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Enticing and challenging, Vietnam maintains its growth story | Analyst Picks| RiskMap 2021

Vietnam

Enticing and challenging, Vietnam maintains its growth story

Stephen Norris & Harrison Cheng

The Communist Party of Vietnam (CPV) will in January 2021 undergo the latest cycle in its five-yearly leadership transition, with most of the country’s senior leaders set to be replaced or retired. At the heart of this process are the barely visible internal factional rivalries that build in the run-up and potentially blow up – sometimes blowing back on business – in the aftermath. Dominant since the last changeover in 2016 (periodic health issues aside), CPV General-Secretary and President Nguyen Phu Trong is in a solid position to maintain an unusually high degree of order at the very top level of the party this time, and thus ensure a relatively orderly renewal.

Trong’s key allies CPV Executive Secretary Tran Quoc Vuong and Hanoi Party Secretary Vuong Dinh Hue are among those to watch. If the transition is stable, they are likely to take senior posts, while current Prime Minister Nguyen Xuan Phuc would also likely reach an accord with Trong and retain a senior role. This would avert high-level purges through politicised corruption investigations (as occurred post-2016). However, transition sees more intense factionalism among local government leadership rivals and turf wars between state ministries, creating political risks for businesses engaging with these layers of government and SOEs, including in Hanoi and Ho Chi Minh City. Understanding the new political stakeholder landscapes becomes a key task for investors.

The positive economic growth picture – impressively sustained through the COVID-19 pandemic due to deft management of sparse healthcare resources that limited disruption to domestic economic activity – and the pro-FDI dispositions of almost all senior leaders is retained through the transition. But both the general operational environment for companies and the regulatory outlook for certain sectors continue to present significant challenges. Recurrent issues with corruption, infrastructure shortfalls, taxation disputes and land acquisition prove intermittently problematic, and dissuade some investors (e.g., manufacturers) looking for new business locations in Asia from opting for Vietnam.

Implementation of relatively new cyber security rules, public-private partnership regulations, and plans to draft new laws to tax online businesses or big tech companies are among key areas to watch. Stronger environmental legislation, increasing local content requirements, an industrial policy framework and an infrastructure masterplan (guiding foreign investment in power plants, airports, and transport projects) are also in the pipeline and will land on the desks of the new leadership in early 2021.

The outlook for investment in Vietnam is strong, particularly if geopolitical and trade frictions ease following political change in the US, and as Vietnam continues to manage its own tense relationship with China, avoiding the sort of reprisals felt by the likes of Australia. The companies that can anticipate and manage these risks stand to thrive in Vietnam in the years ahead.

 

Enticing and challenging, Vietnam maintains its growth story

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