Country Forecast September 2010

1. Country Forecast September 2010 Vietnam Editor: Hilary Ewing Editorial closing date: 7th September 2010

2. Five-year forecast summary

3. Five-year forecast summary The Economist Intelligence Unit expects the political scene to be broadly stable during the forecast period (2010-14). The Communist Party will stay firmly in control, but there are pockets of organised opposition, and, although still rare, political dissidence will become more common. Political effectiveness will remain fairly poor during the forecast period. Vietnam’s business environment rankings will see solid improvements in the forecast period. There will be progress in nearly all areas of the business environment, underpinned largely by the ruling party’s efforts to push ahead with its economic reform programme. Although Vietnam's long-term economic growth prospects remain positive, the early part of the forecast period will be challenging. In 2010-11 annual real GDP growth is forecast to average 6.7%. Growth will accelerate to around 7.4% a year on average in 2012-14. Real GDP growth(%)

4. Five-year forecast summary The forecast for market opportunities is broadly positive. However, in most parts of the country opportunities will still be limited mainly to the lower end of the market, while opportunities at the higher end will be restricted to the main urban areas. Rising disposable income per head will contribute to strong growth in demand for consumer goods. The prospects for long-term economic growth are bright. The economy will remain strong, supported by an expanding private sector. Our central forecast indicates that annual growth in GDP per head will average 5.8% in 2011-30. Household consumption per head(US$)

5. Business environment rankings Methodology

6. The political environment

7. Political outlook Highlights The ruling Communist Party of Vietnam will maintain its firm grip on power and will continue to dictate the political agenda in the forecast period (2010-14). However, political stability is not assured. Ongoing economic troubles, combined with the government's continued harsh crackdown on dissenters and disputes with various religious groups, could lead to public protests. The party is due to hold its next national congress in January 2011, and this means that until then there will be considerable jockeying for position within the current leadership, although it will be largely invisible from the outside. There will be major personnel changes in higher echelons of the party, but the organisation's central tenets will remain unchanged and its overriding objective will be to maintain its position of dominance. The leadership will claim to be committed to maintaining the momentum of economic and administrative reforms, but actual progress could be limited. A widening gap between competing factions within the party means that consensus on key reforms could become increasingly difficult to establish. Vietnam will continue to make strides in strengthening its ties with the West, particularly the US, but it will also maintain close relations with China. The government will continue to pursue bilateral and multilateral free-trade agreements. More from ViewsWire…

8. Demographics

9. Demographic outlook Vietnam's population is forecast to continue to grow steadily, by around 1% a year, during the forecast period (2010-14), and as a result the population will reach 92.2m by 2014, up from 87.1m in 2009. According to the General Statistics Office (the national data provider), the total fertility rate, at 2.03 children per woman, is below the replacement level of 2.33 children per woman. A large workforce and a low dependency ratio will prove advantageous in the forecast period and beyond as new employment opportunities are generated. There are growing concerns over the country's sex ratio at birth. The preference for male children has increased the incidence of gender-based abortions, and, although the government will maintain the ban on such abortions, reducing their incidence will be difficult.

10. The business environment forecast

11. Business environment outlook The Economist Intelligence Unit’s business environment rankings assess a country’s relative attractiveness as an investment location, both globally and regionally. Vietnam's business environment will improve during the forecast period (2010-14), with the country's overall score rising to 5.66, from 4.94 in the historical period (2005-09). Political stability will remain a relative strong point. Political effectiveness will improve, although the score for this category will continue to be undermined by corruption, an inefficient bureaucracy and an unfair legal system. High levels of red tape and the party's controlling mentality continue to act as a general impediment to business operations. The country’s macroeconomic environment will improve slightly.

12. Macroeconomic environment • The macroeconomic environment will improve in 2010-14, increasing Vietnam’s attractiveness as a place in which to do business. • Policymakers will face tough challenges during the early part of the forecast period in terms of striking a balance between stimulating the economy and maintaining price stability. • We forecast that there will continue to be institutional weaknesses in policymaking, most notably with regard to the lack of independence of the State Bank of Vietnam (SBV, the central bank).

