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IMPORTANT NOTICE: The information in this PDF file is subject to Business Monitor International’s full copyright and entitlements as defined and protected by international law. The contents of the file are for the sole use of the addressee. All content in this file is owned and operated by Business Monitor International, and the copying or distribution of this file, internally or externally, is strictly prohibited without the prior written permission and consent of Business Monitor International Ltd. If you wish to distribute the file, please email the Subscriptions Department at [email protected]

om, providing details of your subscription and the number of recipients you wish to forward or distribute this information to. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication.

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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. www. businessmonitor. com www. businessmonitor. com Q1 2010 Q1 2010 VietnaM VietnaM Business Forecast report Business Forecast report includes 10-year forecast to 2019 includes 10 year forecast to 2018 Published by BusIness MonItor InternatIonal ltd Includes 10-year forecasts to end-2017 Challenging Year Ahead Of National Congress “Well Positioned for Global Recovery” ssn 1745-0764 issn 1748-2380 published by Business Monitor international Ltd. published by Business Monitor international Ltd. BUSINESS MONITOR INTERNATIONAL COUNTRY RISK, INDUSTRY AND COMPANY INTELLIGENCE ON GLOBAL MARKETS Terry Alexander – Head of Country Risk and Capital Markets Business Monitor International Terry Alexander heads Business Monitor International’s (BMI) Country Risk team of economists who produce intra-daily political risk, economic and financial markets analysis and forecasts covering over 175 countries.

BMI’s research is relied upon by corporate strategists, treasurers, and researchers at 400 of the Fortune 500 companies. Dear Reader, As Head of Country Risk at Business Monitor International (BMI), I would like to personally welcome you as one of our valued customers, and thank you for deciding to purchase the Vietnam Business Forecast Report. The Vietnam Business Forecast Report is used by corporate strategists, treasurers, and researchers for medium-term risk management, business development and budgetary planning.

Given our forecasting record over 25 years, I am confident that you and your colleagues will also benefit from the report, which features in-depth political risk and macroeconomic analysis, plus BMI’s proprietary business environment ratings, and 5 and 10-year macroeconomic and industry forecasts. This makes for a highly authoritative, holistic country view. The Vietnam Business Forecast Report draws on the expertise of my highly skilled team of economists, backed by a network of in-country public and private sector sources.

That network of informed opinion also includes our own customers, and we welcome any feedback from you to help optimise the value of our research. Please send any comments you have to [email protected] com You may also be interested to learn that BMI publishes a range of Industry Forecast Reports on Vietnam, covering Oil and Gas, Telecommunications, Pharmaceuticals & Healthcare, Food & Drink, Autos, Infrastructure, Real Estate and many other strategic sectors (further details at http://store. businessmonitor. com/countries/asia/).

And for those with regional responsibilities, we publish Business Forecast Reports, and Industry Forecast Reports, on a total of 17 Asian countries (further details at www. businessmonitor. com/bfr/asia). We look forward to serving your strategic information needs on Vietnam, helping you and your company to navigate through the global downturn, and also to benefit from the recovery years. Best Regards, Terry Alexander Head of Country Risk Business Monitor International 4 2006 84. 4 60. 9 974,266. 2 724 8. 2 16. 8 4. 8 13,000. 0 1. 3 6. 6 7. 5 8. 2 11. 2 4. 6 16,051 15,987. 37 21,180. 90 39. 8 42. 6 -2. -2. 8 -0. 2 -0. 3 13. 4 3. 8 20,202. 5 33. 2 45. 0 4. 8 24,223. 0 34. 1 44. 4 23. 5 -9. 8 -7. 0 -9. 8 -10. 9 23. 9 3. 6 26,964. 1 30. 0 39. 1 -11. 3 -15. 1 -10. 4 -12. 8 58. 9 75. 5 48. 6 62. 7 56. 1 67. 3 -11. 2 -12. 2 -7. 7 -9. 0 15. 0 2. 7 29,194. 7 34. 1 47. 4 23,368. 66 24,472. 00 28,500. 00 16,075. 77 16,431. 20 17,900. 00 16,018 17,480 19,000 19,000 19,000. 00 26,980. 00 63. 4 75. 3 -11. 9 -13. 0 -7. 9 -8. 2 16. 0 2. 6 31,616. 3 32. 9 45. 4 -0. 6 -4. 9 1. 7 8. 0 12. 0 15. 0 9. 0 15. 0 8. 2 8. 5 7. 0 12. 0 10. 0 12. 0 6. 0 18,500 18,750. 00 25,345. 00 71. 0 82. 8 -11. 8 -13. 2 -7. 4 -6. 9 17. 6 2. 34,245. 1 31. 7 43. 8 8. 3 23. 0 7. 0 9. 0 6. 5 12. 6 19. 9 7. 3 7. 0 6. 0 -3. 1 -3. 6 -7. 2 -5. 7 -5. 6 -35,827. 0 -53,657. 0 -117,857. 0 -104,501. 4 -113,990. 3 -124,055. 1 -5. 4 6. 0 6. 0 8. 0 12. 0 6. 0 18,500 18,250. 00 24,420. 00 79. 6 91. 1 -11. 6 -13. 1 -6. 7 -5. 4 19. 2 2. 5 37,098. 4 30. 0 42. 4 4. 6 5. 0 5. 5 5. 5 5. 0 4. 5 16. 7 14. 9 6. 8 10. 0 12. 0 14. 0 8. 5 6. 2 5. 1 4. 4 5. 5 6. 0 6. 8 14. 0 4. 0 -136,404. 1 -5. 3 6. 0 6. 0 8. 0 10. 0 4. 0 18,000 17,750. 00 22,860. 00 89. 1 100. 2 -11. 1 -12. 9 -5. 8 -4. 2 21. 7 2. 6 40,195. 3 29. 0 40. 9 835 1,035 974 1,077 1,195 1,350 1,492 1,144,014. 1,478,695. 0 1,628,770. 2 1,825,074. 8 2,053,254. 8 2,288,454. 8 2,562,685. 6 71. 1 89. 8 85. 7 96. 1 108. 1 123. 7 138. 5 154. 4 2,855,652. 5 1,640 6. 9 14. 0 4. 0 -148,650. 6 -5. 2 5. 0 5. 5 8. 0 10. 0 5. 0 17,500 17,250. 00 21,875. 00 99. 8 110. 2 -10. 4 -12. 4 -4. 7 -3. 1 24. 6 2. 7 43,556. 3 28. 2 39. 5 85. 6 86. 8 88. 0 89. 2 90. 4 91. 6 92. 8 94. 1 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f vietnam Q1 2010 TABLE: VIETNAM – MACROECONOMIC DATA AND FORECASTS Population, mn [5] Nominal GDP, US$bn [6] Nominal GDP, VNDbn [6] GDP per capita, US$ [6] Real GDP growth, % change y-o-y [6]

Industrial production index, % y-o-y, ave [1,7] Unemployment, % of labour force, eop [7] Budget balance, VNDbn [8] Budget balance, % of GDP [8] Consumer prices, % y-o-y, eop [2,7] Consumer prices, % y-o-y, ave [2,7] Central Bank policy rate, % [9] www. businessmonitor. com Lending rate, %, eop [5] Real Lending Rate, %, eop [3,10] Exchange rate VND/US$, eop [11] Exchange rate VND/US$, ave [11] Exchange rate VND/EUR, eop [11] Exports, US$bn [12] Imports, US$bn [12] Trade balance, US$bn [12] Balance of goods and services, US$bn [4,12] Current account, US$bn [12] Current account, % of GDP [12]

