Vietnam Country Risk Report Q1 2019

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Q1 2019
Vietnam
Country Risk Report
Includes 10-year forecasts to 2027
Vietnam Country Risk Q1 2019
Contents
Executive Summary....................................................................................................................................................................... 5
Core Views........................................................................................................................................................................................................................................5
Forecast Changes..........................................................................................................................................................................................................................5
Key Risks..........................................................................................................................................................................................................................................5
Country Risk Summary................................................................................................................................................................. 6

Economic Risk Index..........................................................................................................................................................................................6
Political Risk Index..............................................................................................................................................................................................6
SWOT................................................................................................................................................................................................... 7
Economic – SWOT Analysis..............................................................................................................................................................................7
Political – SWOT Analysis..................................................................................................................................................................................8
Economic Outlook.......................................................................................................................................................................... 9
Economic Growth Outlook ...............................................................................................................................................................................9
Vietnam's Manufacturing Powerhouse To Sustain Strong Growth Momentum......................................................................................................9
We maintain our forecast for Vietnam's real GDP to grow by 6.9% in 2018 and 6.5% in 2019, following an expansion of 7.0% y-o-y in the January-
September period.
GDP By Expenditure Outlook ........................................................................................................................................................................11
TABLE: GDP GROWTH FORECASTS........................................................................................................................................................................................................................................................ 11
TABLE: PRIVATE CONSUMPTION FORECASTS.................................................................................................................................................................................................................................. 11
TABLE: GOVERNMENT CONSUMPTION FORECASTS..................................................................................................................................................................................................................... 12
TABLE: FIXED INVESTMENT FORECASTS............................................................................................................................................................................................................................................ 12
TABLE: NET EXPORTS FORECASTS........................................................................................................................................................................................................................................................ 12
Outlook On External Position .......................................................................................................................................................................13
TABLE: CURRENT ACCOUNT BALANCE FORECASTS..................................................................................................................................................................................................................... 13
TABLE: MAIN EXPORT AND IMPORT PARTNERS.............................................................................................................................................................................................................................. 14
TABLE: MAIN EXPORTS AND IMPORTS................................................................................................................................................................................................................................................ 14
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE................................................................................................................................................................................................................ 14
Monetary Policy .................................................................................................................................................................................................15
Vietnam's Overly Loose Monetary Policy Poses A Downside Risk To Macro Stability........................................................................................ 15
We expect the SBV to tighten its monetary policy stance via loan directives and macroprudential measures, opting to keep its benchmark refinancing
rate steady at 6.25%.
Monetary Policy Framework .........................................................................................................................................................................17
TABLE: MONETARY POLICY FORECASTS............................................................................................................................................................................................................................................ 18
Fiscal Policy And Public Debt Outlook .......................................................................................................................................................18
Fiscal Consolidation Appears To Be Underway In Vietnam.......................................................................................................................................... 18
We are lowering our forecast for Vietnam's budget deficit as a share of GDP to come in at 4.4% in 2018 and 4.2% in 2019 (from 4.6% and 4.4%
previously).
Structural Fiscal Position ...............................................................................................................................................................................20
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.......................................................................................................................................................................................................... 20
TABLE: FISCAL AND PUBLIC DEBT FORECASTS............................................................................................................................................................................................................................... 21
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derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.
Currency Forecast ............................................................................................................................................................................................22

Near-Term Stability And Long-Term Downtrend Still Intact For Vietnam Dong.................................................................................................... 22
We expect the Vietnamese dong to remain fairly stable against the dollar in the near term, and we are maintaining our forecast for the currency to
average VND23,100/USD in 2018.
TABLE: CURRENCY FORECAST................................................................................................................................................................................................................................................................ 22
10-Year Forecast............................................................................................................................................................................25
The Vietnamese Economy To 2027..............................................................................................................................................................25
A New Focus On Quality Growth............................................................................................................................................................................................ 25
Vietnam's growth prospects over the next decade remain positive in our view, as reflected by our bullish forecasts for real GDP growth to average
6.6% over 2018-2027. We foresee a more stable economic environment, with inflation averaging a benign 4.5% and the current account remaining
roughly in balance over the forecast period.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.................................................................................................................................................................................................................... 25
Political Outlook............................................................................................................................................................................29
Domestic Politics...............................................................................................................................................................................................29
Vietnam's Diplomacy Firing On All Cylinders................................................................................................................................................................... 29
Vietnam has been aggressively expanding and strengthening its diplomatic network.
TABLE: POLITICAL OVERVIEW................................................................................................................................................................................................................................................................. 29
Long-Term Political Outlook..........................................................................................................................................................................32
Monopoly On Power Unsustainable..................................................................................................................................................................................... 32
Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will
face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV
transforming itself into a technocratic administration, it faces major economic challenges which, if mismanaged, could lead to widespread unrest.
On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations
with the US.
Operational Risk............................................................................................................................................................................35
TABLE: OPERATIONAL RISK..................................................................................................................................................................................................................................................................... 35
Economic Openness.........................................................................................................................................................................................37
TABLE: FREE TRADE AGREEMENTS....................................................................................................................................................................................................................................................... 44
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES.................................................................................................................................................................................................... 47
TABLE: BARRIERS TO FDI........................................................................................................................................................................................................................................................................... 48
Utilities Network................................................................................................................................................................................................49
TABLE: ELECTRICITY RISKS...................................................................................................................................................................................................................................................................... 51
TABLE: FUEL RISKS...................................................................................................................................................................................................................................................................................... 54
TABLE: WATER RISKS................................................................................................................................................................................................................................................................................... 55
TABLE: TELECOMMUNICATIONS RISKS............................................................................................................................................................................................................................................... 57
Global Macro Outlook..................................................................................................................................................................59