13. Fiscal policy Central government budget balance(% of GDP) After expanding to an estimated 9% of GDP in 2009, the budget deficit (excluding on-lending) will remain wide in 2010-14. There are serious concerns about how the government will fund its deficit, particularly in view of the fact that it is already borrowing heavily to finance its off-budget spending programmes. The budget deficit is forecast to narrow gradually in the forecast period, to stand at 4.9% of GDP in 2014, but this will not allay fears regarding fiscal sustainability. The government's tax base remains narrow, and tax evasion is still a serious problem.

14. Monetary policy Money market interest rate(%) • The SBV will continue to take a short-term view with regard to monetary policy. It will take adequate steps to adjust policy when this is made necessary by rising inflation or excessively tight financing conditions, but will do so on an ad hoc basis. • There will be no clear medium- or long-term policy stance on inflation or the maintenance of a stable exchange rate. • The mainstay of the SBV's policy approach will be to ensure that the cost of financing does not undermine economic growth.

15. Policy towards private enterprise & competition The government makes an effort to reform state-owned enterprises (SOEs), but progress is slow. There are signs that the competition law will be applied more forcefully. The government considers price controls on certain goods. 2010-11: More SOEs undertake reforms and are equitised (part-privatised). Progress is made on removing market distortions in terms of access to opportunities and resources. 2012-14:

16. Policy towards foreign investment The government further loosens restrictions on foreign investment and seeks to promote such investment in listed firms. Uncertainty persists regarding the implementation of the unified legal system for foreign and domestic firms. 2010-11: Red tape remains a hindrance. The government opens up more service sectors to foreign investment. Restrictions remain in place on foreign ownership of housing. 2012-14:

17. Foreign trade and exchange controls Trade barriers and tariffs continue to be lowered. Negotiations begin towards a free-trade agreement (FTA) with the EU. Vietnam becomes a negotiating member of the Trans-Pacific Strategic Economic Partnership (TPP) on a financial services and investment agreement. 2010-11: Trade barriers are lowered further. Vietnam pursues additional FTAs. The agreements with the EU and the TPP are concluded. 2012-14:

18. Taxes Progress is made on improving the efficiency of tax collection, but distortions persist. Corporate taxes are held steady at 25%. 2010-11: The tax base is broadened, but the tax regime remains overly complicated. The government fails to meet some of the demands of foreign investors regarding the tax regime, particularly in relation to the foreign-contractor withholding tax. 2012-14:

19. Financing State-owned commercial banks undertake reforms. The government directs lending towards high-priority sectors. The authorities attempt to influence banks' interest rate policies. 2010-11: The availability of financing improves as limits on the activities of foreign banks are relaxed further. As the regulatory environment is strengthened, the stockmarket emerges as an important source of finance. 2012-14:

20. The labour market Wages for unskilled employees remain low, and there are shortages of skilled labour. Worker unrest becomes more common. 2010-11: Wages stay low relative to other countries in the region. The education system remains poorly equipped to train the next generation of young professionals to meet the needs of foreign-invested enterprises. 2012-14:

21. Infrastructure Work continues on three major ports. The government improves the energy supply, in part by buying electricity from neighbouring countries. Demand for telecommunications services rises sharply. 2010-11: New ports become operational, increasing capacity significantly. Ongoing investment in electricity-generating plants improves the reliability of the power supply. Telecoms infrastructure improves as a result of heavy investment. Construction work begins on the country's first nuclear power plant. 2012-14:

22. The economic forecast

23. International assumptions Economic growth (%) The Economist Intelligence Unit forecasts that growth in world GDP measured at market exchange rates will average nearly 3% a year in the forecast period (2010-14). At purchasing power parity exchange rates, growth will average 4.1% annually, compared with 3.3% in the historical period (2005-09). Growth in global trade flows in 2010-14 will average 7.1% a year, slower than before the 2008-09 global financial crisis. This will cloud prospects for Vietnam's export sector, which could also face difficulties as a result of the expected slowdown in the US economy in 2011 and the ongoing sluggishness of the recovery in Europe.