Foreign reserves ex gold, US$bn [12] Import cover, months g&s [12] Total external debt stock, US$mn [13] Total external debt stock, % of GDP [13] Business Monitor international ltd Total external debt stock % of XGS [13] Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Base year 2000; 3 Real rate strips out the effects of inflation; 4 Includes Investment Income flows up until 2004; Sources: 5 IMF; 6 IMF (General Statistics Office); 7 General Statistics Office; 8 ADB, Ministry of Finance; 9 State Bank of Vietnam; 10 IMF/BMI; 11 BMI; 12 Asian Development Bank, State Bank of Vietnam; 13 World Bank ietnam Q1 2010 Contents executive Summary …………………………………………………………………………………………………………… 7 Double-Dip expected ahead Of 2011 national Congress Chapter 1: Political Outlook………………………………………………………………………………….. 9 SWOt analysis…………………………………………………………………………………………………………………………………… Bmi Political Risk Ratings ………………………………………………………………………………………………………………. 10 Domestic Politics …………………………………………………………………………………………………………….. 11 China Relations Lead the internal Power Struggle Vietnam’s relations with China have come to the forefront of an internal power struggle within the Communist Party of Vietnam, pitting economic reformers centred around Prime Minister Nguyen Tan Dung against more conservative Politburo members with links to China. aBLe: POLitiCaL OveRvieW ………………………………………………………………………………………………………….. 11 Chapter 2: economic Outlook ……………………………………………………………………………… 15 SWOt analysis………………………………………………………………………………………………………………………………… 15 Bmi economic Risk Ratings ……………………………………………………………………………………………………………. 6 economic activity ……………………………………………………………………………………………………………. 17 Double-Dip now Our Core Scenario With Vietnam’s balance of payments yet again approaching breaking point, we expect a sharp tightening of fiscal and monetary policy in 2010, which will see real GDP growth dip to 4. 4% from an expected 5. 1% in 2009. taBLe: eCOnOmiC aCtivitY…………………………………………………………………………………………………………….. 17

Balance Of Payments ………………………………………………………………………………………………………. 19 Crisis time again? A widening trade deficit and falling foreign exchange reserves have brought the issue of Vietnam’s balance of payments position and exchange-rate regime to a head. taBLe: CURRent aCCOUnt…………………………………………………………………………………………………………….. 19 monetary Policy ………………………………………………………………………………………………………………. 1 SBv to Raise Rates to 12% in 2010 We are expecting a sharper tightening of monetary policy in 2010 as the government yet again confronts adverse balance-of-payments and inflation dynamics through a tightening of fiscal and monetary policy. taBLe: mOnetaRY POLiCY ……………………………………………………………………………………………………………… 21 Fiscal Policy ……………………………………………………………………………………………………………………. 23 Sharp tightening expected in 2010

We believe a tightening of fiscal policy will be needed in 2010 as part of an effort to rein in the widening trade deficit. taBLe: FiSCaL POLiCY ……………………………………………………………………………………………………………………. 23 investment Climate …………………………………………………………………………………………………………. 25 HCmC Stock market Becoming a Regional Player We view the successful listing of Eximbank as a strong indication of the increasing depth of the Vietnamese stock market.

Chapter 3: 10-Year Forecast ……………………………………………………………………………….. 27 the vietnamese economy to 2019 …………………………………………………………………………………… 27 Rebalancing needed to maintain High Growth We remain positive about Vietnam’s growth prospects over the next 10 years, in spite of the adjustment of our average GDP growth projection over 2013-2019 from 8. 0% to 6. 9%. taBLe: LOnG-teRm maCROeCOnOmiC FOReCaStS …………………………………………………………………………. 7 Business Monitor international ltd www. businessmonitor. com 5 vietnam Q1 2010 Chapter 4: Special Report …………………………………………………………………………………… 31 the World’s Fiscal Conundrum …………………………………………………………………………………………. 31 taBLe: WORLD GOveRnment eXPenDitURe inDiCatORS ………………………………………………………………. 32 taBLe: WORLD GOveRnment RevenUe inDiCatORS ……………………………………………………………………… 3 taBLe: WORLD FiSCaL BaLanCe inDiCatORS ………………………………………………………………………………… 34 Chapter 5: Business environment ……………………………………………………………………….. 37 SWOt analysis…………………………………………………………………………………………………………………………………. 37 Bmi Business environment Risk Ratings …………………………………………………………………………………………. 8 Business environment Outlook…………………………………………………………………………………………. 39 taBLe: Bmi BUSineSS anD OPeRatiOnaL RiSK RatinGS ……………………………………………………………….. 40 institutions ………………………………………………………………….. ………………………………………………… 41 taBLe: Bmi LeGaL FRameWORK RatinGS ……………………………………………………………………………………… 42 nfrastructure …………………………………………………………………………………………………………………. 43 taBLe: LaBOUR FORCe QUaLitY …………………………………………………………………………………………………….. 45 market Orientation …………………………………………………………………………………………………………. 46 taBLe: aSia, annUaL FDi inFLOWS ………………………………………………………………………………………………… 8 taBLe: Bmi tRaDe RatinGS …………………………………………………………………………………………………………… 49 taBLe: vietnam tOP eXPORt DeStinatiOnS ………………………………………………………………………………….. 50 Operational Risk …………………………………………………………………………………………………………….. 51 Chapter 6: Key Sectors ……………………………………………………………………………………….. 3 agribusiness …………………………………………………………………………………………………………………… 53 taBLe: vietnam RiCe PRODUCtiOn, COnSUmPtiOn & tRaDe ………………………………………………………… 54 Defence ………………………………………………………………………………………………………………………….. 56 taBLe: vietnam’S aRmeD FORCeS, 2005-2013 ………………………………………………………………………………. 7 Chapter 7: Bmi Global assumptions ……………………………………………………………………. 61 Global Outlook ………………………………………………………………………………………………………………… 61 taBLe: GLOBaL & ReGiOnaL ReaL GDP GROWtH …………………………………………………………………………….. 61 taBLe: GLOBaL aSSUmPtiOnS ……………………………………………………………………………………………………….. 2 taBLe: DeveLOPeD maRKet eXCHanGe RateS ……………………………………………………………………………… 63 taBLe: emeRGinG maRKet eXCHanGe RateS ……………………………………………………………………………….. 63 6 www. businessmonitor. com Business Monitor international ltd c h a p t e r 1 Political Outlook executive Summary Double-Dip expected ahead Of 2011 national Congress WebelieveVietnamwillneedtotightenfiscalandmonetarypolicysharplyin2010inorderto ringthebalanceofpaymentsbacktoasustainablelevel. Withexternaldemandstillweak,we areforecastingrealGDPgrowthdroppingto4. 4%in2010fromanexpected5. 1%in2009. The co-existenceofslowingeconomicgrowthandincreasinginflationwillinevitablyraisedebateabout economicpolicyattheCommunistPartyofVietnam’s(CPV)NationalCongress,scheduledfor January2011. Webelievethepoliticalimpetusisstillbehindcontinuedeconomicreform,butthat Vietnamwillhavetoloweritseconomicgrowthtargetsandadjustitseconomicpolicymixinorder toavoidfurthermacroeconomicturbulence.

Vietnam’srelationswithChinahavecometotheforefrontofaninternalpowerstrugglewithinthe CommunistPartyofVietnam,pittingeconomicreformerscentredaroundPrimeMinisterNguyen TanDungagainstmoreconservativePolitburomemberswithlinkstoChina. Withthetwofactionsseekingtostrengthentheirpositionsaheadofthe2011NationalCongress,webelievethe reformistswillmaintaintheupperhand. ThesensitivepowerbalancewithinthePolitburowilllimit thescopeforafurtherrapprochementbetweenVietnamandUS,withbilateraltiesalsostrained byHanoi’ssuppressionofCatholicactivists. Whilesuccessfulinboostingdomesticdemandandbringingaboutarecoveryingrowthfrom3. % year-on-year(y-o-y)inQ109to4. 4%and5. 2%inQ209andQ309,Vietnam’ssizeablefiscaland monetarystimuluspackageimplementedover2009hasalsoledtoawideningtradedeficitthrough ahighdegreeofimportleakage. WithVietnam’sforeignexchangereservesbelowthreemonths’ worthofimports,weexpectVietnamtodepreciatethedongtowardsVND19,000/US$,raiseinterest ratesby500bpsto12. 00%andtightenfiscalpolicyin2010inordertoavoidabalance-of-payments crisis. Vietnam is making headway in improving its dilapidated infrastructure with construction on a numberofports,powerplantsandroadprojectscommencedin2009.