Inflation And Policy Risks Rising........................................................................................................................................................................................... 59
TABLE: GLOBAL ASSUMPTIONS............................................................................................................................................................................................................................................................. 59
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y......................................................................................................................................................................................................... 60
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % Y-O-Y...................................................................................................................................................................................................... 61
Index Tables....................................................................................................................................................................................63
TABLE: VIETNAM – MACROECONOMIC DATA AND FORECASTS................................................................................................................................................................................................ 65
Executive Summary
Core Views
We maintain our forecast for Vietnam's real GDP to grow by 6.9% in 2018 and 6.5% in 2019, following an expansion of 7.0% y-o-y in the January-September
period. This will likely be mainly driven by continued strong growth in the export-oriented manufacturing sector, underpinned by liberal trade policies, positive
demographics, and upskilling of its labour force. The rise of the tourism sector – supported by government-led marketing campaigns – will provide a boost to
the services sector.
We expect the SBV to tighten its monetary policy stance via loan directives and macro prudential measures, opting to keep its benchmark refinancing rate steady
at 6.25%. Although inflation remains manageable, we believe that monetary policy remains too loose. Vietnam's rapid economic growth has been padded by
the sharp increase in leverage, and a subsequent unwinding of this debt binge would likely be more painful than the previous crisis in 2010-2012.
We expect the Vietnamese dong to remain fairly stable against the dollar in the near term, and we are maintaining our forecast for the currency to average
VND23,100/USD in 2018. The downside impact of widening interest rate differentials vis-à-vis the US and rising risk aversion will likely be partially offset by the
robust export-oriented manufacturing sector and strong FDI inflows. The SBV is also likely to actively intervene to maintain currency stability in the near term.
Over the longer term, we expect the currency to weaken against the USD gradually due to higher inflation and still-expensive REER.
Vietnam has been aggressively expanding and strengthening its diplomatic network. This has been partly motivated by security concerns as China has become
increasingly assertive in recent years. We expect these diplomatic efforts to bode well for its export-oriented manufacturing sector.
Forecast Changes
We are lowering our forecast for Vietnam's budget deficit as a share of GDP to come in at 4.4% in 2018 and 4.2% in 2019 (from 4.6% and 4.4% previously). This
is due to below-target expenditure and strong revenue growth in the first nine months of 2018, as well as a smaller deficit projected in the 2019 Budget. The
pace of the government's privatisation drive remains sub-par, but has accelerated in the past few years. This is likely to free up fiscal space for the government's
development spending and is positive for long-term growth sustainability and macroeconomic stability.
Key Risks
The potential for a renewed maritime dispute with China poses downside risks to Vietnam's otherwise stable short-term political outlook.
Should the Trump administration introduce fresh tariffs on Vietnamese imports in the US, this would pose a salient risk to Vietnam's export sector, and conse-
quently our economic growth forecast, given the sector's strong orientation to the US economy.
Economic policy slippages (in which the government has a mediocre track record) could dent investor confidence, and result in a slowdown in FDI inflows and
manufacturing growth.
Country Risk Summary
Economic Risk Index

Vietnam's Short-Term Economic Risk Index of 67.5 reflects the country's chronic fiscal deficits. The fiscal subcomponent scores just 36.7 out of 100. That said,
this is partly offset by a robust score of 83.3 in the growth component, reflecting the strong potential for rapid economic expansion and bringing the Long-Term
Economic Risk Index to 66.7.
Political Risk Index

Vietnam's Short-Term Political Risk Index of 82.5 reflects a largely stable political system, kept in place by the ruling Communist Party of Vietnam's monopoly on
power. That said, the recent political dispute with China highlights the potential for more frequent clashes between Hanoi and Beijing. We view one-party rule as
inherently unsustainable in the longer term, and thus award Vietnam a score of 59.7 in our Long-Term Political Risk Index, due mainly to a score of 30.7 in the 'char-
acteristics of polity' subcomponent.
SWOT
Economic – SWOT Analysis

