Distribution Agriculture Industry-Commerce Services Unions 52% 15% 33% 0%
Ethnic Groups Vietnamese (86%), other (14%) Languages Vietnamese, French, Chinese, English, Khmer, tribal languages Religions Buddhist, Taoist, Roman Catholic, indigenous beliefs, and other
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Current Data

31-Oct-2011
Vietnam
Country Forecast
Comment & Analysis
Reformists Put on Notice Leadership changes approved by the ruling Communist Party of Vietnam (CPV) at its quinquennial congress in early 2011 were confirmed by the 500-member National Assembly in July. The personnel shuffle has enhanced the influence of the CPVs conservative faction, which now claims both the national presidency and the post of party general-secretary. Prime Minister Nguyen Tan Dung, an advocate of liberal economic policies, won election to a second five-year term, but his freedom of movement will be more limited going forward, and any serious setbacks for the economy that pose a threat to stability will carry a greater risk of triggering an abrupt change in policy course. Among the key figures hat Dung will rely on to forestall a power grab by the hard-liners is Finance Minister Vuong Dinh Hue, who will be responsible for bringing fresh vigor to a program to reform the countrys inefficient state-owned enterprises (SOEs), which account for about one-quarter of GDP. Vuong previously served as the head of Vietnams State Audit Office, and replaces Vu Van Ninh, who was blamed for some of the countrys economic woes, but remains in the Cabinet as a deputy minister. Nguyen Van Binh, a Russian-educated economist and accounting expert who is known for being well-attuned to the concerns of the business community, takes over as head of the State Bank of Vietnam. He will undoubtedly face strong pressure to adopt a cautious approach to monetary tightening, and his response will have significant implications for the success of efforts to rein in inflation. The Defense portfolio remains in the hands of Gen. Phung Quang Thanh, who has been at the forefront of efforts to improve ties with the US. His continued presence in the Cabinet points to policy continuity on that front, as does the election of Pham Binh Minh as foreign minister. Minh is generally seen as pro-Western and previously served at Vietnams embassy in Washington and the UN headquarters in New York as Vietnams deputy permanent representative. Thanhs re-election as minister of defense also suggests that Vietnam will maintain a firm stance toward China following recent naval skirmishes in disputed areas of the South China Sea.
Comment & Analysis
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Policy Challenges High on the prime ministers immediate list of priorities is a state-sector wage reform program aimed at addressing distortions that have contributed to reduced productivity and a brain drain in the state sector. The objective is to replace a system in which higher pay levels are closely tied to seniority and wage hikes are awarded without regard to productivity with a model that relies more on merit-based remuneration. The reform is seen as an essential first step toward the privatization of SOEs, which currently account for somewhat more than one-quarter of GDP. A key medium-term goal is building out the domestic infrastructure, including urban transportation and communication networks deemed essential to creating a solid foundation for a transition to a knowledge-based economy. Success on this front will require not only increased investment spending, but also improvement in the execution of the capital budget. To ensure adequate revenues for higher levels of investment, the government has proposed tighter tax enforcement in the foreign-owned sector of the economy, more careful management of natural resources, and adjustments in tariff levels, all of which have implications for international firms doing business in Vietnam. In terms of non-policy risks, the main concern is the banking sector. Based on an analysis of six banks that account for nearly 30% of commercial banking assets, the Moodys rating agency has concluded that the quality of assets held by the lenders is much worse than implied by official data on non-performing loans. The states majority ownership of all major banks represents an implicit guarantee of deposits that will provide protection against a systemic crisis, but the governments failure to intervene to prevent a loan default by a large SOE in late 2010 highlights the risks inherent in making such an assumption. Slower Growth, Easing Inflation Real GDP growth slowed to 5.6% (year-on-year) over the first half of 2011, compared to the 6.2% pace set in the first two quarters of 2010. A combination of less favorable external conditions and the dampening affect of monetary tightening and other antiinflation measures will hold the annual growth rate to 5.5%. The main near-term risks for the economy stem from the governments uncertain ability to tame inflation without triggering a hard landing. Consumer price increases have edged downward since topping 23% (year-on-year) in August, a three-year high, but inflation came in above 21% (year-on-year) in October. The weakening trend is expected to persist over the final two months of the year, but the annual average will remain quite high, at 18.2%, in 2011.
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Comment & Analysis

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Exports grew by nearly 34% (year-on-year) over the first 10 months of 2011, boosted by the devaluation of the dong early in the year. Although imports grew by close to 25% over the same period, the trade deficit has narrowed compared to the same period last year. The pace of export growth will slow in the final quarter of the year, but a corresponding easing of commodity prices and the dampening effect of anti-inflation measures will also check the growth of imports, preventing a significant widening of the trade shortfall, and the current account deficit is forecast to narrow to $2.9 billion this year. Multilateral agencies have advised Hanoi to take steps to eliminate uncertainty by adopting a more predictable exchange-rate policy. However, no steps are likely to be taken in that regard, as the competing pressures created by high inflation and belowtarget growth rates will discourage action that might limit the flexibility of monetary authorities.