Nonetheless,itwilltake anumberofyears,ifnotdecades,untilVietnam’sinfrastructureratingof37. 2comesanywhere nearthe68. 0Chinascores. Ontheeconomicreformfront,thegovernment’sprivatisationprocess isgainingpaceagainwiththelistingofVietcombank,VietinBank and eximbankin2009. We arealsoexpectingimprovementsinthebusinessenvironmentfromtheVietnam-JapanEconomic PartnershipagreementandafreetradeagreementcurrentlyundernegotiationwiththeEuropean Union. Business Monitor international ltd www. businessmonitor. com 7 vietnam Q1 2010 2009 XXXXXXXXXXX QX 8 www. usinessmonitor. com Business Monitor international ltd chapter 1 Political Outlook SWOt analysis Strengths TheCommunistPartygovernmentappearscommittedtomarket-orientedreforms,althoughspecific economicpolicieswillundoubtedlybediscussedatthe2011NationalCongress. Theone-party systemisgenerallyconducivetoshort-termpoliticalstability. RelationswiththeUSaregenerallyimproving,andWashingtonseesHanoiasapotentialgeopoliticalallyinSouthEastAsia. Weaknesses CorruptionamonggovernmentofficialsposesamajorthreattothelegitimacyoftherulingCommunistParty.

Thereisincreasing(albeitstilllimited)publicdissatisfactionwiththeleadership’stightcontrolover politicaldissent. Opportunities Thegovernmentrecognisesthethreatthatcorruptionposestoitslegitimacy,andhasactedto clampdownoncorruptionamongpartyofficials. Vietnamhasallowedlegislatorstobecomemorevocalincriticisinggovernmentpolicies. Thisis openingupopportunitiesformorechecksandbalanceswithintheone-partysystem. threats Theslowdowningrowthin2009and2010islikelytoweighonpublicacceptanceoftheone-party system, and street demonstrations to protest economic conditions could develop into a full-on challengeofundemocracticrule.

AlthoughstrongdomesticcontrolwillensurelittlechangetoVietnam’spoliticalsceneinthenext fewyears,overthelongerterm,theone-party-statewillprobablybeunsustainable. RelationswithChinahavedeterioratedoverthepastyearduetoBeijing’smoreassertivestance overdisputedislandsintheSouthChinaSeaanddomesticcriticismofalargeChineseinvestmentinabauxiteminingprojectinthecentralhighlands,whichcouldpotentiallycausewidescale environmentaldamage. Business Monitor international ltd www. businessmonitor. com 9 vietnam Q1 2010 2009 XXXXXXXXXXX QX Bmi Political Risk Ratings

Vietnam’s short-term political risk (STPR) rating of 80. 6 reflects a largely stable political system, kept in place largely by the ruling Communist Party of Vietnam (CPV)’s monopoly on power. While public expressions of discontent have so far been limited, slower growth and high inflation pose a threat to stability in the near term. However, we see one-party rule as inherently unsustainable in the longer term, and thus accord Vietnam a rating of 52. 8 in our long-term political risk (LTPR) ratings, due mainly to a score of 27. 6 in the characteristics of polity rating.

Singapore Hong Kong China Taiwan Vietnam Laos Malaysia South Korea North Korea Indonesia Sri Lanka India Bangladesh Philippines Thailand Cambodia Myanmar Pakistan Regional average 74. 4 South Korea Hong Kong Malaysia Singapore India Taiwan China Sri Lanka Thailand Philippines North Korea Pakistan Indonesia Vietnam Cambodia Bangladesh Laos Myanmar Regional average 60. 2 S-T Political 97. 3 86. 7 83. 5 81. 9 80. 6 80. 2 80. 2 77. 1 76. 9 75. 8 72. 9 72. 5 69. 8 67. 9 65. 4 64. 8 56. 5 49. 6 Global average 67. 3 L-T Political 81. 2 76. 9 74. 2 71. 6 70. 5 66. 4 64. 4 62. 7 57. 8 57. 0 55. 1 54. 4 53. 6 52. 8 51. 9 50. 4 43. 31. 3 Global average 63. 2 Rank Trend 1 = 2 = 3 = 4 = 5 + 6 = 7 8 = 9 = 10 + 12 = 13 14 = 15 = 16 = 17 = 18 + 19 = Emerging Markets average 64. 5 Rank Trend 1 2 = 3 = 4 = 5 + 7 = 8 = 9 = 10 = 11 = 12 = 13 = 14 = 15 = 16 = 17 = 18 = 19 = Emerging Markets average 59. 3 10 www. businessmonitor. com Business Monitor international ltd POLitiCaL OUtLOOK Domestic Politics China Relations Lead the internal Power Struggle Faced with ever-increasing internet penetration and an army of bloggers, the Communist Party of Vietnam (CPV) has in recent years sought to improve its means of monitoring and controlling public opinion.

Nonetheless, hardliners within the Politburo are now arguing that increasingly unruly expressions of dissent against public policy on the internet is evidence of Prime Minister Nguyen Tan Dung’s reformist agenda getting out of control, thus necessitating a policy redirection. Indeed, this is becoming a key theme ahead of the CPV’s next National Congress, scheduled for early 2011, which threatens to pit economic reformers against more conservative hardliners in the quest for political nominations.

The rapid economic growth seen in recent years has undermined the base for political dissidents in Vietnam as the general public has seen little reason to oust a regime that has delivered tangible material gains for the majority of the population. Nonetheless, the CPV has become notably unnerved by an increasing mass of political opinion driven by the easy access to internet and online forums that a majority of the Vietnamese population now enjoys. Vietnamese authorities have estimated that 21mn Vietnamese use the internet, and there are reportedly between one and four million blogs, covering a wide area of topics.

To police this immense body of content, the government regulates internet content and usage through a variety of technical and legal means, but users are constantly TABLE: POLITICAL OVERVIEw System of Government Head of State Head of Government Last Election Composition Of Current Government Key Figures Single-Party Socialist Republic President Nguyen Minh Triet (serving first five-year term) Prime Minister Nguyen Tan Dung (serving first five-year term) Parliamentary – May 2007 Communist Party Congress – April 2006 Communist Party of Vietnam The 14-person Communist Party Politburo, lected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nong Duc Manh, State President Nguyen Minh Triet, Prime Minister Nguyen Tan Dung and General Minister of Public Security Le Hong Anh. Deputy Prime Minister – Nguyen Sinh Hung, Foreign Minister – Pham Gia Khiem, Minister of Planning and Investment – Vo Hong Phuc, Vice President – Truong My Hoa, Central Bank Governor – Nguyen Van Giau.

Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originating from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology. Presidential and Parliamentary – May 2012 CPV Congress – Spring 2011 Ongoing Disputes Key Relations/ Treaties BMI Short-Term Political Risk Rating BMI Structural Political Risk Rating Source: BMI

BMI VIEw Vietnam’s relations with China have come to the forefront of an internal power struggle within the Communist Party of Vietnam, pitting economic reformers centred around Prime Minister Nguyen Tan Dung against more conservative Politburo members with links to China. With the two factions seeking to strengthen their positions ahead of the 2011 National Congress, we believe the reformists will maintain the upper hand. Other Key Posts Main Political Parties (number of seats in parliament)

Next Election Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council 80. 6 52. 8 Business Monitor international ltd www. businessmonitor. com 11 vietnam Q1 2010 2009 XXXXXXXXXXX QX seeking and finding means to circumvent these measures, in spite of the heavy penalties handed down by the authorities. China Dominating internet Discussion

The most inflammatory subject on Vietnamese blogs over the past year has been Hanoi’s relationship with China, which has been tested by ongoing disputes over the Paracel and Spratly islands in the South China Sea, a controversial Chinese-financed bauxite mining project in the central highlands and a severely skewed trade relationship. A number of journalists and bloggers have criticised Beijing’s – and the Vietnamese government’s – conduct in the above-mentioned disputes, a criticism that has fallen on fertile ground as the Vietnamese public is highly sensitive to any perceived encroachment of Vietnam’s sovereignty by its northern neighbour.