Strengths
Vietnam has been one of the fastest growing economies in Asia in recent years, with GDP growth averaging 6.5% annually between 2000 and 2017.
The country has a fairly large population, ranking third in South East Asia, and its working population will continue to rise over the coming years.
Wages are competitive relative to regional peers such as China, Malaysia and Thailand.
Vietnam has been pushing for greater international economic integration through participation in free trade agreements/communities, and its exports are well
diversified both geographically and product wise.
Weaknesses
Vietnam still suffers from bloated fiscal deficits and high public sector debt, leaving the economy vulnerable to global economic uncertainties. The fiscal deficit
is dominated by substantial spending on social subsidies that could be difficult to withdraw.
The country relies heavily on imported inputs for its export and manufacturing sectors. This could undermine its export competitiveness and make the economy
more vulnerable to currency volatility.
Opportunities
WTO membership and ASEAN economic integration should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enter-
prises stronger through increased foreign competition.
The government has continued to move forward with market reforms, including privatisation of state-owned enterprises, addressing the high level of bad loans
in the banking sector as well as liberalising the banking sector.
Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 32% of the population in 2013 to more than 50%
by the early 2040s.
Threats
Although inflation subsided in 2014, complacency by the State Bank of Vietnam on this front could still pose downside risks to macroeconomic stability.
The potential for an escalation of political tensions with China over sovereign claims to parts of the South China Sea could have a negative impact on the economy.
Market reforms could progress at a much slower pace as the government remains cautious about ceding ownership to foreign investors.
Political – SWOT Analysis

Strengths
The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the coming years.
The one-party system is generally conducive to short-term political stability.
Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia.
Weaknesses
Corruption among government officials poses a major risk to the legitimacy of the ruling Communist Party.
There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent.
Opportunities
The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials.
Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within
the one-party system.
Threats
Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party state will prob-
ably be unsustainable.
Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea.
Economic Outlook
Economic Growth Outlook
Vietnam's Manufacturing Powerhouse To Sustain Strong Growth Momentum
Key View
• We maintain our forecast for Vietnam's real GDP to grow by 6.9% in 2018 and 6.5% in 2019, following an expansion of 7.0%
y-o-y in the January-September period.
• This will likely be mainly driven by continued strong growth in the export-oriented manufacturing sector, underpinned by liberal
trade policies, positive demographics, and upskilling of its labour force.
• The rise of the tourism sector – supported by government-led marketing campaigns – will provide a boost to the services sector.
Vietnam posted real GDP growth of 6.9% y-o-y in Q318, up from 6.7% y-o-y in the previous quarter, bringing the cumulative growth
in the first three quarters of 2018 to 7.0% y-o-y. We believe that continued efforts by the government to liberalise the economy will
underpin robust growth in the export-oriented manufacturing and construction sectors, while the services sector will also benefit
from higher tourist arrivals. The expansion in Q318 was largely led by strong manufacturing growth of 12.7% y-o-y, followed by the
construction, and wholesale and retail sectors, which both grew by 8.5% y-o-y. The strong economic performance was in line with
our expectations, and we are therefore maintaining our real GDP growth forecasts of 6.9% in 2018 and 6.5% in 2019.
Manufacturing Sector Leading Growth
Real GDP Growth & Manufacturing Value Added, % chg y-o-y
Note: Data for first nine months of each year. Source: Vietnam Statistics, Fitch Solutions
Export-Oriented Manufacturing To Continue Powering Ahead

The manufacturing sector continued to be the outperformer and main engine of growth, contributing 2.6 percentage points (pp)
to the headline GDP figure. Over the coming quarters, we expect this strong trend to continue, underpinned by three factors. First,
in our view, increasingly liberal trade policy has been the key factor of Vietnam's industrial success. Vietnam shares the top spot in
South East Asia with Singapore for having the most number of bilateral and multilateral free trade agreements (FTAs), being a signa-
tory to 16 of them. We believe that as Vietnam continues to live up to its commitments to further reduce import tariffs, this will lead
to deeper economic integration with the world, boost foreign investments and enhance productivity. Some of these reductions in
import tariffs have already come into effect since January 2018 (such as a 0% import tariff for automobile, motorbike and vehicle
components under the ASEAN FTA) and there are further commitments to progressively reduce tariffs to 0% by 2022 for a range
of other commodities. For instance, under the ASEAN-Japan Comprehensive Economic Partnership, the existing 5% import tax rate
for various commodities will be removed by 2019. Similarly, under the ASEAN-India FTA, items currently subject to import tax rates
of between 1-3% will see 0% import tariffs by 2019. Under the Vietnam-Korea FTA, a range of commodities with import tax rates
ranging from 10-20% will also see a gradual reduction to 0% by 2022.
Second, Vietnam has made steady progress in improving its business environment. This can be seen by the higher scores in the
World Economic Forum's Competitiveness Index, where it improved by five places to 55th (out of 137) in the 2017-18 edition, and in
the 2018 World Bank's Ease of Doing Business Index ,where it climbed by 14 places to 68th among 190 economies. The Vietnamese
government has also invested heavily in power and transport infrastructure to meet rapidly rising demand from the burgeoning
manufacturing sector, resulting in a positive feedback loop.
Third, Vietnam will continue to enjoy demographic dividends over the coming decade, with more than half of its population currently
under the age of 35. Moreover, the Vietnamese government's efforts to promote access to quality primary education seems to be
having some success. In the latest 2015 OECD Programme for International Student Assessment (PISA), which tests high school
students in math, science and other disciplines, Vietnam ranked a respectable eighth out of 72 participating countries, ahead of other
more developed countries such as Germany and Netherlands. This will help to ensure a steady pool of skilled labour going forward.
Still Room For Vietnam's Tourism Share To Grow
South East Asia – Tourism Contribution, % Of GDP
Source: WTCC, Fitch Solutions
Services Sector To Be Supported By Strong Tourism