24. Economic outlook Economic outlook(% real change) Economic growth in Vietnam is expected to be strong in 2010-14, averaging over 7% a year. However, this will be below the rates of real GDP growth that were recorded in the years prior to the 2008-09 global economic downturn. Growth in economic activity in Vietnam will be underpinned by strong recoveries in consumption, investment and exports. The latter component of GDP will be boosted by solid growth in global trade throughout the forecast period. Demand for Vietnamese goods, particularly from the US, Chinese and European markets, will help to sustain buoyant growth in exports.

25. Wage and price inflation Consumer price inflation(%; annual av) Year-on-year consumer price inflation will accelerate to 8.5% in 2010, before slowing to an average of 7.7% in the remainder of the forecast period. Vietnam will remain highly vulnerable to movements in international commodity prices, which will continue to have a significant impact on the domestic rate of inflation. The risks to our inflation forecast therefore remain on the upside. Strong demand-side pressures and the depreciation of the dong against the US dollar (making imports more expensive) will push up the general price level. Assuming that the authorities continue to maintain a policy bias in favour of supporting growth rather than stabilising prices, we forecast that the outstanding stock of domestic credit will rise by an average of around 25% a year in 2010-14.

26. Exchange rates Exchange rates Until there are clear signs that the trade deficit is narrowing, inflationary pressures are receding and foreign direct investment is picking up markedly, it is unlikely that downward pressure on the dong will ease. The State Bank of Vietnam (the central bank) may try to engineer a controlled and gradual fall in the value of the local currency in the forecast period, but it will probably have to opt for further devaluations, a widening of the currency’s trading band, or both. The dong is forecast to depreciate from an average of D19,107:US$1 in 2010 to D20,822:US$1 in 2014.

27. External sector External sector(US$ bn unless otherwise indicated) Although the current account will remain in deficit throughout the forecast period, the deficit will narrow markedly as a percentage of GDP, shrinking from 9.6% in 2010 to 6.3% in 2014. The performance of the current account will largely track that of the trade account. The trade account will post a huge deficit in 2010 as growth in the value of imports outpaces that in exports, before shrinking gradually in 2011-14 as these trends reverse. In addition to the deficit on the merchandise trade account, the services and income accounts will also remain in the red throughout the forecast period.

28. Foreign direct investment

29. Foreign direct investment Stocks and flows According to the IMF, FDI inflows totalled US$7.6bn in 2009 and US$9.6bn in 2008, compared with just under US$2bn in 2005. Commitments for new projects (excluding additional investment in existing projects) reached US$10.8bn in the first eight months of 2010, growing by 41% year on year. However, realised FDI reached only US$7.3bn in the same period, up by just 3.6% year on year. A large proportion of FDI commitments are not disbursed in the year in which they are promised, if at all. FDI has flowed into Vietnam from a wide range of countries, although nations in the Asia and Australasia region are particularly prominent investors. Vietnam has received less FDI than most of its South-east Asian neighbours, and the impact of FDI has been less marked, with little technology transfer between foreign firms and their local partners. Inward foreign direct investment stock, 2010(% of GDP)

30. Foreign direct investment Determinants Foreign investors have generally been attracted to Vietnam by its buoyant economy. Other favourable factors include the country’s stable political scene and low labour costs. In an effort to bolster foreign investor interest, the government has appeared willing to implement reforms, most notably eradicating discrimination against foreign firms by implementing a Unified Enterprise Law and a Common Investment Law in 2006. Foreign investors are also now permitted to convert profits and principal into foreign exchange without restriction. However, investment from abroad is still discouraged by pervasive red tape, relatively poor-quality human capital and problems obtaining access to land and capital. The government is aware of these difficulties and is taking steps to tackle them, but progress is likely to be slow. Inward foreign direct investment stock per head, 2010(US$)