Comment & Analysis
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Vietnam
Country Forecast
Forecast Scenarios
SUMMARY OF 18-MONTH FORECAST CPV Mainstream 55% Orthodox CPV 40% CPV Liberals 5%
REGIMES & PROBABILITIES
SUMMARY OF FIVE-YEAR FORECAST CPV Mainstream 55% Orthodox CPV 40% CPV Liberals 5%
REGIMES & PROBABILITIES
Most Likely Regime Scenario 18-Month Forecast Period: CPV Mainstream (55% Probability) Five-Year Forecast Period: CPV Mainstream (55% Probability)
CPV Mainstream 2011 2012-2016 Growth (%) 5.5 7.1 Inflation (%) 18.2 8.7 CACC ($bn) -2.90 -6.60
The mainstream faction of the Communist Party of Vietnam (CPV) that has dominated the political scene over the past two decades supports liberal economic reforms, including an expanded role for the private sector and foreign investors, but overwhelmingly rejects political liberalization. The CPV chose its leaders for the next five years at a national congress held in January 2011, and the personnel changes reflect an effort to more evenly balance the influence of the partys mainstream and orthodox factions. The reformist prime minister, Nguyen Tan Dung, won re-election to his post in January (and was confirmed by the National Assembly in July). His presence will provide protection against a wholesale retreat from the liberal model that has guided economic policy, but the replacement of some of his like-minded underlings by more conservative figures will narrow Dungs room for maneuver going forward, and any serious setbacks for the economy that pose a threat to stability will carry a greater risk of triggering an abrupt change in policy course. The appointment of a hard-liner, Truong Tan Sang, as president will create an additional check on Dungs freedom to act. The new general-secretary of the party, Nguyen Phu
Forecast Scenarios
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Trong, is a conservative with a reputation for seeking consensus, and his chief responsibility will be mediating any disputes that might erupt between Dung and Sang, who are long-time rivals. The conservatives have long expressed skepticism about the liberal economic reforms pushed by Dung and the outgoing reformist president, Nguyen Minh Triet, and their doubts have been reinforced by evidence that rapid economic growth is generating socioeconomic imbalances that pose a threat to domestic stability. The increased influence granted to the orthodox Communists suggests that such concerns are gaining wider acceptance within the CPV, as does the larger number of members of the military and the police within the Central Committee and the Politburo, which signals the assignment of higher priority to national security issues. Given the generational nature of the partys ideological dividethe conservative faction is dominated by the CPVs old guard, while the majority of younger members are aligned with the mainstream factionthe renewed influence of the hard-liners is likely to be a temporary phenomenon. But that does not mean the conservatives will surrender to demographic reality without a fight. As such, the 2016 leadership elections may be unusually contentious, and preparations for that battle will create a heightened risk of instability in the interim, with sparring between President Sang and Prime Minister Dung being the most likely source of strife. Political Pressures Will Limit Improvements to Investment Climate While most key officials are amenable to easing restrictions on investment, and changes already made or under consideration should facilitate the expansion of the private sector, economic reform will be undertaken with a close eye on the domestic impact of the changes. The Politburo will carefully monitor the results of liberalization at every step to ensure that the political temperature does not rise to a point where unrest might threaten the CPVs political control. Evidence that economic liberalization is contributing to social instability, either by failing to deliver as promised or by encouraging unrealistic expectations among the population, will generate pressure from conservatives, resulting in occasional unanticipated (and politically motivated) setbacks that will frustrate international investors. That said, the integration of the Vietnamese economy into global markets will create strong incentives to press ahead with liberalization to the full extent that it is politically feasible to do so. The countrys accession to the WTO in January 2007 represents a significant wedge in that regard. Under the terms of accession, Vietnam has committed to aggressive liberalization of its services sector that will result in a substantial easing of restrictions on market access and foreign equity ownership over a period of several years. Page 16 31-Oct-2011 Forecast Scenarios