We believe that Vietnam's tourism sector (which directly contributed 5.9% of GDP in 2017) has enormous potential. Combined
with coordinated government efforts, it will continue to provide a tailwind for the services sector. Out of all the services subsectors,
the retail and wholesale sector was the fastest growing and contributed the most (0.9pp) to headline growth over the first nine
months of 2018. This was supported by continued strong growth in the number of international tourist arrivals by 14.9% y-o-y in
Q318 (23.1% y-o-y in Q218), which brought the total number of foreign visitors to 11.6mn in the January-September period. The
government is looking to sustain this strong momentum and in September, the Vietnam National Administration of Tourism held
various marketing activities in foreign markets including the US, Canada and Indonesia. In recognition of Vietnam's achievement in
tourism, the country also won the award for 'Asia's Leading Destination' at the 2018 World Travel Awards in Hong Kong in September.
Risks To Outlook
While we believe that Vietnam could see short-term gains from the intensifying trade tensions between the US and China as
manufacturers shift their production out of mainland China, Vietnam's longer-term growth outlook is more uncertain. Vietnam is
highly trade dependent and relies heavily on imported capital goods for its exports. The economy would therefore suffer if rising
trade tensions disrupt global production networks and supply chains. Vietnam's reliance on foreign direct investment also puts
the economy at risk from the drying up of external financing due to growing risk-off sentiment and rising interest rates globally.
GDP By Expenditure Outlook

Private Consumption: We forecast private consumption as a share of GDP to increase very gradually over the coming years. Vi-
etnam's large and youthful population, rising affluence, and sustained remittance inflows are some factors that will keep private
consumption growth robust at an average of 6.8% per annum over the next decade.
Government Consumption: We forecast government consumption as a share of GDP to remain largely stable at around 6.3% over
our forecast period from 2018 to 2027, as we expect the government's limited revenue collection to limit the amount of expenditure
going forward. Vietnam's public debt as a share of GDP also remains elevated at close to 60%.
TABLE: GDP GROWTH FORECASTS

2016 2017e 2018f 2019f 2020f 2021f
Nominal GDP, VNDbn 4,502,913.0 5,007,857.0 5,551,002.4 6,192,984.3 6,913,973.9 7,714,795.2
Real GDP growth, % y-o-y 6.2 6.8 6.9 6.5 6.5 6.5
GDP per capita, VND 47,615,070.2 52,415,899.8 57,528,619.0 63,564,035.1 70,292,433.0 77,704,200.4
2022f 2023f 2024f 2025f 2026f 2027f
Nominal GDP, VNDbn 8,605,036.7 9,594,227.9 10,692,857.2 11,918,159.0 13,284,771.3 14,809,023.4
Real GDP growth, % y-o-y 6.5 6.5 6.5 6.6 6.6 6.6
GDP per capita, VND 85,883,129.2 94,913,108.3 104,890,509.2 115,976,565.2 128,301,470.6 142,006,727.3
e/f = Fitch Solutions estimate/forecast. Source: GSO, Asian Development Bank, Fitch Solutions
TABLE: PRIVATE CONSUMPTION FORECASTS

2016 2017e 2018f 2019f 2020f 2021f
Private final consumption, VNDbn 3,086,298.0 3,405,750.0 3,778,986.2 4,229,683.2 4,734,132.1 5,296,215.6
Private final consumption, % of GDP 68.5 68.0 68.1 68.3 68.5 68.7
Private final consumption, real growth % y-o-y 7.3 7.3 7.0 6.8 6.8 6.8
2022f 2023f 2024f 2025f 2026f 2027f
Private final consumption, VNDbn 5,922,207.1 6,619,025.9 7,394,299.1 8,260,378.6 9,227,900.2 10,308,745.7
Private final consumption, % of GDP 68.8 69.0 69.2 69.3 69.5 69.6
Private final consumption, real growth % y-o-y 6.8 6.8 6.8 6.8 6.8 6.8
Fixed Investment: Vietnam will be able to continue to attract foreign firms by providing them with a low-cost production base,
generous tax incentives, and a large pool of young and skilled workers. As such, we expect an increasing number of labour-intensive
foreign manufacturing firms to shift their production plants to the country. Sustained foreign direct investment (FDI) inflows will be
supportive of fixed investment growth over the coming years.
In addition, considering that Vietnam had been running current account surpluses for the past few years, this implies that the pri-
vate sector has accumulated savings. Unlocking these savings would allow for greater private sector participation in the country's
economic development, and provide an immense boost to growth over the long term. Accordingly, we forecast gross fixed capital
formation as a share of GDP to rise from around 24% in 2016 to 26% by 2027.
Net Exports: Vietnam's trade account flipped from a structural deficit to a surplus in 2012 and the country has managed to sustain
a net export surplus of around 0.8-3% of GDP. While sustained growth in the export-oriented manufacturing sector will keep exports
TABLE: GOVERNMENT CONSUMPTION FORECASTS