With the regime in Hanoi fearful of China’s sensitivity to any criticism and aware of the need to maintain a working relationship with Beijing, the authorities have stepped in to stem any perceived instigation of anti-Chinese public opinion. This has seen the arrest of journalists and bloggers who have published articles and blogposts critical of China, on the basis that the criticism threatens efforts by the two governments to reform the economic relationship between the two countries.

This has so far been characterised by a heavily skewed trade flow with an avalanche of cheap Chinese goods flooding the Vietnamese market, driving local competitors out of business, with little but commodities such as coal and rubber going the other way. The massive trade deficit with China – which amounted to US$11. 1bn in 2008, roughly 12% of GDP – has been a subject of dispute between Chinese and Vietnamese leaders in recent years, and thus a point of discussion during Prime Minister Nguyen Tan Dung’s visit to China in April 2009. The perceived solution to achieve a ore mutually beneficial economic relationship has been to promote increased Chinese investment in Vietnam. This does indeed make economic sense as investment from Vietnam’s traditional sources of foreign direct investment – Malaysia, Singapore, South Korea and Taiwan – is likely to be less forthcoming over the next few years as foreign investment partners rebuild their balance sheets and pare back their expansion plans. Indeed, foreign direct investment pledges have dropped 85. 7% yo-y in the first three quarters of 2009 to US$7. 6bn.

The crux is that with a manufacturing sector equally, if not more, competitive than Vietnam’s, the Chinese interest in investing in Vietnam has thus almost exclusively been directed towards the extractive industry, with the aim of securing resources to fuel the Chinese industrial behemoth. This has fuelled allegations in the case of the bauxite mining project in Lam Dong province that China is merely exploiting Vietnam’s natural resources, while causing considerable environmental damage in the central highlands, which are both scenic and the centre of Vietnam’s coffee industry.

Add to this the propensity of Chinese investors to bring their own workers rather than to employ locals, and the severe public backlash against the investment plans comes as no surprise. With technical solutions failing adequately to prevent the posting of inflammatory content on the internet, the government has turned to incarcerating a number of bloggers and journalists to deter the voicing of critical opinion. No Sea Change Likely Map – South China Sea Source: BMI 12 www. businessmonitor. com Business Monitor international ltd POLitiCaL OUtLOOK Political Jockeying ahead Of 2011 Congress

The ability to control domestic dissent has become a key issue ahead of the CPV’s 11th National Congress, scheduled for early 2011, at which key appointments and policy decisions are to be made. The increasing leeway of opinion expressed in new media has reportedly become a sticking point for more conservative forces within the CPV to argue that Prime Minister Dung has gone too far in his policy of economic liberalisation and increased openness towards the US and North East Asian countries such as Japan and South Korea at the expense of Hanoi’s relationship with its ideological brethren in Beijing.

This could lay the ground for a serious confrontation at, or before, the 11th National Congress. We continue to expect Nguyen to maintain his authority within the Politburo as a younger, less ideological generation of CPV members is strongly supportive of continued economic reform. However, he is likely to face continued opposition from a more conservative faction within the Politburo, which believes that his agenda of increased economic liberalisation is putting the CPV’s monopoly on public opinion – and, by extension, political power – at risk.

Members of this faction are said to be at the forefront of the reaction against bloggers, since the General Department II (GDII), an intelligence unit led by Vice Defence Minister Nguyen Chi Vinh, has been instrumental in tracking and punishing political dissent on the internet. It has been alleged that hardliners have also used the technology at the command of GDII to monitor ideological opponents within the CPV, thus gaining an upper hand in the behind-the-scenes jostling for promotions that characterises the CPV and other power structures.

While there is thus a risk that the internal power struggle could intensify ahead of the National Congress, we see no major risks to policy direction. Hence, we maintain our 90 out of 100 rating for Vietnam in the policy continuity sub-category of our shortterm political risk ratings. With inflation currently in low single digits and the conflict with China over the Paracel and Spratly islands contained, Vietnam scores a high 80 out of 100 in our short-term political risk rating. A low characteristics of polity rating (27. 6 out of 100) brings Vietnam’s long-term political risk rating down to 52. , reflecting our view that one-party rule is unsustainable in the longer term. Business Monitor international ltd www. businessmonitor. com 13 vietnam Q1 2010 2009 XXXXXXXXXXX QX 14 www. businessmonitor. com Business Monitor international ltd chapter 1 2 economic Outlook Political Outlook SWOt analysis Strengths Vietnamhasbeenoneofthefastest-growingeconomiesinAsiainrecentyears,withGDPgrowth averaging7. 6%annuallybetween2000and2007. TheeconomicboomhasliftedmanyVietnameseoutofpoverty,withtheofficialpovertyrateinthe countryfallingfrom58%in1993to20%in2004.

Weaknesses Vietnamstillsuffersfromsubstantialtrade,currentaccountandfiscaldeficits,leavingtheeconomy vulnerableastheglobaleconomycontinuestosufferin2010. Thefiscalpictureiscloudedby considerableoff-the-booksspending. Theheavily-managedandweakdongcurrencyreducesincentivestoimprovequalityofexports, andalsoservestokeepimportcostshigh,thuscontributingtoinflationarypressure. Opportunities WTOmembershiphasgivenVietnamaccesstobothforeignmarketsandcapital,whilemaking Vietnameseenterprisesstrongerthroughincreasedcompetition.

Inspiteofthecurrentmacroeconomicwoesthegovernmentshouldcontinuetomoveforwardwith marketreforms,includingprivatisationofstate-ownedenterprises,andliberalisingthebankingsector. Urbanisationwillcontinuetobealong-termgrowthdriver. TheUNforecaststheurbanpopulation torisefrom29%ofthepopulationtomorethan50%bytheearly2040s. threats Inflationanddeficitconcernshavecausedsomeinvestorstoreassesstheirhithertoupbeatviewof Vietnam. Ifthegovernmentfocusestoomuchonstimulatinggrowthandfailstorootoutinflationary pressure,itrisksprolongingmacroeconomicinstability,whichcouldleadtoapotentialcrisis.

Thethreatofprolongedmacroeconomicinstabilitycouldprompttheauthoritiestoputreformson hold,astheystruggletostabilisetheeconomy. Business Monitor international ltd www. businessmonitor. com 15 vietnam Q1 2010 Bmi economic Risk Ratings Vietnam’s short-term economic risk (STER) rating of 43. 8 reflects mainly a deterioration of external conditions and the fiscal situation as the government has attempted to supplant a sharp reduction in external demand with fiscal stimulus. Vietnam’s chronic fiscal and current account deficits also weigh down our long-term economic risk (LTER) ratings, where the fiscal and external components score 35. and 33. 3 (out of 100) respectively. However, this is partly offset by a robust score of 75. 0 in the growth component, reflecting a strong potential for rapid economic expansion, bringing the overall LTER to 53. 9. S-T Economy 92. 1 83. 3 79. 8 75. 6 75. 4 74. 0 72. 9 65. 8 63. 3 59. 4 56. 7 56. 3 54. 8 45. 0 43. 8 43. 1 12. 5 Global average 54. 2 L-T Economy 78. 6 75. 1 74. 8 72. 8 72. 8 71. 3 66. 6 58. 8 54. 6 53. 9 53. 3 51. 2 47. 2 47. 1 44. 7 44. 3 38. 6 Global average 52. 4 Rank Trend 1 = 2 = 3 = 4 = 5 + 6 + 7 = 8 9 = 10 = 11 = 12 = 13 = 14 = 15 = 16 = 18 + 19 = Emerging Markets average 52. Rank Trend 1 = 2 = 3 = 4 = 5 = 6 + 7 = 8 9 = 10 + 11 = 12 = 13 = 14 = 15 = 16 = 17 + 19 = Emerging Markets average 49. 5 China Singapore Hong Kong Thailand Malaysia South Korea Taiwan India Philippines Indonesia Cambodia Laos Bangladesh Sri Lanka Vietnam Pakistan Myanmar North Korea Regional average 56. 4 Singapore China Hong Kong Malaysia Taiwan South Korea Thailand India Indonesia Vietnam Bangladesh Philippines Sri Lanka Laos Pakistan Cambodia Myanmar North Korea Regional average 54. 2 16 www. businessmonitor. com Business Monitor international ltd COnOmiC OUtLOOK economic activity Double-Dip now Our Core Scenario We have shifted our Vietnam growth outlook from expecting a gradual economic recovery in 2010 to a double-dip scenario with real GDP expansion dipping from an expected 5. 1% in 2009 to 4. 4% in 2010. This is based on our expectations that fiscal and monetary policy will have to be tightened sharply in early 2010 in order to rein in the widening trade deficit and halt inflationary pressures. Our outlook for Vietnam has much in common with that for China.

