August, 2011

VIETNAM

EDC ECONOMICS

Economy
Nominal GDP (2010) 93 bil USD Population (2010) 87 million Total Trade/GDP (2010) 147 % Currency Vietnamese dong Exchange regime Pegged rate Merchandise imports from Canada (2010) CAD 205 million Main sources of for. exchange (excl. FDI) Crude oil Textile and apparels Largest merchandise export market (2010) U.S. (20 %) Main imports Refined petroleum Industrial M&E Iron & steel

With the new government in place, the focus has clearly shifted to controling inflation over continued economic growth. The Central Bank has raised interest rates aggressively since November, up 500 basis points, while the government has slashed capital investment plans and public spending by 7.4%. As a result, GDP growth figures for Q1 and Q2 came in at 5.4% and 5.7% y/y respectively, a sharp slowdown from previous quarters and well below Vietnam's 7-8% potential growth. Growth will slow to 5.8% in 2011, and accelerate to 7.0% in 2012. With FX reserves falling to USD 12 billion early in the year, authorities devalued the dong by 8% in February then imposed import restrictions on luxury goods in April to rein in the trade deficit. The Central Bank's tightening and efforts to de-dollarize the economy should limit devaluations and ease inflationary Economic Activity
10 9 8 7 6 5 4 3 2 1 0 Q206 Q406 Q207 Q407 Q208 Q408 Q209 Q409 Q210 Q410 Q211 Real GDP, y/y % chg. (L) Industrial production, y/y % chg. (R) 25 20 15 10 5 0 -5 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 -4,000 -2,000 -3,000 -1,000

External Trade
Trade balance, USD Mn. (L) Exports, USD Mn. (R) Imports, USD Mn. (L) 2,000 1,000 0

Financial Indicators
22,000 21,000 20,000 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 12 000 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 0 0 Jun-06 400 200 10 5 600 15 VND per USD (L) EMBI sovereign spread (R) 1,200 1,000 800 30 25 20

Monetary Policy Indicators

V Sovereign Ratings
MLT external debt # Fitch B+ # S&P BB# Moody's B1 Risks to the outlook
- Higher FDI and privatization - Easing of tensions with China - Sharp devaluation - Banking sector problems

External Sector Performance

Fiscal Performance
Public Debt/GDP, % (L) Budget Balance/GDP, % (R) 0 -1 -2 -3 -4 -5 -6 -10 -15 -7 -8 2003 2005 2007 2009

Economic & Political Intelligence Centre

25 20 2001 2003 2005 2007 2009

Economic Indicators
GDP (% growth, real) Inflation (% chg, pa avg.) Fiscal Balance (% of GDP) Exports (%, comp. annual growth) Imports (%, comp. annual growth) Current Account (% of GDP) Reserves (months of curr. debits) External Debt (% of GDP) Debt Service Ratio (due) Exchange Rate (to USD; eoy)
Sources: EIU, EDC Economics