2016 2017e 2018f 2019f 2020f 2021f
Government final consumption, VNDbn 293,106.0 325,804.0 358,806.0 399,342.5 443,830.8 491,877.7
Government final consumption, % of GDP 6.5 6.5 6.5 6.4 6.4 6.4
Government final consumption, real growth % y-o-y 7.5 7.3 6.2 6.2 6.1 5.8
2022f 2023f 2024f 2025f 2026f 2027f
Government final consumption, VNDbn 544,865.7 603,273.7 667,623.7 738,837.8 817,648.1 904,865.0
Government final consumption, % of GDP 6.3 6.3 6.2 6.2 6.2 6.1
Government final consumption, real growth % y-o-y 5.8 5.8 5.8 5.8 5.8 5.8
TABLE: FIXED INVESTMENT FORECASTS

2016 2017e 2018f 2019f 2020f 2021f
Fixed capital formation, VNDbn 1,066,160.0 1,190,474.6 1,349,332.7 1,527,228.7 1,712,573.2 1,919,494.9
Fixed capital formation, % of GDP 23.7 23.8 24.3 24.7 24.8 24.9
Fixed capital formation, real growth % y-o-y 9.9 10.2 9.3 8.0 7.0 7.0
2022f 2023f 2024f 2025f 2026f 2027f
Fixed capital formation, VNDbn 2,150,390.9 2,407,911.0 2,694,982.1 3,016,277.9 3,375,878.5 3,778,350.8
Fixed capital formation, % of GDP 25.0 25.1 25.2 25.3 25.4 25.5
Fixed capital formation, real growth % y-o-y 7.0 7.0 7.0 7.0 7.0 7.0
TABLE: NET EXPORTS FORECASTS

2016 2017e 2018f 2019f 2020f 2021f
Net exports of goods and services, VNDbn 115,342.0 140,282.4 143,471.0 144,730.6 163,811.9 185,320.4
Net exports of goods and services, % of GDP 2.6 2.8 2.6 2.3 2.4 2.4
Net exports of goods and services, real growth % y-o-y 46.1 30.4 14.0 12.6 8.0 8.0
2022f 2023f 2024f 2025f 2026f 2027f
Net exports of goods and services, VNDbn 209,552.9 236,840.9 267,554.4 302,250.9 341,446.8 385,725.6
Net exports of goods and services, % of GDP 2.4 2.5 2.5 2.5 2.6 2.6
Net exports of goods and services, real growth % y-o-y 8.0 8.0 8.0 8.0 8.0 8.0
as a share of GDP rising, firm domestic demand conditions and high import-content of manufactured goods will result in elevated
levels of imports. As such, we expect net exports as a share of GDP to remain roughly around 2% over the coming years.
Outlook On External Position

According to Vietnam's current account data dating back to 1990, the country runs a net international investment deficit of ap-
proximately 50% of GDP as of end 2017, owing to substantial trade deficits in the 1990s and 2000s.
External Position To Remain Roughly Balanced
Current Account Balance, 2016-2027
e/f = Fitch Solutions estimate/forecast. Source: Asian Development Bank, Fitch Solutions
Vietnamese exports performed well over the last two decades, but rapid import growth kept the country's trade and current ac-
count balances mostly in deficits. However, this trend appears to have changed as the export-oriented manufacturing sector pow-
ers ahead. The reason for Vietnam's export sector boom is largely due to foreign firms increasingly moving their manufacturing
facilities into Vietnam to take advantage of demographic advantages and trade openness. Over the coming years, we believe that
TABLE: CURRENT ACCOUNT BALANCE FORECASTS