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But Vietnam entered the WTO as a designated non-market economy, reflecting the governments maintenance of a socialist orientation even as it has introduced a wide range of market mechanisms over the past 20 years. A change in the designation is unlikely until sometime (probably late) in the current decade, and will require farreaching reforms of the legal system, the establishment of a market-based labor system, the elimination of price and currency controls, and a significant reduction of the states role in economic affairs. The governments five-year development plan for 20112015 marks a continuation of a long-term program to achieve industrialized-country status by 2020. The central goal of the 20062010 plan was lifting Vietnam out of the ranks of the worlds poor countries to the middle-income category, an objective that was achieved last year. The new plan focuses on ensuring sustainable development, which will entail closer attention to addressing the social strains that have emerged as a result of a decade of rapid growth. Specific targets of the plan include average annual real GDP growth of 7%8%, supported by a five-year increase in the state budget by 22%23.5% and a 12.2% increase in exports. Another key goal is reducing urban unemployment to 4% by 2015. In terms of social development, the plan sets a goal of ensuring access to clean water for 98% of the urban population and 96% of the rural population. In broad terms, the plan is aimed at solidifying the foundation for a modern, marketbased (but still socialist-oriented) economy capable of competing in the global marketplace. Toward that end, the plan will promote economic diversification, with particular attention to the services sector; encourage the application of advanced technologies to improve the efficiency and competitiveness of industrial production; grant high priority to pursuing enhanced regional and international economic integration, and revising the legal framework as necessary to achieve compliance with international and multilateral agreements; and otherwise facilitate the creation of a welcoming climate for private investment, stressing equality, transparency, and stability, so as to boost employment opportunities. As with the previous plan, the key to fulfilment of current objectives will be a steady increase in the economic role of the private sector and, especially, foreign direct investment (FDI). The government has set a goal of attracting annual FDI of $22 billion $25 billion, improving the quality of FDI, and closing the large gap between committed and disbursed FDI. Changes implemented under a new investment law that came into effect in July 2006 streamlined and added flexibility to the investment process, a reform that contributed to a steep rise in licensed FDI in 20072008. After dropping amid the global recession, licensed FDI rebounded to $19.8 billion last year, but that was still well
Forecast Scenarios
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below the total registered in 2008, and licensed FDI for the first 10 months of 2011 was less than 80% of the figure for the same period in 2010. Officials have made some progress in creating a more inviting climate for business, but there is still much work to be done if Vietnam is to compete effectively with other countries in the region. According to the most recent Doing Business report issued by the World Bank, Vietnam ranks near the bottom globally with regard to the difficulty of paying taxes and protecting investors. Other weaknesses highlighted by the World Bank included difficulty in accessing power supplies and the very low recovery rate in cases of insolvency. Other specific impediments include high transportation (particularly maritime) fees, high legal costs, and the regular assessment of additional fees to clear goods through customs. In addition, foreign companies have reported that tax administrators frequently reject claimed deductions, with the result that their actual tax burden is well above the official rate. On a more positive note, a new labor code promised to greatly enhance labor-market flexibility. Proposed changes include a relaxation of restrictions on termination, an increase in maximum overtime hours (from 200 per year to 300), the licensing of agencies providing workers on a temporary basis, a requirement that at least 51% of a firms work force approve any collective wage agreements, tight restrictions on resort to strikes, and the elimination of the 36-month limit on set-term labor contracts. However, the revised code also reduces the maximum term of work permits for foreign employees from 36 months to 12 months. Taking these various factors into account, Vietnam is expected to lag substantially behind top regional competitors for investment for the foreseeable future. Moreover, resistance from conservative elements, especially within the bureaucracy and the military, and a deep-rooted culture of corruption pose potentially insurmountable obstacles to creating a more welcoming business climate. In general, the government will seek to attract FDI in all industries producing goods for export, processing industries, and those that promote agricultural and rural economic development. Foreign investment also will be encouraged in information technology, biotechnology, oil and gas, electronics, and telecommunications. Top priority will be given to foreign investment projects in remote, isolated, and mountainous regions, as well as in areas that suffer from what the government characterizes as the most difficult stage of socioeconomic development.
