By John Ruwitch
HANOI, Aug 2 (Reuters) - Vietnam is rebounding from the
global slowdown and the government reported economic growth of
6.2 percent in the first half. Still, the southeast Asian
frontier market is seen as risky and opaque for investors.
Sovereign five-year credit default swaps are trading at a
spread of around 230 basis points, or about 85 basis points
higher than those of Indonesia and the Philippines.
Fitch cut Vietnam's credit rating on July 29 to four
notches below investment grade, and criticised inconsistent
policy.
Following is a summary of key risks to watch in Vietnam:
* GOVERNMENT EFFECTIVENESS AND TRANSPARENCY
The ruling Communist Party is preparing for a national
congress in January 2011 at which several members of the
all-powerful Politburo, as well as underlings, are expected to
be replaced or reshuffled.
Analysts say behind-the-scenes jockeying for power is well
under way and will intensify, colouring all major policy
decisions in the coming months. Against the backdrop of a
system marked by burdensome bureaucracy, opaque decision-making
and weak accountability, the risk of unpredictability in the
formulation and implementation of policy may be elevated.
Political analysts warn there could be a degree of policy
paralysis, or at least enhanced conservatism, in the coming
months as factions and players compete before the congress.
Market reforms and the restructuring of inefficient state
enterprises are vulnerable to being undermined by entrenched
interests and conservative elements in the Party who are more
focused on security.
That said, the Party last month removed the chairman of
Vinashin, a failing, debt-laden, state-owned shipbuilding
conglomerate, and ordered its reorganisation in a move likely
to win plaudits from the investment community as a step toward
a more efficient state sector. There was, undoubtedly, a major
political element to the decision, but details remain unclear.
Vietnam's state-owned conglomerates are run by relatively
senior Party members.
A separate transparency-related problem is the low quality
and uneven quantity of economic data that the government makes
public. Economists say this could lead to miscalculations about
the health of the economy, and damage investor sentiment.
What to watch:
-- Who's up and who's down in the political manoeuvring
before the party congress.
-- Prime Minister Nguyen Tan Dung has embarked on a plan to
trim bureaucratic procedures, and foreign direct investors in
particular will watch how that plays out.
-- Investors list poor infrastructure as one of Vietnam's
major barriers. The government's ability to coordinate swift,
efficient development in this area after pledges of record
official development assistance is a key issue.
-- A crackdown on dissent led to a spike in what Western
diplomats and analysts saw as politically motivated court
convictions late last year and early this year. A renewed
crackdown could unfold before the congress, which could dent
relations with major trade partners including the United
States.
* EXCHANGE RATE AND MONETARY POLICY
Vietnam's fixed exchange rate has frequently caused
economic pressures to build. The central bank devalued the dong
in February for the fourth time since mid-2008 to relieve
pressure on the currency, and pumped money into the banking
system through open market operations. The gap between
unofficial and official currency rates has narrowed, a sign
that pressure has been relieved and risk eased, although in
recent weeks rates have pushed against, and at times gone
through, the weak end of the band.
The government has taken a series of other steps to regain
control over the currency market, and the central bank has
shown a determination to keep currency demand and supply in
balance, although economists predict a year-end spike in dollar
demand.
The Fitch downgrade illustrates continued scepticism among
some analysts over the quality of Vietnam's policymaking.
In terms of policy instruments, the benchmark base rate
lost much of its significance when the State Bank of Vietnam
freed lending rates from a cap linked to it. It remains to be
seen what will replace the base rate as the benchmark, and
officials say the issue is still being discussed. The
authorities have been urging banks to lower lending rates, with
partial success.
What to watch:
-- The gap between black market dollar/dong rates and
interbank rates -- a key gauge of pressure on the currency.
-- Steps taken by the central bank to bring the trade
deficit under control. Some analysts expect a continued orderly
weakening of the currency in 2010. In May, however, annual
price pressures eased for the second month in a row as food
prices eased.
-- Whether Moody's and Standard & Poor's, which both have a
negative outlook on their Vietnam ratings, follow Fitch and
downgrade the country.
-- Announcements on new monetary policy instruments.
* CORRUPTION
Corruption is endemic in Vietnam at all levels of
government and a major barrier to foreign investment. The
authorities regularly pledge commitment to aggressively
fighting corruption, and had encouraged the media to act as a
watchdog, but these efforts lost steam after several
journalists were detained for reporting on major scandals.
Progress on graft will remain a key determinant of long-term
investment attractiveness.
What to watch:
-- Vietnam's rank in corruption perceptions rankings. A
strong improvement or decline would influence long-term
investment. In Transparency International's 2009 Corruption
Perceptions Index, Vietnam's score was unchanged from the
previous year, giving it a ranking of 120 out of 180 countries.
-- Corruption scandals sparked by politicking ahead of the
party congress.
* SOCIAL UNREST
Reports of social unrest periodically surface in Vietnam,
in particular labour strikes, protests and land disputes. The
actions may be linked to perceived economic injustices or
corruption, although religion and politics have played a role
in some recent demonstrations. There is no evidence for now
that widespread unrest is likely, or that there is any imminent
risk of the regime being challenged from below.
In late July, reports emerged of a protest involving
several thousand people in Bac Giang province over the death of
a driver while in police custody.
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
high. Any move by China to assert sovereignty over disputed
islands in the South China Sea, or perceived weakness by
Vietnam on this issue, could galvanise broad-based support for
demonstrations.
-- The role of the Catholic church. Catholics have engaged
in periodic protests over church land taken over by the
government after 1954. The Catholic Church, while officially
shunning involvement in politics, has 6-7 million followers in
Vietnam and is well organised. Some priests have been outspoken
about human rights and democracy.
-- 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.
(Editing by Andrew Marshall)