2016 2017e 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f 2027f
Balance of trade in goods, USDbn 11.0 10.8 11.3 11.8 13.0 14.3 15.7 17.3 19.0 20.9 23.0 25.3
Balance of trade in goods, % of GDP 5.5 4.9 4.7 4.5 4.5 4.5 4.5 4.5 4.4 4.4 4.4 4.4
Balance of trade in services, USDbn -12.9 -14.7 -15.7 -16.8 -18.0 -19.3 -20.6 -22.0 -23.6 -25.2 -27.0 -28.9
Balance of trade in services, % of GDP -6.4 -6.7 -6.5 -6.4 -6.3 -6.1 -5.9 -5.7 -5.5 -5.3 -5.1 -5.0
Primary income balance, USDbn -12.9 -14.7 -15.7 -16.8 -18.0 -19.3 -20.6 -22.0 -23.6 -25.2 -27.0 -28.9
Primary income balance, % of GDP -6.4 -6.7 -6.5 -6.4 -6.3 -6.1 -5.9 -5.7 -5.5 -5.3 -5.1 -5.0
Secondary income balance, USDbn 8.0 8.5 9.4 10.3 11.3 12.5 13.7 15.1 16.6 18.3 20.1 22.1
Secondary income balance, % of GDP 4.0 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.8 3.8 3.8
Current account balance, USDbn 6.2 4.7 5.0 5.3 6.3 7.5 8.8 10.3 12.0 13.9 16.1 18.5
Current account balance, % of GDP 3.1 2.1 2.1 2.0 2.2 2.4 2.5 2.7 2.8 2.9 3.1 3.2
improvements in Vietnam's productive capacity and growth in its manufacturing and service exports will continue to support the
country's trade balance, despite strong import growth due to growing domestic demand. In addition, strong remittances growth
will also help to shore up the country's external position. Vietnam's financial account experienced net inflows, reflecting sustained
foreign investor interest in the country.
TABLE: MAIN EXPORT AND IMPORT PARTNERS

Main Export Destinations % Of Total Main Import Sources % Of Total
US 20.2 China 24.9
UK, Germany 5.9 South Korea 17.4
China 14.2 Japan 7.9
Japan 8.2 Thailand 4.7
South Korea 6.2 Taiwan 5.5
Source: ADB, Fitch Solutions
TABLE: MAIN EXPORTS AND IMPORTS

Main Export Products % Of Total Main Import Products % Of Total
Telephone and spare parts 16.1 Electronic products 12.7
Textiles 13.8 Machinery and equipment 15.2
Electronics 7.8 Mineral fuels, lubricants and related materials 11.2
Footwear 6.8 Fabrics 6.4
Aquatic products 5.2 Steel 5.1
Source: GSO, Fitch Solutions
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE

2012 2013 2014 2015 2016
Capital and financial account, % of GDP 7.6 0.3 - - -
Net FDI inflows per capita, USD 79.2 75.9 87.0 114.4 122.7
Net portfolio investment, USDbn 2.0 1.5 - - -
Net other Investment, USDbn 5.2 3.5 - - -
Source: Asian Development Bank, Fitch Solutions
Monetary Policy
Vietnam's Overly Loose Monetary Policy Poses A Downside Risk To Macro Stability
Key View
• We expect the SBV to tighten its monetary policy stance via loan directives and macroprudential measures, opting to keep its
benchmark refinancing rate steady at 6.25%.
• Although inflation remains manageable, we believe that monetary policy remains too loose.
• Vietnam's rapid economic growth has been padded by the sharp increase in leverage, and a subsequent unwinding of this debt
binge would likely be more painful than the previous crisis in 2010-2012.
We expect the State Bank of Vietnam (SBV) to keep its benchmark refinancing rate steady at 6.25% through the end of 2018 and
2019 to balance growth and inflation objectives, despite policymakers exhibiting a hawkish bias. Instead, we expect policymakers
to adopt selective tightening measures such as introducing tighter loan directives and implementing macroprudential measures.
Although the SBV is gradually modernising its monetary policy framework, transitioning towards the use of inflation as the nominal
anchor and allowing more exchange rate flexibility, it continues to use credit growth targets as the primary monetary tool. We are
of the view that the central bank's monetary policy stance and banking liquidity remain too loose in Vietnam, and although macro
stability remains intact for now, risks are weighted to the downside.
SBV Likely To Keep Its Policy Rate Steady
SBV Policy Rate, % & Headline Inflation, % chg y-o-y
Source: SBV, Fitch Solutions
SBV Is Tightening Even Though Benchmark Rate Is Still Unchanged

We note that the central bank has shifted towards a more hawkish stance since the start of the year, as seen by the slightly lower
credit growth target of 17% for 2018, versus 18% in 2017, and the fact that credit growth actually slowed to 8.2% y-o-y in the first
eight months of 2018, versus 10.8% y-o-y in the same period a year ago. This is despite the central bank keeping its benchmark
refinancing rate at 6.25% for the 15th consecutive month in October, following its last 25bps rate cut in July 2017. In a sign that the
SBV is shifting to a more cautious stance, it instructed commercial banks at the start of October to maintain control over new loans
to risky sectors such as real estate, consumer credit and securities investment. Furthermore, the central bank announced tighter
lending regulations in August to reduce the risk of duration mismatch between loans and deposits. The maximum ratio of short-term
funds used for medium- and long-term loans will be lowered from the current level of 45% to 40% with effect from January 2019.
Monetary Policy Still Too Accommodative