However, while the policy aims of the respective governments are similar, we view the macroeconomic concerns in Vietnam as more alarming, at least in the short term, as Hanoi’s fiscal and monetary resources are considerably more limited. As a consequence, we find it likely that the inevitable shift towards tighter monetary and fiscal policy will come earlier in Vietnam than in China. Indeed, while Hanoi’s fiscal and monetary stimulus has helped economic growth recover from a low of 3. 1% y-o-y in Q109 to 5. % in Q309, it has also been a key factor, in our view, behind a considerable widening of the trade deficit over the same period to US$1. 9bn in October. While the return to positive growth in G3 markets in H209 and 2010 should give some support to Vietnamese exports, we believe a continuation of the current accommodative policy would lead to a further widening of the trade deficit. With Vietnam’s foreign exchange reserves in Q409 estimated to be below the three months of imports seen as a minimum, we believe drastic policy action will be needed to avoid a balance-of-payments crisis.

This will include: A downward adjustment of the dong towards our VND19,000/US$ end-2009 forecast, from VND17,862/US$ on November 6, to stem the outflow of US dollars through the trade channel. A hiking of policy rates to uphold public confidence in the dong, stem capital outflows, and contain upward pressure on inflation through higher import prices. We are now expecting 500bps of hikes in 2010, bringing the Vietnam base rate from 7. 00% in November 2009 to 12. 00%. A reduction of the fiscal deficit from VND118trn (US$6. 6bn), or 7. % of GDP, to VND105trn BMI VIEw With Vietnam’s balance of payments yet again approaching breaking point, we expect a sharp tightening of fiscal and monetary policy in 2010, which will see real GDP growth dip to 4. 4% from an expected 5. 1% in 2009. This will raise criticism of economic policy at the 11th National Congress in January 2011, but we expect the market reform agenda to be maintained. Stimulus Behind Economic Recovery Percentage Point Contribution To Quarterly GDP Growth, y-o-y 10 9 8 7 6 5 4 3 2 1 0 Services Industry and Construction Agriculture, Forestry & Fishery Q106

Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Source: General Statistics Office TABLE: ECONOMIC ACTIVITY 2008 Nominal GDP, VNDbn [2] Nominal GDP, US$bn [2] Real GDP growth, % change y-o-y [2] GDP per capita, US$ [2] Population, mn [3] Industrial production index, % y-o-y, ave [1,4] Unemployment, % of labour force, eop [4] 1,478,695. 0 89. 8 6. 2 1,035 86. 8 14. 9 5. 0 2009f 1,628,770. 2 85. 7 5. 1 974 88. 0 6. 8 5. 5 2010f 1,825,074. 8 96. 1 4. 4 1,077 89. 2 10. 0 5. 5 2011f 2,053,254. 8 108. 1 5. 5 1,195 90. 4 12. 0 5. 0 2012f 2,288,454. 8 123. 7 6. 0 1,350 91. 14. 0 4. 5 2013f 2,562,685. 6 138. 5 6. 8 1,492 92. 8 14. 0 4. 0 2014f 2,855,652. 5 154. 4 6. 9 1,640 94. 1 14. 0 4. 0 Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; Sources: 2 IMF (General Statistics Office); 3 IMF; 4 General Statistics Office. Business Monitor international ltd www. businessmonitor. com 17 Q309 vietnam Q1 2010 (US$5. 9bn), or 5. 7% of GDP, in 2010 on the back of reductions in both current and capital expenditure growth. Domestic Demand Correction Needed To Close Trade Deficit Retail Sales Growth, % chg 60 50 40 30 20 10 0 y-o-y 3-month average mplications For Growth We expect the fiscal and monetary tightening to lead to a double dip in growth after the tentative rebound seen in the last three quarters of 2009. We are expecting real GDP growth to come in at 4. 4% in 2010, as weak growth in G3 markets will weigh on exports and prevent a marked improvement in net exports in spite of the devaluation of the dong. This will mean that the slowdown in domestic demand will be harder felt. With inflation expected to average roughly 9. 0% in 2010, we expect government consumption to decrease by 3. 5% in real terms, which will shave 0. percentage points (pp) off headline growth. A more marked effect will be coming from a slowdown in private consumption growth as credit conditions are tightened. We expect private consumption growth (in real terms) to slow to 2. 3% from an expected 4. 9% in 2009 and 9. 2% in 2008. This should see the contribution to growth from private consumption decrease to 1. 6pp in 2010 from 3. 3pp in 2009 and a massive 6. 0pp in 2008. We are, on the other hand, expecting an increase in the contribution from gross fixed capital formation from 0. 4pp to 1. 1pp as FDI disbursements, down 12. % y-o-y to US$8bn in January-October 2009, recover and state-and aid-financed projects gather pace. However, the precarious state of the property market, where activity and prices have been supported by the loan-subsidy programme, is a risk to this forecast. While only a minority of property purchases are financed through bank lending, higher interest rates should still have an impact on the market and on commercial and residential construction. May-05 May-06 May-07 May-08 Sep-05 Sep-06 Sep-07 Sep-08 May-09 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Source: BMI Sep-09 Policy Rebalancing needed at 2011 Party Congress

We expect the slowdown in growth in 2009 and 2010 to make economic policy the main matter of debate during the Communist Party of Vietnam (CPV)’s 11th National Congress scheduled for January 2011. The macroeconomic roller coaster ride experienced in recent years has raised criticism against Prime Minister Nguyen Tan Dung, the most important proponent of economic reform, from more conservative members in the Politburo. We believe the mainstay of the CPV is still behind Nguyen’s reform agenda, meaning that there will be no drastic shift in the socio-economic development strategy for 2011-2016.

However, we expect measures to be taken to achieve greater macroeconomic stability, including a reduction of official growth targets, a shift in monetary policy towards inflation targeting and increased exchange rate flexibility. This is likely to come at a cost to economic growth in the short term, and we are consequently forecasting real GDP growth of 5. 5% and 6. 0% in 2011 and 2012 respectively, as the global economic environment is expected to be less conducive than in the 2003-2007 boom years.