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The government has been pursuing an ambitious program to divest itself of public business enterprises, which are large in number, but relatively small in output. Nearly 20 years after the government initiated its equitization (partial privatization) program, state-owned enterprises (SOEs) still account for about one-quarter of GDP, and consume roughly 40% of business-related resources, including credit. The process has been slowed by a cumbersome bureaucracy and opposition from powerful state managers and local CPV officials. Local economists have warned that the continued presence of numerous large SOEs, such as PetroVietnam and Vietnam Airlines, will create a drag on economic growth, as private companies lacking the political connections of the state firms will be at a disadvantage in the competition for capital and loans. That in turn has implications for the external balances, as the SOEs are a key source of demand for imports, while private firms make a large contribution to export growth. The inefficiency of the state sector is highlighted by the debt troubles of one of the largest SOEs, shipbuilder Vinashin, which is carrying total debt of $4.5 billion and failed to make a payment on a $600 million loan to international creditors in late 2010. The government refused to bail the company out, and some officials have been arrested, sending a strong message to the managers of other SOEs to reform or face the consequences. However, the governments stance sent a strong negative message to international creditors, who were under the impression that the government would guarantee the debts of the SOEs. In part because of Vinashins default, all three major international rating agencies downgraded Vietnams credit rating in 2010. The terms of Vietnams membership in the WTO include opening its heavily protected services sector to foreign competition. Officials have sought to better prepare local firms by inviting foreign investors to purchase minority shares of banks and insurers, with the aim of enhancing the accountability, transparency, and efficiency of the enterprises. In 2006, the State Bank of Vietnam (SBV) issued an order for all state-owned banks to speed up the process of restructuring, including the application of Western accounting standards to provide a more accurate assessment of the health of the institutions. However, the government has failed to attract strategic investors for plum assets, including Vietcombank and Bao Viet Insurance, owing to a requirement that prospective buyers agree to top up their offer if it is lower than the average price per share determined by a subsequent initial public offering (IPO). The risk for investors was underscored when the share price for Bao Viet stock fell sharply lower than the minimum IPO price when the stocks began trading in the over-the-counter market. Beyond the legal impediments to generating interest in the assets put up for sale, the more recent
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slump in the local stock marketsa reflection of the retreat of domestic investors in response to the governments anti-inflation measureswill encourage officials to delay some planned sales of firms in the banking, telecommunications, and airline industries. The increased presence of foreign firms generated pressure on the government to equalize tax rates that had favored international investors. Effective January 2004, the corporate tax rate for domestic firms fell from 32% to 28%, while the rate for foreign firms rose from the previous maximum of 25% to 28%. The government has more recently taken steps to reduce its reliance on revenue sources that are targeted for reduction or elimination under trade and investment treaties. A new natural resource tax that took effect on July 1, 2010 introduced higher royalty rates on mining output and eliminated tax exemptions and reductions previously available to companies. A Personal Income Tax Law (PITL) was initially scheduled to take effect in January 2009, but was delayed as part of a package of stimulus measures introduced in 2009. Taxpayers will continue to be categorized by residency status, but at least initially the tax rate on income will be 20% for both residents and non-residents, representing a significant reduction in the rate for non-residents. The PITL is part of a broader program of simplifying and equalizing the tax structure that it is hoped will promote enforcement of (and adherence to) tax obligations, creating room for a further lowering of the corporate tax rate and the reduction or elimination of numerous business-related fees. One tax change that has generated some controversy is a 25% levy on capital gains from property transactions approved in November 2008. The measure was introduced with the aim of curbing real estate speculation, which was blamed for skyrocketing housing costs. Separate taxes on land use and home ownership are still under consideration. Real estate brokerages claim that the measure will inevitably drive up prices, making dwellings even more unaffordable for those with lower incomes, and other critics have warned that the tax will cripple the fledgling property market. But signs of overheating were clearly evident when the tax measure was approved, and there remain concerns that loose state-directed lending could generate a new speculative bubble. Foreign exchange reserves totaled more than $24 billion at the end of 2008, but by the end of 2010, the figure had been halved, the result of a widening trade deficit, weaker flows of remittances, and the hoarding of dollars by households and businesses attempting to create a hedge against the weakening dong. The combination of dong depreciation and shrinking reserves has raised doubts about the ability of monetary authorities to check inflation, even as high interest rates and an increasingly gloomy outlook for exports point
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to slower economic growth. Investors have been pulling out of the stock market as confidence weakens, creating pressure on the government to create enticing opportunities by moving more aggressively toward the sale of the most attractive SOEs. Toward that end, Prime Minister Dung is pushing hard for approval of a state-sector wage reform aimed at addressing distortions that have contributed to reduced productivity and a brain drain in the state sector. The objective is to replace a system in which higher pay levels are closely tied to seniority and wage hikes are awarded without regard to productivity with a model that relies more on merit-based remuneration. The reform is seen as an essential preparation for sale of plum SOEs. The fall in international reserves prompted the central bank to ration dollars to local banks, and officials are much more closely scrutinizing foreign-exchange transactions to ensure compliance with the rules. The central bank engineered a 9.3% devaluation of the dong in early 2011, the most significant adjustment of the exchange rate in nearly two decades, while simultaneous tightening monetary and fiscal policy with the aim of taming inflation. The narrowing of the current account deficit helped to boost net reserves to about $13.5 billion by mid-2011, but the total represents less than two months of import cover. The factors contributing to the drain on reserves will persist in the near term, a prospect that points to the further weakening of the dong and a risk of balance-of-payments difficulties, particularly given the decline in disbursed international donor support. Over the medium term, higher oil prices and proceeds from the equitization program will enable the central bank to restore reserves to a level sufficient to provide at least three months of import cover, limiting the danger of any pronounced or prolonged tightening of repatriation restrictions or exchange controls during the forecast period. Expanding Trade Opportunities The government will liberalize trade policies according to its obligations as a member of the WTO and the ASEAN Free Trade Area (AFTA), and its bilateral agreement with the US. Under the terms of WTO membership, Vietnam is obligated to reduce tariffs on most goods to 0%35% by 2014. Among products with higher bound tariffs are alcoholic and some caffeinated beverages, tobacco products, new and used motor vehicles and components, and roof tiles. In addition, quotas (with variable tariff rates) on imports such as eggs, tobacco, sugar, and salt will be eliminated according to negotiated timetables. The government has also agreed to set limits on trade-distorting subsidies for agricultural exports.