Despite the tightening measures, we continue to argue that monetary policy and liquidity in the banking sector remain too loose as
interbank rates are significantly lower than policy interest rates, limiting the effectiveness of the central bank's monetary transmis-
sion mechanism. As of October 7, the SBV's benchmark refinancing (credit extension by SBV to banks) and discount rates stood at
6.25% and 4.25% respectively, versus the overnight interbank rate of 3.14% and one-month rate of 4.11%.
This is partly a result of the SBV's efforts at building foreign reserves without full sterilisation, resulting in excess liquidity in the bank-
ing system. While inflation has remained relatively modest due to lower food prices and the ongoing de-dollarisation, coming in at
4.0% y-o-y in September, and unchanged from the previous month, the liquidity flush has the potential to result in higher inflation
and greater non-performing loans as interest rates may be distorted.
Credit Cycle Shows Strong Correlation With Growth
Private Credit-To-GDP & Real GDP Growth, %
Source: World Bank, Fitch Solutions
At the same time, credit growth at 17-18% per annum remains well above nominal GDP growth, which is around 11-12%. This is a
concern as outstanding private sector credit-to-GDP reached 130.7% in 2017 (according to data from the World Bank), from just
96.8% in 2013, reflecting the economy's reliance on credit for growth, which is unsustainable. The amount of leverage is also signifi-
cantly higher than comparable peers such as Philippines (47.8%), Indonesia (38.7%), Cambodia (86.7%), and even more developed
countries such as Malaysia (124%). In our view, a continued buildup of economic distortions is increasing the risk that a subsequent
unwinding of the credit binge due to either a domestic or exogenous shock (such as the real estate crash in 2010-12) would be more
painful – and could see the economy grow at a much slower pace for longer periods – than the previous banking crisis.
Monetary Policy Framework

We expect inflation to remain manageable over the coming years, as Vietnamese policymakers should have learnt from past eco-
nomic missteps that resulted in elevated price pressures in the country. As such, we forecast inflation to average around 4.6% per
annum from 2018 to 2027, versus its historical average of 8.5% a year over 2008 to 2017.
Inflation To See Less Volatility In Coming Years
Consumer Price Inflation, 2009-2027
e/f = Fitch Solutions estimate/forecast. Source: General Statistics Office, Fitch Solutions
Inflation Credibility: The lack of monetary prudence by the central bank resulted in rapid credit growth and soaring price pressures
in the last decade. However, the government managed to bring inflation to below its target of 5.0% in 2014-2017.
Food And Housing Account For The Lion's Share
Breakdown Of CPI Basket, %
Source: GSO, Fitch Solutions
While this achievement was partly attributed to low oil prices, we are optimistic that the central bank will be increasingly prudent in
its monetary policy over the coming years as it seeks to ensure financial stability in the country.
Central Bank Targets And Operations: The government fixes an annual inflation target, and the State Bank of Vietnam employs
monetary tools to ensure that the inflation target is met. Some of these tools include the refinancing rate, exchange rate, reserve
requirement ratio, open market operations, as well as other ad-hoc measures as stipulated by the government.
TABLE: MONETARY POLICY FORECASTS

2016e 2017e 2018f 2019f 2020f 2021f
Consumer price inflation, % y-o-y, eop 4.7 2.6 4.8 4.8 4.8 4.7
M2, VNDbn 5,871,583.5 6,341,310.2 6,848,615.0 7,328,018.0 7,840,979.3 8,311,438.1
M2, % y-o-y 9.0 8.0 8.0 7.0 7.0 6.0
Central bank policy rate, % eop 6.50 6.25 6.25 6.25 6.25 6.25
2022f 2023f 2024f 2025f 2026f 2027f
Consumer price inflation, % y-o-y, eop 4.7 4.6 4.6 4.6 4.6 4.6
M2, VNDbn 8,810,124.3 9,250,630.6 9,713,162.1 10,198,820.2 10,810,749.4 11,459,394.4
M2, % y-o-y 6.0 5.0 5.0 5.0 6.0 6.0
Central bank policy rate, % eop 6.25 6.25 6.25 6.25 6.25 6.25
e/f = Fitch Solutions estimate/forecast. Source: GSO, State Bank of Vietnam, Fitch Solutions
Fiscal Policy And Public Debt Outlook