A failure to take a decision on rebalancing economic policy would, on the other hand, mean a high risk of a continuation of macroeconomic volatility as expressed in Vietnam’s score of 43. 8 out of 100 in our short-term economic risk ratings. Slow Global Recovery And Policy Shift To Bring Lower Growth Vietnam – Real GDP Growth, % 10 9 8 7 6 5 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008e 2009f 2010f 2011f Source: General Statistics Office, f=BMI forecast 18 2012f www. businessmonitor. com Business Monitor international ltd eCOnOmiC OUtLOOK Balance Of Payments Crisis time again? While successful in bringing about a recovery in growth from 3. % y-o-y in Q109 to 4. 4% and 5. 2% in Q209 and Q309 respectively, Vietnam’s sizeable fiscal and monetary stimulus package implemented over 2009 has also led to a high degree of import leakage. This is because the government’s ‘buy Vietnamese’ campaign has failed to divert consumers from the cheap Chinese-produced goods flooding the market, while public infrastructure and foreign-invested projects have driven up imports of capital goods such as machinery and steel. Meanwhile, exports were down by 13. 8% y-o-y in January-October 2009 due to weak external demand and lower commodity prices. Indeed, trade deficits of US$1. 8bn and US$1. bn in September and October 2009, respectively, were the largest since May 2008, when the State Bank of Vietnam (SBV) was forced to hike the base rate by 325bps (followed by another 200bps hike and a 2% depreciation of the dong on June 10) to stave off a balance-of-payments crisis. BMI VIEw A widening trade deficit and falling foreign exchange reserves have brought the issue of Vietnam’s balance of payments position and exchange-rate regime to a head. We believe that both an adjustment of the exchange rate and policy tightening will be needed to bring Vietnam’s external dynamics back on to a sustainable footing. TABLE: CURRENT ACCOUNT 006 Imports, US$bn [4] Goods imports, % of GDP [4] Exports, US$bn [4] Goods exports, % of GDP [4] Goods exports, % of imports [4] Trade balance, US$bn [4] Trade in goods balance, % of GDP [4] Services imports, US$bn [1,5] Services imports, % of GDP [1,5] Services exports, US$bn [1,5] Services exports, % of GDP [1,5] Goods and services exports, US$bn [2,4] Goods and services exports, % of GDP [2,4] Balance of goods and services, US$bn [2,4] Balance of goods and services, % of GDP [4] Net income, US$bn [6] Income account balance, % of GDP [6] Net transfers, US$bn [4] Net transfers, % of GDP [4] Current account, US$bn [4] Current account, % of GDP [4] Openness to international trade, % [3,4] 42. 6 69. 9 39. 8 65. 4 93. 5 -2. 8 -4. 6 5. 1 8. 4 5. 1 8. 4 44. 9 73. 7 -2. 8 -4. 6 -1. 4 -2. 3 4. 0 6. 7 -0. 2 -0. 3 135. 3 2007 58. 9 82. 8 48. 6 68. 3 82. 4 -10. 4 -14. 6 6. 9 9. 7 6. 0 8. 5 54. 6 76. 7 -11. 3 -15. 8 -2. 2 -3. 0 6. 4 9. 0 -7. 0 -9. 8 151. 1 2008 75. 5 84. 0 62. 7 69. 8 83. 1 -12. 8 -14. 2 8. 6 9. 6 6. 3 7. 0 69. 0 76. 8 -15. 1 -16. 8 -2. 0 -2. 2 7. 3 8. 1 -9. -10. 9 153. 8 2009f 67. 3 78. 6 56. 1 65. 5 83. 3 -11. 2 -13. 1 6. 4 7. 5 5. 5 6. 4 61. 6 71. 9 -12. 2 -14. 2 -2. 5 -2. 9 6. 9 8. 1 -7. 7 -9. 0 144. 0 2010f 75. 3 78. 4 63. 4 66. 0 84. 2 -11. 9 -12. 4 7. 4 7. 7 6. 2 6. 5 69. 7 72. 5 -13. 0 -13. 6 -2. 4 -2. 5 7. 6 7. 9 -7. 9 -8. 2 144. 4 2011f 82. 8 76. 6 71. 0 65. 7 85. 8 -11. 8 -10. 9 8. 4 7. 8 7. 1 6. 5 78. 1 72. 3 -13. 2 -12. 2 -2. 6 -2. 4 8. 3 7. 7 -7. 4 -6. 9 142. 4 2012f 91. 1 73. 6 79. 6 64. 3 87. 3 -11. 6 -9. 3 9. 6 7. 7 8. 0 6. 5 87. 6 70. 8 -13. 1 -10. 6 -2. 8 -2. 2 9. 2 7. 4 -6. 7 -5. 4 138. 0 2013 f 100. 2 72. 3 89. 1 64. 3 88. 9 -11. 1 -8. 0 10. 9 7. 8 9. 1 6. 6 98. 2 70. 9 -12. -9. 3 -3. 1 -2. 2 10. 1 7. 3 -5. 8 -4. 2 136. 7 2014f 110. 2 71. 4 99. 8 64. 6 90. 5 -10. 4 -6. 8 12. 3 8. 0 10. 3 6. 7 110. 1 71. 3 -12. 4 -8. 1 -3. 4 -2. 2 11. 1 7. 2 -4. 7 -3. 1 136. 1 Notes: f BMI forecasts. 1 Includes Investment Income up until 2004; 2 Includes Investment Income flows up until 2004; 3 Imports plus exports, % of GDP; Sources: 4 Asian Development Bank, State Bank of Vietnam; 5 Asian Development Bank, State Bank of Vietnam, General Statistics Office from 2005; 6 General Statistics Office, IMF. Business Monitor international ltd www. businessmonitor. com 19 vietnam Q1 2010 Trade Deficit Forcing Central Bank To Draw On Reserves

Slipping Trade Deficit Cause For Action Exports, Imports & Trade Balance (US$mn) Exports (LHS) Imports(LHS) Trade Balance (RHS) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan-07 Jan-08 Jan-09 Jul-07 Jul-08 Apr-07 Apr-08 Apr-09 Oct-07 Oct-08 Jul-09 Oct-09 -4,000 -3,500 -3,000 -2,500 -2,000 -1,500 -1,000 -500 0 500 1,000 With official sources having estimated FDI inflows and remittances at roughly US$800mn and US$500mn per month, respectively, in 2009 and net portfolio flows roughly flat (according to data from the HCMC Stock Exchange), we believe the SBV has started to run down its foreign-exchange reserves in recent months. The latter stood at US$20. bn in May, according to IMF data, but the Asian Development Bank stated in September that FX reserves had fallen from US$23bn in December 2008 to US$17. 6bn by the end of June, which is below the three months’ worth of imports widely seen as a minimum to uphold liquidity within a fixed-exchange rate regime. To counter concerns about the balance-of-payments situation, Central Bank Governor Nguyen Van Giau stated on October 22 that a loan deal had been struck with Japan to bolster its FX reserve stockpile by US$1bn annually between 2010 and 2012. This followed an announcement the previous day that the World Bank would lend Vietnam US$1bn to boost its foreign exchange reserves.

However, we believe such measures will not be sufficient to cover the reserves drawdown, and we are thus forecasting foreign-exchange reserves to fall to US$15bn by the end of 2009, a projected 2. 7 months of imports. Source: General Statistics Office Trade Account & Current Account (% Of GDP) 30 25 20 15 10 5 0 Jul-08 Dec-07 Feb-09 Further Drawdown In Reserves Expected Weaker Dong no Panacea, Policy tightening needed Essentially, we believe a downward adjustment of the exchange rate is needed in order to boost the price competitiveness of domestically produced goods and thus curb the trade deficit. We have therefore maintained our VND19. 00/US$ end-09 forecast for the dong.

However, an adjustment of the exchange rate would not be a panacea as it would not only further undermine confidence in the currency but also expose bottlenecks in the economy and thus add to already present inflationary pressures. Hence, we also see an increase probability of a sharper-than-expected tightening of fiscal and monetary stimulus in 2010 in spite of the adverse consequences such action would have on growth. A downward adjustment of the dong will aid an expected 13. 0% increase in exports in 2010 to US$63. 4bn after an expected 10. 5% drop in 2009. However, this is also based on BMI’s oil and gas team’s forecast that the price of oil (OPEC Basket) will rise to US$83/ bbl in 2010, up 40. % from an expected average of US$59/bbl in 2009, which will inflate both exports and imports (Vietnam still exports most of its crude, and imports most of its refined petroleum products, in spite of having brought its first oil refinery online in 2009). We are forecasting imports to amount to US$75. 2bn in 2010 compared with US$67. 4bn in 2009, but these projections are subject to upside risks if the government fails to curb import growth by curtailing domestic demand and/or adjusting the exchange rate downward. Our core scenario, including both of the latter, would leave a trade deficit of US$11. 2bn and US$11. 9bn in 2009 and 2010, respectively, equivalent to 13. 1% and 12. 4% of expected GDP.