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A new law passed as a condition for WTO accession has harmonized the licensing procedure for both foreign and domestic traders, and the government has committed to making the necessary rules changes required to permit foreign firms and individuals to engage in trade activities as importers/exporters of record, subject to registration, and to allow importers to choose their domestic distributors. Trade in some products will remain under monopoly control of the state for moral reasons (tobacco and alcohol products), cultural reasons (newspapers, journals, and audio-visual materials), or because they are natural monopolies (all petroleum products). Under an enhanced trade deal reached with the US in May 2006, tariffs on 94% of US manufactured goods and 75% of agricultural goods will be reduced to 15% or less, and Vietnam has also agreed to open up its telecoms, financial, and energy sectors to foreign competition in return for US congressional approval of permanent normal trade relations (PNTR), which was achieved in December 2006. Some Risk of Turmoil Many sources of discontent are present in Vietnam, including soaring inflation, rampant corruption, a widening disparity in the incomes of the urban and rural populations, and a repressive and authoritarian government. However, the risk of a generalized outbreak of political unrest that might threaten the CPVs control is low. Significantly, the vast majority of urban Vietnamese have reaped the benefits of rapid economic growth, and unemployment is lower in the cities than in the countryside. As such, the risk of a dangerous escalation of tensions is lower in urban areas, where an outbreak of unrest would pose a greater threat of serious instability. In general, public protests in Vietnam are spontaneous, isolated, arise over local issues, and are dealt with swiftly and harshly by the authorities. A case in point is the eruption of unrest along the border region with Laos in late April 2011. Reportedly, several thousand ethnic minority Hmong protesters organized a protest in Dien Bien Phu province to express a mixture of religious, political, and social grievances, and to demand political autonomy. Unconfirmed reports indicated that dozens of demonstrators were killed by security forces. Ethnic tensions might also lead to unrest among the Montagnards, or mountain people, of the Central Highlands over issues of land ownership and use, as well as religious freedom. Reports of abuses by the government brought the glare of international attention in 2002, but external pressure has been fairly muted in recent years, indicating that the government in Hanoi will not face significant pressure to adopt a soft approach should it encounter problems with the Montagnards.
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Although there are organized dissident groups, the most prominent of which are Block 8406 and the US-based Vietnam Reform Party, supporters of these movements represent only a tiny minority of the Vietnamese population, and the organized nature of the groups makes it that much easier for the government to monitor and control their activities. Internationally, competing claims to the oil-rich Spratly and Paracel Island groups in the South China Sea will strain efforts to maintain peaceful relations with regional neighbors, notably China, which has been accused of violating a regional understanding by building military bases on some of the Spratly atolls. Nonetheless, the risk that tensions over the Spratlys will boil up into a major confrontation is low. Growth-focused Fiscal Policy Will Create Inflation Risks Real GDP growth slowed to 5.6% (year-on-year) over the first half of 2011, compared to the 6.2% pace set in the first two quarters of 2010. A combination of less favorable external conditions and the dampening affect of monetary tightening and other antiinflation measures will hold the annual growth rate to 5.5%. The main near-term risks for the economy stem from the governments uncertain ability to tame inflation without triggering a hard landing. Consumer price increases have edged downward since topping 23% (year-on-year) in August, a three-year high, but inflation came in above 21% (year-on-year) in October. The weakening trend is expected to persist over the final two months of the year, but the annual average will remain quite high, at 18.2%, in 2011. Over the medium term, the countrys membership in the WTO and the continued liberalization of investment rules will help to attract sizeable inflows of FDI, and a continued focus on the establishment of small and medium-sized enterprises (SMEs) will bring greater balance to the overall economy. The PNTR with the US promises to significantly boost the growth of bilateral trade and US investment in Vietnam over the medium term, helping to underpin growth rates averaging 7.1% annually though 2016. The government will continue to pursue an expansionary fiscal policy throughout the forecast period, and significant deficits will persist. Inflation will ease in the second half of the forecast period as reduced global uncertainty contributes to reduced pressure on the currency, but price increases will remain high, owing to demand pressures generated by the maintenance of a loose fiscal policy and the resumption of robust growth. A sustained reduction of inflation will require aggressive steps by the government to redirect the flow of credit away from state enterprises toward
