FACTBOX-Key political risks to watch in Vietnam

By John Ruwitch

HANOI, March 1 (Reuters) - Vietnamese policymakers drove the economy to a robust 6.8 percent growth rate in 2010, but the cost was macroeconomic stability. Inflation soared into the double digits and the currency continued to depreciate.

All three major ratings agencies -- Fitch, Moody's and Standard & Poor's -- cut Vietnam's credit ratings in 2010, highlighting macroeconomic risks and underscoring problems in the southeast Asian country's economy, once a favoured frontier investment. To a large extent, analysts say, policy is to blame.

Following is a summary of key risks to watch in Vietnam:

MACROECONOMIC POLICYMAKING

Vietnam's economic policymaking, which takes place to a large extent in a black box, has become a key worry for many economists and investors.

After letting prices soar into the double digits with little action other than anti-inflation rhetoric, and allowing the dong to languish outside its official trading band for more than four months, the authorities took their first step to fix the economy on Feb. 11 by devaluing the currency.

The central bank then left economists and investors wondering for the next week if that was a one-off or if it would be followed by steps to make it stick and bring down inflation.

On Feb. 17 the State Bank of Vietnam raised the refinance rate by 200 basis points and, a few days later, it hiked another key interest rate. A few days later, the prime minister officially endorsed a package of monetary and fiscal tightening measures to bring inflation down and right the listing economy.

Many economists hope inflation will now begin to abate, although critics say the government's ends would have been better served if it had unveiled the entire package at once.

The question hanging over the economy is: once inflation comes under control, will the authorities revert to their pro-growth ways only to find themselves back at square one later this year, or early next year?

What to watch:

-- Follow-through on the raft of measures to bring down inflation and stabilise the economy.

-- Credit default swaps spreads.

-- The gap between black market dollar/dong rates and interbank rates, which are a key gauge of pressure on the currency.

-- Steps taken by the authorities to cut the trade deficit.

GOVERNMENT EFFECTIVENESS IN KEY REFORMS

The Vietnamese leadership must move forward on certain key reforms to remain attractive to investors in the long term and boost the health of the economy, analysts say. The government has plans for these reforms already; success will be measured by the level of implementation.

Bureaucratic red tape has been referred to as Vietnam's biggest non-tariff barrier, stalling projects and hindering trade. An ambitious government initiative to cut a third of all administrative procedures has catalogued thousands upon thousands of them. It remains to be seen how the slash and burn stage of the campaign plays out.

The near-bankruptcy of state shipbuilder Vinashin cast a spotlight on reform of state-owned enterprises, and its heavy debt load sparked ratings downgrades of some banks.

Officials have called on state-owned companies to focus on their core competencies, and some have begun divesting slowly from far-flung subsidiaries. The "equitisation", or partial privatisation, of SOEs will also help put some space between government regulators and businesses.

What to watch:

-- Concrete measures to cut red tape.

-- Further divestments by SOEs from non-core businesses.

-- Stepped up "equitisation" of state firms via IPOs and strategic partnerships.

CORRUPTION

Corruption, endemic in Vietnam, is a major barrier to foreign investment. The authorities regularly reiterate a commitment to fighting corruption, and had encouraged the media to act as a watchdog, but journalists were arrested in 2008 for reporting on major scandals.

There is a stream of small cases reported in the state-controlled media, but few see signs the problem is being addressed seriously on a systematic basis. Progress on graft will remain a key determinant of long-term investment attractiveness. Lack of progress will continue to inhibit investment and erode public sentiment toward government.

In Transparency International's 2010 Corruption Perceptions Index, Vietnam's rank rose slightly to 116 from 120 in the previous two years, suggesting little change in corruption levels.

What to watch:

-- Vietnam's rank in corruption perceptions rankings. A strong improvement or decline might influence long-term investment, although there would have to be fundamental underlying change.

SOCIAL UNREST

Reports of social unrest periodically surface in Vietnam, mostly over labour and land disputes.

Recent protests included a demonstration in Ha Nam province, near Hanoi, against land requisitions for an investment park, following a handful of protests elsewhere last year.

Three years ago there were anti-China demonstrations in Hanoi over disputed islands in the South China Sea, a topic that has resurfaced in the face of growing Chinese assertiveness and the apparently increasing frequency of detentions of Vietnamese fishermen by Chinese patrols.

There is no evidence for now that widespread unrest is likely, or that there is any imminent risk of Communist Party rule being challenged from below.

What to watch:

-- Any sign that a broader national protest movement is emerging out of local disputes. So far, this seems unlikely.

-- Territorial disputes in the South China Sea. This issue is highly charged in Vietnam, where suspicion of China runs deep. China's more aggressive assertions of sovereignty over disputed islands in the South China Sea, or perceived weakness by Vietnam on this issue, could provoke big demonstrations.

-- The role of the Catholic church. Catholics have engaged in periodic protests over church land taken over by the government after 1954. The Church, while officially shunning politics, has 6-7 million followers in Vietnam and is well organised.

-- Volatile commodity prices. Reports have emerged of coffee farmers who made losses when bean distributors went broke this spring ransacking their buying agents' homes and businesses. High world commodity prices will also fuel further inflation.

(Editing by Daniel Magnowski)