Canadian Exports and CDIA

06-10 avg. 7.0 10.9 -5.6 18.6 19.6 -6.8 3.2 30.5 1.7 17494

Sources: Haver Analytics, Statistics Canada

VIETNAM
August 2011 ECONOMICS
General Political Environment: Vietnam is a one-party state with the Communist Party of Vietnam (CPV) ruling at the national, provincial and local levels. All institutions of government, including the judiciary, take their cues from the CPV. The political landscape, of late, has been dominated by the 11th National Congress in January 2011 and National Assembly nominal elections in June 2011 where the CPV appoints the next generation of leaders and sets policy direction. As expected, both President Triet and CPV General Secretary Manh were replaced during the National Congress meetings. Prime Minister Dung, however, managed to secure his position for a second five-year term despite speculation of his removal over alleged mismanagement of the economy. Vietnam observers have pointed to divisions within the CPV between reformers and conservatives, the latter which prefer to maintain strong CPV control over society and the economy. In spite of these competing factions, the CPVs prioritization of economic growth renders it unlikely that the party would make drastic changes to ongoing economic reform programs for fear of impacting economic growth. Having embarked upon a process of reform in 1986, Vietnam has come to follow a path that resembles Chinas development model. Specifically, the CPV has concentrated on fostering economic development as its main source of continued legitimacy. While continuing efforts to promote growth, in the near term Prime Minister Dung will focus his attentions on managing the economy given the deterioration in the macroeconomic environment. Investment Environment: Vietnam is gradually moving from a highly-regulated and closed investment environment to one that is more open. The reform process was accelerated in the lead-up to and following Vietnams formal accession into the WTO in 2007. A number of laws strengthening the investment environment have come into effect since 2006. The governments economic reform plans and market opportunities have resulted in increased FDI into Vietnam. For example FDI commitments almost doubled between 2006 and 2008 to USD 66.5 bn. While inflows dropped to USD 21.5bn in 2009 due to the financial crisis, recent data highlights a recovery in FDI inflows in 2010. In spite of considerable progress on foreign investment-related reform, foreign companies continue to face challenges. Corruption is endemic and Vietnam remains one of the most corrupt countries in Asia. In spite of the 2006 anti-corruption law, graft scandals in the public and corporate sector highlight the endemic nature of corruption. The judiciary lacks institutional capacity and has a tendency to take direction from the government. Although dispute resolution mechanisms exist it often takes a very long time to have awards enforced. While the government is generally supportive of foreign investment and has put in place legislation to encourage this investment, there remains a degree of protectionism among elements of Vietnamese political and ruling circles. Foreign companies may also find themselves in a disadvantaged position should they be in competition with one of Vietnams 3,000+ state-owned enterprises (SOE). The SOE equitisation program to convert SOEs into listed companies or shareholding entities has been slow, mostly as a result of internal divisions between reformers and conservatives. As such, SOEs will remain a fixture of Vietnams investment environment for the foreseeable future. Inadequate infrastructure continues to hamper the investment and operational environment, but also offers opportunities for foreign investors especially in the power and transportation areas. Vietnam faces an acute power shortage, and has had to resort to power cuts with negative impacts on the manufacturing and industrial sectors. This shortage has resulted in the government approving several large power projects in recent months. At the same time, while opportunities exist, SOE dominance in many infrastructure sectors is a challenge that foreign investors will have to overcome. Vietnam remains in dispute with several neighbouring countries over ownership of portions of the resource rich South China Sea and surrounding area. These issues have come to the forefront in recent months as highlighted by alleged altercations, (including claims of sabotaging seismic cables) between Chinese and Vietnamese oil exploration vessels. Similar tensions arose in 2008 during ExxonMobile and PetroVietname explorations in contested waters. National oil companies across the region appear to be accelerating exploration programs pointing to heightened tensions in the region. Political Violence: Political violence is not of significant concern in Vietnam due the governments control over the population, and the militarys support for the regime. However, reports of localized protests over high food prices, land, labor, and economic injustices including corruption surface periodically. More recently, theres been a rise in nationalistic anti-Chinese protests over maritime disputes; these protests however are generally low-key and localized. Political Outlook The National Congress meetings and elections in January and June 2011 took center stage in the political sphere as leaders maneuvered for top leadership positions at the CPV. Vested interests and conservatives within the CPV are likely to attempt to slow down economic and investment-related reforms, but are unlikely to halt or reverse them. This reform process began in earnest following Vietnams accession to the WTO in 2007 but has progressed at a slower than expected pace. The implementation of these reforms has led to increased interest in Vietnam on the part of foreign investors; however, investors continue to face several challenges including high levels of corruption and slow and uneven implementation of investment-related legislation. The government will focus its efforts on managing the economy in the near term.

Political
Political Structure One-party rule The Communist Party of Vietnam (CPV) General Secretary of CPV Nguyen Phu Trong President Head of State Nguyen Minh Triet Truong Tan Sang Prime Minister Head of Government Nguyen Tan Dung Executive/Legislative Bodies (Government and CPV) 15 member CPV Politburo 150 member CPV Central Committee Quoc Hoi (Unicameral National Assembly) Pre-approved Candidates elected by popular vote. Last Elections CPV Congress: January 2011 National Assembly: June 2011 Next Elections CPV Congress: 2016 National Assembly: 2016 Press Freedom Survey: 2011 Score: 82 Not Free (0: Free; 100: Not Free) freedomhouse.org Control of Corruption Index: 2009 Score: -0.52 (-2.5: Worst; +2.5: Best) worldbank.org

Economic & Political Intelligence Centre