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private-sector businesses. Given the likely lack of political will to impose such a policy, inflation is forecast to average 8.7% per year through 2016. Import Demand Will Sustain Large External Deficits Exports grew by nearly 34% (year-on-year) over the first 10 months of 2011, boosted by the devaluation of the dong early in the year. Although imports grew by close to 25% over the same period, the trade deficit has narrowed compared to the same period last year. The pace of export growth will slow in the final quarter of the year, but a corresponding easing of commodity prices and the dampening effect of anti-inflation measures will also check the growth of imports, preventing a significant widening of the trade shortfall, and the current account deficit is forecast to narrow to $2.9 billion this year. Multilateral agencies have advised Hanoi to take steps to eliminate uncertainty by adopting a more predictable exchange-rate policy. However, no steps are likely to be taken in that regard, as the competing pressures created by high inflation and belowtarget growth rates will discourage action that might limit the flexibility of monetary authorities. The anticipated acceleration of real GDP growth will fuel strong growth of imports over the medium term, but robust growth of exports, increased flows of remittances from Vietnamese overseas, and improvements in the tourism sector will hold the current account shortfall to an average of $6.6 billion per year through 2016. Improved levels of foreign investment will help to allay concerns about any additional foreign borrowing that will be necessary to cover the shortfall in the balance of payments. The willingness of the international community to provide credit and donor support will depend upon evidence of the governments commitment to reform. Membership in the WTO should help in that regard, but the government will need to crack down more aggressively on corruption if foreign financial assistance is to be assured. Second Most Likely Regime Scenario 18-Month Forecast Period: Orthodox CPV (40% Probability) Five-Year Forecast Period Orthodox CPV (40% Probability)
Orthodox CPV 2011 2012-2016 Growth (%) 4.8 4.0 Inflation (%) 19.1 7.2 CACC ($bn) -3.70 -4.20
Reports of growing doubts within the CPV over the wisdom of continuing to pursue a program of liberal economic reforms were partially confirmed at the January 2011 party congress, which resulted in the elevation of members of the CPVs orthodox faction to some key positions. The increased assertiveness of conservative elements with the CPV Page 24 31-Oct-2011 Forecast Scenarios

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reflects concern that the economic reforms have contributed to social discontent that poses a threat to domestic stability and, by extension, the CPVs political authority. Many officials also feel that reforms foster corruption. A dangerous increase in domestic unrest could trigger a power struggle between Prime Minister Dung and President Sang, in which case the president would probably hold the upper hand, as the military and security forces are under the firm control of officers who are already equivocal about reform programs and would likely view a shift in policy as an appropriate response to a breakdown of social order. Tighter Restraints on Foreign Investment Taking a more suspicious view of foreign investment than the current regime, the hardliners would be inclined to impose more severe restrictions on ownership, equity, operations, taxation, repatriation, and exchange. Nevertheless, the government would ease restrictions in strategic sectors, such as oil exploration, in which the ideological risks were deemed acceptable. Hard-liners would increase reliance on state enterprises despite their notorious corruption and inefficiency. Delays and bureaucratic obstacles would increase. Many officials would avoid making decisions, in order to protect themselves from retaliation for allowing foreign investments that displeased the Politburo. Permitted foreign investment would be limited, and that which was allowed would be carefully scrutinized. Officials would make every effort to protect themselves from criticism for being too lax regarding foreigners and foreign influences. This governments desire to isolate the economy from the instability of its neighbors would keep it from adopting austere fiscal and monetary policies. Foreign firms would be required to cope with escalating workers activities inspired by the CPV. The actions would be designed to increase wages and other benefits for workers and to allow workers to become more involved in management decisions. A Brake on Trade Liberalization The hard-line faction would not grant high priority to fulfilling the obligations of membership in the WTO and would be disinclined to liberalize export rules. In fact, an orthodox CPV regime would make maximum use of formal and informal nontariff barriers to protect the state sector. That said, some concessions might be made in order to protect access to the US market and ensure the maintenance of normal trade relations. Resistance Would Beget Repression Some who currently advocate political and economic liberalization would resist the shift to hard-line policies. Protest demonstrations and strikes would be especially widespread in the south, the heart of the liberal attitudes toward economic and social policies. After
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an initial period of disturbance, security forces, including the military, would take the measures necessary to repress disturbances and restore order. Foreign firms would be safe from direct attacks after the hard-line government was firmly established. An orthodox government would also be more likely to risk confrontations related to the territorial disputes with China and other Southeast Asian nations. A Lid on Economic Growth Under the return of an orthodox regime, real GDP growth would slow to an annual average of only 4% through 2016. Inflation would average 7.2% per year through the forecast period, with the impact of inefficiencies in the state sector held in check by the maintenance (or restoration) of government subsidized prices for basic necessities. The economy would be less resilient because a hard-line government would be reluctant to pursue economic reform and would receive reduced levels of foreign aid and investment. The regime in power would not affect the level of economic benefit from increasing oil production. Less International Input and Interest The revival of orthodox Marxist policies forecast under this scenario would profoundly discourage foreign aid and investment, in turn reducing domestic demand for imports. At the same time, trade relations could be disrupted, creating a drag on export growth that would keep the external accounts in deficit, although at a somewhat lower level than under a mainstream CPV regime. Foreign loans would be more difficult to come by. Cautious lenders would provide loans, but only at higher rates and on more restrictive terms. The current account deficit would average $4.2 billion annually through 2016.