With the widening of the trade account forecast to outpace the rise in remittances from US$6. 2bn in 2009 to US$6. 8bn in 2010, we are expecting the current account deficit to increase slightly in dollar terms, from US$7. 7bn in 2009 to US$7. 9bn in 2010, but to shrink from 9. 0% to 8. 2% of GDP for the respective years. Dec-00 Sep-02 Source: IMF, International Financial Statistics Trade Account & Current Account (% Of GDP) 0 -2 -4 -6 -8 -10 -12 -14 -16 2003 2004 2005 2006 2007 2008e 2009f 2010f Policy Shift Needed To Achieve Economic Rebalancing May-07 Nov-03 Jun-04 Jan-05 Aug-05 Feb-02 Mar-06 Jul-01 Apr-03 Oct-06 Trade Account Current Account 011f 2012f 2013f 2014f Source: General Statistics Office, f= BMI Forecasts 20 www. businessmonitor. com Business Monitor international ltd eCOnOmiC OUtLOOK monetary Policy SBv to Raise Rates to 12% in 2010 Easy monetary policy has been key to the government’s efforts to cushion the sharp downturn in external demand in 2009, which has aided a recovery in GDP growth from a low of 3. 1% y-o-y in Q109 to 5. 2% in Q309. In addition to bringing down the Vietnam base rate by 700bps to 7. 00%, the State Bank of Vietnam (SBV) has implemented the government’s interest rate subsidy programme, which has seen eligible firms enjoy a four percentage point (pp) subsidy on loans.

Disbursements under the interest rate programme have amounted to VND402trn (US$22. 5bn) in the first nine months of 2009, which represents 30% of the total VND credit outstanding in the economy. This has seen the total amount of outstanding loans increase by 33. 3% between January and October, eroding the credibility of the SBV’s 30% credit growth target for 2009 as a whole. The interest-rate programme has undoubtedly decreased the number of bankruptcies in the corporate sector, but we estimate that a sizeable share of the funds has also been used for investment in the real estate and stock market, which have rebounded in 2009 after collapsing in 2008.

The reduction in the subsidy from four to two percentage points of the loan-subsidy programme as it is extended into 2010 will undoubtedly have an impact on lending costs and possible knock-on effects on economic growth and the stock market. With these risks in mind, the SBV has indicated that it intends gradually to unwind its accommodative policy over 2010 as real GDP growth continues to recover. However, we believe a sharper tightening of monetary policy will be needed in 2010. This is because the stimulus-driven strength of domestic demand has seen the trade deficit widen to a level in excess of capital inflows in late 2009, forcing the SBV to draw down its foreign-exchange reserves to uphold dollar liquidity.

While the SBV could yet again revert to dollar rationing, we believe a downward adjustment of the dong, through a widening of the trading band, will be needed in order to bring the official exchange rate in line with market conditions and arrest the drop in foreign-exchange reserves. The latest such adjustments were conducted in December 2008 and March 2009, bringing a depreciation of the dong by 6. 3% against the US dollar between October 2008 and October 2009. BMI VIEw We are expecting a sharper tightening of monetary policy in 2010 as the government yet again confronts adverse balance-of-payments and inflation dynamics through a tightening of fiscal and monetary policy. We believe the State Bank of Vietnam will raise the benchmark Vietnam base rate by 500bps to 12. 00% by mid-2010 as inflation briefly returns to double digits. Consumer Price Inflation, % y-o-y, & policy rate (%) 0 25 20 15 10 5 0 -5 -10 Jun-07 Tightening Expected 4. 5 3. 5 2. 5 1. 5 0. 5 Average Lending Rate, % Private Sector Loans, % NPL Ratio, % (RHS) Mar-08 Mar-09 Jun-08 Jun-09 Sep-08 Sep-07 Dec-07 Dec-08 Sep-09 -0. 5 -1. 5 Source: General Statistics Office, State Bank of Vietnam TABLE: MONETARY POLICY 2007 Consumer prices, % y-o-y, eop [1,3] Consumer prices, % y-o-y, ave [1,3] M2, VNDbn [4] M2, % y-o-y [4] Central Bank policy rate, % [5] Lending rate, %, eop [6] Lending rate, %, ave [6] Real Lending Rate, %, eop [2,7] Real lending rate, %, ave [2,7] 12. 6 8. 3 1,153,340 25. 0 8. 2 12. 0 12. 0 -0. 6 3. 7 2008 19. 9 23. 0 1,441,675 25. 0 8. 5 15. 0 15. -4. 9 -8. 0 2009f 7. 3 7. 0 1,730,010 20. 0 7. 0 9. 0 9. 0 1. 7 2. 0 2010f 7. 0 9. 0 2,076,012 20. 0 12. 0 15. 0 12. 0 8. 0 3. 0 2011f 6. 0 6. 5 2,491,214 20. 0 10. 0 12. 0 12. 0 6. 0 5. 5 2012f 6. 0 6. 0 2,989,457 20. 0 8. 0 10. 0 12. 0 6. 0 6. 0 2013 f 6. 0 6. 0 3,587,349 20. 0 8. 0 12. 0 12. 0 6. 0 6. 0 2014f 5. 0 5. 5 4,304,818 20. 0 8. 0 10. 0 12. 0 5. 0 6. 5 Notes: f BMI forecasts. 1 Base year 2000; 2 Real rate strips out the effects of inflation; Sources: 3 General Statistics Office; 4 IMF, State Bank of Vietnam; 5 State Bank of Vietnam; 6 IMF; 7 IMF/BMI. Business Monitor international ltd www. businessmonitor. com 21 vietnam Q1 2010

Yet another devaluation would deal another blow to public confidence in the dong, and thus have to be coupled with a sharp rise in interest rates in order to prevent a run into US dollars and gold. We expect the SBV to raise the Vietnam base rate by 500bps to 12. 00% in H110, with a possibility of an easing towards the end of the year if downside pressures on the dong subside and inflation appears contained. Food Prices To Lead Inflation Higher Food & Headline CPI, m-o-m % 8 7 6 5 4 3 2 1 0 -1 -2 Headline CPI Food and Foodstuff Higher Food And Oil Prices To Lift Inflation In 2010 While base effects from 2008 and a disinflation in food prices have brought down headline inflation to 3. % y-o-y in October, we believe inflation will head higher in Q409 and H110. Indeed, Vietnam enjoyed a record rice harvest in 2009, pushing down domestic prices for rice in spite of the government’s efforts to push up rice exports (+34% y-o-y in volume terms in January-September) to decrease the oversupply. We expect that farmers hit with falling prices and rotting stocks will reduce planting, with the spring 2010 harvest also likely to be impaired by tropical storms Ketsana and Mirinae hitting Vietnam in H209. Our commodities team is thus expecting a relatively meagre 1. 3% increase in Vietnam rice production in 2010, which is below the projected 2. 5% increase in rice consumption.

Moreover, we see a possibility that India, which has in recent years alternated with Vietnam as the second-largest rice exporter in the world after Thailand, will have to import rice for the first time in 21 years after a dismal monsoon, with adverse weather also hurting domestic production in the Philippines, the largest rice importer in the world. This should put upward pressure on rice prices, according to our commodities team, which is forecasting rough rice to average 15. 00/cwt in 2010 compared with an expected average of 13. 00/cwt in 2009. In addition, our oil and gas team is forecasting the global oil price (OPEC basket) to average US$83/bbl in 2010, up 40. 7% from an expected US$59/bbl average in 2009, which will have an impact on the transport and communications sub-component, but also on food prices through higher costs for fertiliser.

