Country risk: Vietnam is revving up again

Vietnam has weathered the Covid storm better than most and now looks on track for economic growth

Despite the fact investors have been facing increased risks due to the Covid-19 lockdowns, analysts have still upgraded in-favour markets – because of improved political stability, effective policymaking or simply because economies have not been too badly affected.

Vietnam is one of them.

In Euromoney’s latest quarterly survey its total risk score improved, contrasting with Indonesia, the Philippines and Thailand with downgraded scores.

What’s more, Vietnam’s risk score is better off compared to five years ago, highlighting its favourable longer-term trend:

In late May, Standard & Poor’s appeared to cotton on, altering its sovereign credit ratings from stable to positive, which means Vietnam is the only country worldwide to see an improvement from any of the ratings agencies in the wake of the pandemic.

S&P cited some administrative changes, including a directive allowing the ministry of finance to make guaranteed government debt repayments directly to creditors, avoiding delays.

But on Euromoney’s scoring system, there is even a case for Vietnam to be re-rated to investment grade.

Largely this reflects the country’s stunning economic performance. Before the pandemic struck, GDP increased consistently by around 6%-7% per annum in real terms, fuelled by inward investments in the manufacturing base; the average for 2003-12 was 6.6%.

Even as other countries struggled with recession last year due to the lockdowns, the economy still grew by 2.9%. Myanmar was similar, but in Vietnam, with a one-party state (for good or bad), the political scene is more stable with no major risk of internecine civil conflict. Legislative elections passed off peacefully and smoothly on May 23.

Moreover, there is widespread belief the country will return to strong GDP growth this year. S&P is saying 8.5%. Other forecasters are in the 6%-7% ballpark.

Survey contributor Minh Nguyen, a socio-economic specialist at the Mekong River Commission Secretariat, is generally optimistic about the country’s long-term prospects given the resilience of the economy and the Vietnamese people in coping with crises, pointing to the government's determination and strong track record in handling difficult social and economic challenges.

“The latest figures for growth in trade, industrial production, retail sales and stable foreign direct investment (FDI) performance, as published by the World Bank and Asian Development Bank in their economic updates in May and April respectively, are presenting a relatively positive picture,” she says.

“The situation leading to the big election and the government's strong stance in pushing forward the election despite the complicated and expanding Covid fourth wave also shows the party and government’s confidence in its continued power and credibility among the people.”

Most of Vietnam’s political risk indicators have improved through the crisis, and while some are still low-scoring, government stability is one of the country’s strengths.

Of course, Vietnam is not riskless and is facing some considerable short-term challenges. Gabriela Nudel, an independent international analyst and economist, says there are two main challenges for the coming months.

“The first is how to cope with a recent surge in Covid-19 cases and low vaccination rates in the middle of a good economic performance so far with closed borders.

“The other challenge is more socio-political and involves the new prime minister and how his government (the four pillars decision-making process) would confront pending reforms in the short and medium term.

“[New prime minister Pham Minh] Chinh has a great opportunity as some major companies are looking to diversify or relocate their operations in Asia outside China.

“Business reforms and renewed relationship with external investors will foster FDI, and this inflow could enhance infrastructure and digital transformation and put the country in a better position in the manufacturers’ supply chain (both regionally and globally).”

Survey contributor Jeffrey Sherlock, professor of International Business and Management at Taylor University, adds that, “dealing with an authoritarian Communist regime always carry risks as the rule of the party can frequently trump the rule of law, but it seems that the government of Vietnam has quietly, but relatively steadily, moved to engage the broader world.

“That has meant a generally positive trend toward the rule of law, at least as it relates to business.”

Overcoming challenges

The fourth wave of infection is nevertheless proving to be much more challenging now that the new variant has been found in many provinces in Vietnam and vaccinating a population of nearly 100 million is a huge task.

“Some provinces are beginning to show strained medical capacity in dealing with the positive and severe cases, as well as in isolation of high-risk populations”, notes Minh Nguyen.

Vietnam’s score for soft infrastructure, which includes healthcare, is down slightly to reflect this, and economic activities may be affected, depending on the scale of the outbreak and whether and how quickly the government will be able to curb the disease expansion this time.

Minh is “optimistic but a bit cautious still about the risks in the country,” she says.

“Overall there is still much worth the increased interests of investors compared to several other destinations in the region.”

Sherlock is “bullish” on Vietnam's continuing progress. Although he notes the tensions with China, he says Vietnam will win out “if it continues to build effective relationships with foreign companies and countries while carefully managing the relationship with China”.

Nudel believes some issues are more than encouraging if they materialize in the medium term – such as, "the implementation of special economic zones (SEZs), the idea of international financial centres in Ho Chi Minh City and Da Nang to cover niches such as fintech, and a major public spending programme to improve infrastructure and connectivity (the north-south highway, more seaports and airports)."

Reopening the borders, easing tensions with China and resolving trade conflict with the US are all important for Vietnam’s risk profile, but it would seem the country is on the right track. Vietnam is up to 87^th in the survey and its steady improvement seems set to continue.