Third Most Likely Regime Scenario 18-Month Forecast Period: CPV Liberals (5% Probability) Five-Year Forecast Period: CPV Liberals (5% Probability)
CPV Liberals 2011 2012-2016 Growth (%) 5.2 5.4 Inflation (%) 17.3 9.6 CACC ($bn) -2.60 -5.30
Liberals advocate greater reliance on market mechanisms, but their standing has ebbed since this was discredited within the ruling circle by the regional economic difficulties of 19971998. The liberals form a decided minority within the party, and the public at large views their ideas with suspicion. Although their prospects for gaining control would improve substantially if such ventures in international cooperation as the trade agreement with the US produced clear economic and social benefits, there is little chance of such a favorable circumstance becoming apparent in the 18-month forecast period. Page 26 31-Oct-2011 Forecast Scenarios

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Moreover, as there will be no mechanism for an orderly transfer of government control to liberal members of the CPV before the next party congress in 2016, this regime would most likely come to power during the forecast period amid a serious economic and/or social crisis that results in a mid-term change in leadership. As such conditions would more likely result in the establishment of a hard-line CPV regime, the probability of this scenario is very low. Political Pressures Would Limit Improvements to Climate for Investment A core goal of the liberals would be to relax most restrictions on investment, liberalizing both equity regulations and rules on operations. Revisions in the tax code would be aimed at reducing discrimination against foreign businesses. A liberal government would also seek to streamline the bureaucracy and rationalize the legal system. Regardless of how it came to power, a regime headed by CPV liberals would need to navigate dangerous political waters as it attempted to implement policies designed to rapidly open the economy and move more aggressively to address the impediments to foreign investment. The distrust of conservatives in the CPV and nationalists inside and outside the party would require liberals to move cautiously on any policies that did not hold the promise of producing immediate and concrete benefits, or they could face a strong backlash. Further Trade Liberalization International support for a liberal regime would provide the government with access to financial assistance that would reinforce officials inclination to reduce tariffs. However, this regime would also be more vulnerable to pressure from domestic producers for protective measures. Increased foreign credits would help to prevent a significant depletion of foreign exchange reserves, providing a basis for reducing payment delays. A government headed by the liberal faction of the CPV would pursue policies aimed at increasing the countrys integration into global trade networks, and Vietnam would remain an active participant in regional and global trade organizations. Turmoil to Rise for a Time Under the liberals, the potential for turmoil would rise, at least temporarily. Many nonCommunists, ranging from business executives to students, would see the emergence of such a regime as a sign of the CPVs vulnerability. Workers would feel free to strike for higher wages, and this government would be reluctant to use harsh, repressive tactics. Internal disorder under a liberal regime would create concerns among the governments of neighboring countries, but the risk of international intervention would be low because of the domestic concerns of regional powers such as China. A liberal government might
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be more willing to negotiate with its neighbors over historic territorial disputes. If its initiatives produced improved standards of living and even led to some relaxation of political constraints, this regime could restore order later in the forecast period. In such a case, the foundations of a much more stable society could be constructed. No Immediate Benefit to the Economy Assuming this regime managed to establish firm control over the levers of power, the eventual resumption of steady flows of foreign aid and investment would help to boost the growth rate. However, slower growth in the first half of the forecast period, the result of policy uncertainty during the transition of leadership and the threat of domestic instability, would hold growth for the entire forecast period to an annual average of 5.4% through 2016. A liberal administration would increase spending on social programs and would follow less restrictive monetary policies. As this government reduced wage controls and other restrictions in the labor market, workers would become increasingly assertive in pressing for higher wages to compensate for an increasing cost of living. Combined with healthier growth later in the forecast period, these factors would contribute to inflation averaging 9.6% annually over the five-year forecast period. Economic disruptions arising from the political uncertainty that would accompany the emergence of a liberal CPV regime would dampen both export activity and demand for imports, contributing to a narrowing of the current account deficit early in the forecast period. The resumption of healthy growth beyond the middle of the forecast period would spark a revival in demand for imports, which for the most part would be offset by increased exports of oil and manufactured goods. Nevertheless, the current account deficit would remain fairly large at an annual average of $5.3 billion through 2016.