With a devaluation of the dong likely to add to inflationary pressures, we expect consumer price inflation to rise sharply in H110, potentially returning to double-digit rates by midyear. Policy tightening and weaker growth should pave the way for some disinflation towards the end of the year, with our end-2010 inflation forecast standing at 7. 0%. This could allow the SBV to start easing rates towards the end of the year if it feels confident enough that inflation is under control. Jan-06 Jan-07 Jan-08 Jan-09 Jul-06 Jul-07 Jul-08 Apr-06 Apr-07 Apr-08 Source: General Statistics Office Policy Shift Needed To Stabilise Inflation Average Annual Consumer Price Inflation (%) 25 20 15 10 5 0 -5 Apr-09 Oct-06 Oct-07 Oct-08 Jul-09 new Central Bank Law Small Step towards independence

The National Assembly was in Q409 reviewing a bill for a new Central Bank Law, which should be passed into legislation in early 2010 without any major alterations. The bill aims to clarify the SBV’s mandate, which presently does not stipulate the relative importance between the twin objectives of inflation targeting and managing the exchange rate. However, the SBV’s de facto mandate has been to implement a 1% annual depreciation against the US dollar to boost the competitiveness of Vietnamese exports, which has led to a highly expansionary monetary policy as policymakers have been unwilling properly to sterilise the strong inflows of FDI and remittances during the 2003-2007 boom years.

The current law proposal sees the SBV retain its legal status as a ministerial agency, meaning 2001 2002 2003 2004 2005 2006 2007 2008 2009f 2010f 2011f 2012f f = BMI forecast. Source: General Statistics Office, f= BMI forecasts 22 www. businessmonitor. com Business Monitor international ltd eCOnOmiC OUtLOOK that monetary policymakers will remain under the authority of the government. However, we believe the combination of high inflation and low growth in 2010 will prompt a policy shift towards achieving more macroeconomic stability in contrast to just high growth rates at the Communist Party of Vietnam’s 11th National Congress in January 2011.

As a consequence, we expect increased progress in 2011 onwards in implementing the 2006 plan to make the SBV fully independent in setting policies on monetary, interest rate and exchange rate management by 2020. We expect a redirection of economic and monetary policy to aid a stabilisation of inflation at around 6. 0% annually in 2011-2013 as Vietnam settles on a more sustainable growth path around 7. 0%. Fiscal Policy Sharp tightening expected in 2010 Vietnam has boosted its already accommodative fiscal policy in 2009 in order to cushion the blow from the global downturn, which has decreased exports (-14. 3% y-o-y in JanuarySeptember) and foreign direct investment inflows (-12. % y-o-y in January-October). We are forecasting a fiscal deficit of VND118trn (US$6. 6bn), or 7. 2% of GDP, in 2009, after a reported VND53. 7trn (US$3. 0bn) shortfall in 2008. However, including off-budget expenditure, we are estimating that the 2009 fiscal deficit could be as large as VND159trn (US$8. 9bn), or 9. 8% of GDP. This strong fiscal injection has seen domestic demand, as illustrated by the strong clip in retail sales ( see chart), outpace exports, resulting in the trade deficit reaching almost US$2bn in October 2009. As a consequence, we believe monetary and fiscal tightening will be needed in 2010 to bring the trade account back to a sustainable level.

Indeed, a gradual unwinding of government stimulus is already under way, with a second stimulus package passed by the National Assembly on October 30 including a reduction in the SBV’s loansubsidy programme from four percentage points in 2009 to two percentage points in 2010. In addition, tax breaks accorded to small and medium-sized enterprises (SMEs) in 2009 BMI VIEw We believe a tightening of fiscal policy will be needed in 2010 as part of an effort to rein in the widening trade deficit. We are expecting a reduction of the fiscal deficit from an estimated VND118trn (US$6. 6bn), or 7. 2% of GDP in 2009, to VND105trn (US$5. 9bn), or 5. 7% of GDP, in 2010 on the back of cuts in both current and capital expenditure growth. TABLE: FISCAL POLICY 007 Fiscal revenue, VNDbn [1] Revenue, % of GDP [1] Fiscal expenditure, VNDbn [1] Expenditure, % of GDP [1] Fiscal expenditure, VNDbn [1] Current expenditure, % of total expenditure [1] Current expenditure, % of GDP [1] Capital expenditure, VNDbn [1] Capital expenditure, % of total expenditure [1] Capital expenditure, % of GDP [1] Budget balance, VNDbn [1] Budget balance, % of GDP [1] 315,915. 0 27. 6 341,417. 0 29. 8 229,257. 0 67. 1 20. 0 112,160. 0 32. 9 9. 8 -35,827. 0 -3. 1 2008 401,600. 0 27. 2 425,257. 0 28. 8 307,457. 0 72. 3 20. 8 117,800. 0 27. 7 8. 0 -53,657. 0 -3. 6 2009f 377,821. 0 23. 2 465,678. 0 28. 6 330,078. 0 70. 9 20. 3 135,600. 0 29. 1 8. 3 -7. 2 2010f 426,240. 5 23. 4 495,741. 9 27. 2 346,581. 9 69. 9 19. 0 149,160. 0 30. 1 8. 2 -5. 7 2011f 481,240. 6 23. 4 555,230. 9 27. 0 388,171. 7 69. 18. 9 167,059. 2 30. 1 8. 1 -5. 6 2012f 543,803. 6 23. 8 621,858. 6 27. 2 4,347,52. 3 69. 9 19. 0 187,106. 3 30. 1 8. 2 -5. 4 2013f 615,077. 6 24. 0 696,481. 7 27. 2 486,922. 6 69. 9 19. 0 209,559. 1 30. 1 8. 2 -5. 3 2014f 696,408. 9 24. 4 780,059. 5 27. 3 545,353. 3 69. 9 19. 1 234,706. 1 30. 1 8. 2 -5. 2 -117,857. 0 -104,501. 4 -113,990. 3 -124,055. 1 -136,404. 1 -148,650. 6 Notes: e BMI estimates. f BMI forecasts. Sources: 1 ADB, Ministry of Finance. Business Monitor international ltd www. businessmonitor. com 23 vietnam Q1 2010 Tightening Needed In 2010 Fiscal Deficit (% Of GDP) 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 will not be renewed in 2010.

However, the positive effect of this on tax revenue will be countered by the phasing out of some import tariffs according to Vietnam’s WTO obligations, which could see the government lose up to VND3trn (US$167mn) in tax revenue. Finance Minister Vu Van Ninh told the National Assembly on October 23 that the government was aiming to cut the budget deficit to 6. 5% of GDP after an expected 6. 9% shortfall in 2009, defying calls for a 6. 0% target on the grounds that revenue sources were not expected to grow in 2010. We believe a sharper tightening will be needed, and are pencilling in a fiscal deficit of VND105bn (US$5. 9trn), equivalent to 5. 7% of GDP, in 2010 on the back of reductions in both current and capital expenditure growth.

Including off-budget expenditure, the 2010 fiscal deficit is expected to rise to VND125trn (US$7. 0bn), or 6. 8% of GDP. 2005 2006 2007 2008e 2009f 2010f 2011f 2012f Source: Ministry of Finance, f= BMI forecasts 2013f Government Debt Load Still manageable Concerns About Sustainability Rising Yield on 5-year Government Bond (%) 25 20 15 10 5 0 Jan-07 Jan-08 Jan-09 Jul-06 Jul-07 Jul-08 Apr-07 Apr-08 Apr-09 Oct-06 Oct-07 Oct-08 Jul-09 Oct-09 Fears about a renewed spike in inflation and doubts about the sustainability of fiscal policy have contributed to government bond yields gradually rising in 2009, with the yield on the benchmark 5-year government bond breaking through 10% in early October.

The government has consistently set stop-out rates on new issues below yield levels in the secondary market, meaning a number of failed primary auctions throughout 2009. The government’s refusal to raise stop-out rates in primary bond auctions is partly explained by its ready access to cheap financing from bilateral and multilateral partners. The Asian Development Bank, the World Bank and Japan have all granted Vietnam loans for budget support and to boost its foreign-ex

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BMI – Vietnam Business Forecast Report. (2018, Mar 02). Retrieved from https://graduateway.com/bmi-vietnam-business-forecast-report/

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