31. Foreign direct investment Potential Vietnam is set to lower barriers to entry in a number of important service sectors, such as transport, communications, healthcare, education and culture. However, the government's reform rhetoric will remain more impressive than the changes that it actually implements, as the authorities remain intent on limiting what they perceive to be the more harmful effects of FDI. As a result, cumbersome legislation and obstructive red tape will continue to deter some foreign investors. However, given that the Vietnamese economy is forecast to continue to expand rapidly, foreign investors will remain keen to tap into the fast-growing domestic market, and particularly the market for services. Annual inflows of foreign direct investment(US$ m)

32. Market opportunities

33. Market opportunities GDP per head(US$ at PPP) Market opportunities in Vietnam will expand in line with population growth and rising incomes, although the country's low level of GDP per head by regional standards will limit the extent of potential opportunities. The prospects for the retail sector are promising, owing to rising disposable income per head (which will contribute to strong growth in demand for consumer goods) and continued growth in the number and size of retail outlets. In line with greater access to modern retail outlets in urban areas and an expansion in the number of credit options available to the relatively wealthy, a culture of consumerism will spread.

34. The long-term forecast

35. Long-term outlook Real GDP growth(% annual change) Vietnam is one of the poorest members of the ten-country Association of South-East Asian Nations (ASEAN), but it has enjoyed relatively rapid rates of economic growth in the past few years. Vietnam's favourable demographic profile will help to facilitate continued economic expansion. Wide-ranging economic reforms will bolster foreign investor confidence in the country, paving the way for a sustained pick-up in foreign direct investment (FDI). This in turn will contribute to the upgrading of technology and to improved competitiveness.

36. Long-term outlook Demographic trends: Vietnam's demographic profile is fairly favourable. The working-age population is currently around 61m and accounts for 70% of the population. This ratio will rise in the next decade and beyond, facilitating continued national economic expansion. There are concerns regarding the potential for a rise in unemployment if sufficient new jobs are not created. The expansion of the elderly population could also become a problem, and could expose inadequacies in social security and healthcare. External conditions:Vietnam will benefit from an increasingly favourable external environment in the next few decades. Its relations with the US have been improving, and economic and political co-operation between the two countries is forecast to continue to grow. Vietnam joined the World Trade Organisation in 2007, in a development that testifies to the willingness on the part of the leadership of the country’s ruling Communist Party to embrace the global trend towards a market-based economic model. Vietnam appears to be interested in negotiating bilateral free-trade agreements. Long-term performance: The economy will remain strong in the next couple of decades, supported by an expanding private sector, which will contribute to greater competition and the more efficient allocation of resources. Wide-ranging economic reforms could prove painful initially as Vietnam becomes increasingly open to international trade, but these changes will bolster foreign investor confidence and will thus pave the way for a sustained pick-up in FDI. The Economist Intelligence Unit forecasts that annual growth in GDP per head will average 5.8% in 2011-30.

37. Long-term outlook GDP per head(US$ at PPP; index, US=100) Nominal GDP(US$ at PPP; index, Vietnam=100)

38. Resources

39. Map

40. Comparative GDP, 2009 Gross domestic product(US$ bn; market exchange rates) Gross domestic product per head(US$; market exchange rates)

41. Basic data Land area 330,363 sq km Population 85.2m (2007, General Statistics Office estimate) Climate Tropical monsoon; north cool and damp in winter (November-April), hot and rainy in summer; south more equable; centre most subject to typhoons. The rains are highly unpredictable Weather in Hanoi Hottest month, June, 26-33°C; coldest month, January, 13-20°C; wettest month, August, 343 mm average rainfall; driest month, January, 18 mm average rainfall Weather inHo Chi Minh City Hottest month, April, 24-35°C; coldest month, January, 21-32°C; wettest month, September, 335 mm average rainfall; driest month, February, 3 mm average rainfall Language Vietnamese (spoken by about 90% of the population); English (increasingly favoured as a second language); some French; a little Russian and German; minority languages such as Hmong, Thai, Khmer in remoter rural areas Currency Dong (D) Time 7 hours ahead of GMT Public holidays January 1st (New Year’s Day); February 14th-18th (Tet, Lunar New Year); April 30th (Liberation of Saigon); May 1st (Labour Day); September 2nd (National Day)