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Forecast Summary
SUMMARY OF 18-MONTH FORECAST CPV Mainstream 55% Same SLIGHTLY LESS SLIGHTLY LESS Same Same Same SLIGHTLY LESS SLIGHTLY LESS Same Same SLIGHTLY MORE SLIGHTLY MORE Orthodox CPV 40% SLIGHTLY MORE MORE SLIGHTLY MORE MORE SLIGHTLY MORE SLIGHTLY MORE Same SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE MORE MORE CPV Liberals 5% MORE Same SLIGHTLY MORE Same Same SLIGHTLY MORE SLIGHTLY LESS Same SLIGHTLY MORE Same SLIGHTLY MORE SLIGHTLY MORE
REGIMES & PROBABILITIES RISK FACTORS CURRENT Turmoil Investment Equity Operations Taxation Repatriation Exchange Trade Tariffs Other Barriers Payment Delays Economic Policy Expansion Labor Costs Foreign Debt Very High Low Low High High Moderate High Very High Moderate Low Moderate Low
SUMMARY OF FIVE-YEAR FORECAST CPV Mainstream 55% Same SLIGHTLY LESS Same Same Same Orthodox CPV 40% SLIGHTLY MORE MORE SLIGHTLY MORE MORE MORE CPV Liberals 5% Same SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY MORE MORE
REGIMES & PROBABILITIES RISK FACTORS BASE Turmoil Restrictions Investment Trade Economic Problems Domestic International High Moderate Moderate Moderate Low
* When present, indicates forecast of a new regime
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Vietnam Real GDP Growth Under Alternative Regimes

CPV Mainstream Orthodox CPV CPV Liberals
9.0 8.0 (percent) 7.0 6.0 5.0 4.0 3.0 2006
2007
2008
2009
2010e
2011f
20122016f
Vietnam Inflation Under Alternative Regimes

24 22 20 18 16 14 12 10 8 6 2006
(percent)
2007
2008
2009
2010e
2011f
20122016f
Vietnam Current Account Under Alternative Regimes

0.0 -2.0 ($billions) -4.0 -6.0 -8.0 -10.0 -12.0 2006
2007
2008
2009
2010e
2011f
20122016f
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Vietnam
Country Forecast
Political Framework
Players To Watch
Nguyen Tan Dung: Dung replaced Prime Minister Phan Van Khai in 2006, after Khai made clear that the first deputy prime minister was his preferred choice as successor. A staunch advocate of liberal economic reforms who has been responsible for implementing the governments economic program, Dung enjoys extensive ties within the CPV and is also well-respected in financial circles. However, a combination of weaker growth and worrisome inflation evident in recent years has left him vulnerable to heavy criticism from hard-liners within the CPV. Although Dung was re-elected at a party congress held in early 2011, his freedom of action will be constrained by the presence of members of the partys orthodox faction in key posts, including the national presidency. Truong Tan Sang: A member of the CPVs hard-line Communist faction, Sang was confirmed as state president in July 2011, following his election at a party congress early in the year. The former party chairman of Ho Chi Minh City is a long-standing rival of Prime Minister Dung, and Sangs status as the top-ranking CPV officialpreviously held by the partys general-secretarypoints to a high potential for a stormy relationship between the prime minister and the president. Nguyen Phu Trong: Unlike Dung and Sang, the new CPV general-secretary is a northerner, and unlike his predecessor, Nong Duc Manh, who held the top position if the ruling CPVs Central Committee, Trong is not even in the top five of the partys power rankings. A conservative with a reputation for seeking consensus, Trongs chief responsibility is likely to be mediating any disputes that might erupt between Dung and Sang, who are long-time rivals. Communist Party of Vietnam: The CPV has generally avoided the bitter policy disputes and purges that have troubled communist parties in other countries, despite clear factional divisions, and the public airing of internal disputes are rare. All top leaders oppose political liberalization, but economic liberalization has become an increasingly divisive issue, as growing wealth inequality and high inflation have contributed to spreading discontent that has raised the specter of destabilizing social unrest. In the
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event of a power struggle between President Sang and Prime Minister Dung, the hardliners might be able to count on the decisive support of the military and security forces. Bureaucracy: Most middle-level and senior officials are members of the CPV. Fearing that economic liberalization may jeopardize their employment and prerogatives, they are inclined to delay or even sabotage reform initiatives. Bureaucratic inefficiency and corruption often frustrate investors.
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Political Framework
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* Indicates forecast of a new regime.

Inflation % 11.0 18.2 8.7

Current Account ($bn) -5.61 -2.90 -6.60

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Vietnam Country Forecast

Regional Inflation Rates (2010): East Asia/Pacific

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977 7.0 11.0 4.6 35.3 -5.7 -6.4

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