42. Business environment rankings: Methodology Outline of the model The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by Country Forecasts using a standard analytical framework. It is designed to reflect the main criteria used by companies to formulate their global business strategies, and is based not only on historical conditions but also on expectations about conditions prevailing over the next five years. This allows the Economist Intelligence Unit to utilise the regularity, depth and detail of its forecasting work to generate a unique set of forward-looking business environment rankings on a regional and global basis. The business rankings model examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure. Each category contains a number of indicators that are assessed by the Economist Intelligence Unit for the last five years and the next five years. The number of indicators in each category varies from five (foreign trade and exchange regimes) to 16 (infrastructure), and there are 91 indicators in total. Almost half of the indicators are based on quantitative data (eg, GDP growth), and are mostly drawn from national and international statistical sources for the historical period (2005-09) and from Economist Intelligence Unit assessments for the forecast period (2010-14). The other indicators are qualitative in nature (eg, quality of the financial regulatory system), and are drawn from a range of data sources and business surveys adjusted by the Economist Intelligence Unit, for 2005­09. All forecasts for the qualitative indicators covering 2010-14 are based on Economist Intelligence Unit assessments. The main sources used in the business rankings model include CIA, World Factbook; Economist Intelligence Unit, Country Risk Service, Country Finance, Country Commerce; Freedom House, Annual Survey of Political Rights and Civil Liberties; Heritage Foundation, Index of Economic Freedom; IMF, Annual Report on Foreign Exchange Restrictions; International Institute for Management Development, World Competitiveness Yearbook; International Labour Organisation, International Labour Statistics Yearbook; UN, Human Development Report; US Social Security Administration, Social Security Programs Throughout the World; World Bank, World Development Report; World Development Indicators; World Economic Forum, Global Competitiveness Report. Back to Rankings

43. Business environment rankings: Methodology Calculating the rankings The rankings are calculated in several stages. First, each of the 91 indicators is scored on a scale from 1 (very bad for business) to 5 (very good for business). The aggregate category scores are derived on the basis of simple or weighted averages of the indicator scores within a given category. These are then adjusted, on the basis of a linear transformation, to produce index values on a 1-10 scale. An arithmetic average of the ten category index values is then calculated to yield the aggregate business environment score for each country, again on a 1-10 scale. The use of equal weights for the categories to derive the overall score reflects in part the theoretical uncertainty about the relative importance of the primary determinants of investment. Surveys of foreign direct investors' intentions yield widely differing results on the relative importance of different factors. Weighted scores for individual categories based on correlation coefficients of recent foreign direct investment inflows do not in any case produce overall results that are significantly different to those derived from a system based on equal weights. For most quantitative indicators the data are arrayed in ascending or descending order and split into five bands (quintiles). The countries falling in the first quintile are assigned scores of 5, those falling in the second quintile score 4 and so on. The cut-off points between bands are based on the average of the raw indicator values for the top and bottom countries in adjacent quintiles. The 2005-09 ranges are then used to derive 2010-14 scores. This allows for intertemporal as well as cross-country comparisons of the indicator and category scores. Measurement and grading issues The indices and rankings attempt to measure the average quality of the business environment over the entire historical or forecast period, not simply at the start or at the end of the period. Thus in the forecast we assign an average grade to elements of the business environment over 2010-14, not to the likely situation in 2014 only. The scores based on quantitative data are usually calculated on the basis of the numeric average for an indicator over the period. In some cases, the "average" is represented, as an approximation, by the recorded value at the mid-point of the period (2007 or 2012). In only a few cases is the relevant variable appropriately measured by the value at the start of the period (eg, educational attainments). For one indicator (the natural resources endowment), the score remains constant for both the historical and forecast periods. Back to Rankings

44. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

45. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

46. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

47. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

48. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

49. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

50. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.