Fiscal Consolidation Appears To Be Underway In Vietnam
Key View
• We are lowering our forecast for Vietnam's budget deficit as a share of GDP to come in at 4.4% in 2018 and 4.2% in 2019 (from
4.6% and 4.4% previously).
• This is due to below-target expenditure and strong revenue growth in the first nine months of 2018, as well as a smaller deficit
projected in the 2019 Budget.
• The pace of the government's privatisation drive remains sub-par, but has accelerated in the past few years.
• This is likely to free up fiscal space for the government's development spending and is positive for long-term growth sustain-
ability and macroeconomic stability.
Vietnam seems to be embarking on a gradual fiscal consolidation path, having reported a narrower than expected budget shortfall
in the first nine months of 2018, and setting a smaller deficit target in its 2019 Budget, relative to the 2018 Budget. In light of these
developments, we are lowering our fiscal deficit forecasts as a share of GDP to 4.4% in 2018 and 4.2% in 2019 (from 4.6% and 4.4%
previously). The government has also adhered to the public debt ceiling of 65% of GDP and successfully divested its stakes in multi-
ple state-owned enterprises (SOEs) to pare back its debt levels. We believe that ongoing fiscal reforms will likely free up fiscal space
for development spending, which is positive for long-term macroeconomic stability and growth sustainability. We are therefore
maintaining our forecast for Vietnam's real GDP growth to average 6.6% per annum over the coming decade.
2019 Budget Expected To See Smaller Deficit Versus 2018's

According to a draft budget submitted to the National Assembly, reported by the Hanoitimes in mid-October, the Vietnamese
government is targeting a budget deficit of VND222trn (USD9.5bn), equivalent to 3.6% of GDP in 2019. This is slightly lower than
the Budget 2018 deficit target of 3.7% of GDP. We reiterate that these figures exclude principal debt repayment (which amounted
to roughly 3.0% of GDP in 2017), and hence is a poor estimate of the country's true fiscal position. Nevertheless, the 2019 Budget
signals the government's intention to reduce its fiscal shortfall, as compared to the previous year. We will write in more detail once
the full numbers of the 2019 Budget are made available publicly by the Ministry of Finance.
Deficit Likely To Continue Narrowing
Budget Balance, % Of GDP
e = Ministry of Finance estimate; f = Fitch Solutions forecast. Source: Ministry of Finance, Fitch Solutions
Fiscal Improvement Partly Due To Lower Than Expected Capital Spending…

In the first nine months of 2018, the government's expenditure came in at VND989.3trn, representing just 64.9% of the 2018 Budget,
while revenue came in at VND962.5trn, which was 73% of the government's full-year target. This resulted in a smaller than expected
budget deficit of VND26.8trn in the January-September period, versus the full-year deficit projection of VND204trn. The better than
expected improvement in the government's fiscal position came partially on the back of capital spending underperforming official
projections (50.9% of the 2018 Budget), and was in line with our expectations that the ongoing anti-corruption drive will weigh on
development spending.
…But Strong Revenue Growth Also Helped

On the positive side, the smaller shortfall was also due in part to the government's success at moderating its recurrent expenditure
growth, while boosting revenue collection. According to data from the Ministry of Finance, recurrent expenditure grew by 5.3%
y-o-y in the first nine months of 2018, while domestic revenue expanded by 14.3% y-o-y. Another significant contributor to overall
revenues was receipts from crude oil, which surged by 42.5% y-o-y on the back of higher oil prices. Given that the government is
planning to hike fuel excise tax, value-added tax, and special sales tax on sugary drinks in 2019, this should see revenue growth
continue to outperform in the coming quarters.
Privatisation Remains Below Target, But Pace Has Accelerated

Lastly, although the pace of the SOE privatisation drive remains sub-par relative to the government's ambitious target, we highlight
that there have been sustained activities and an acceleration in the past few years. The government reportedly collected VND28.1trn
from the privatisation of SOEs in H118, while in the first eight months of 2018, 10 out of 85 SOEs received approval from the govern-
ment for their divestment plans, worth VND29.5trn. This brought total government earnings from the privatisation drive to VND198trn
since 2016, which marked a threefold increase from 2011-2015, equivalent to roughly 4% of GDP. The government successfully
divested capital from 17 out of 135 SOEs in the 2017 plan, and the remaining companies delayed their plans to 2018, pushing up
the total number of SOEs waiting for divestment in 2018 to 181 firms. While these figures are unlikely to be achieved, some big
companies such as PetroVietnam Power Corporation, PetroVietnam Oil Corporation and Power Generation Corporation are
reportedly undergoing privatisation.
Structural Fiscal Position

Fiscal Deficit: Vietnam's fiscal position has been precarious, having posted consistent annual budget deficits in excess of 4.0% since
2009. While positive developments on the fiscal revenue front have continued to unfold, poor expenditure management continues
to undermine Vietnam's fiscal position.
Fiscal Consolidation On The Horizon
Gross Debt & Fiscal Balance, 2009-2027
e/f = Fitch Solutions estimate/forecast. Source: IMF, Ministry of Finance, Fitch Solutions
Accordingly, we expect Vietnam's fiscal balance to remain in negative territory over our forecast period from 2018 to 2027, posing
a salient risk to the country's strong economic growth momentum.
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES

Main Sources Of Revenue % Of Total Main Areas Of Expenditure % Of Total
Value added tax 24.5 Social expenditure 32.3
Corporate income tax 17.2 Investment development 20.7
Excise tax 7.8 Education and training 15.1
Capital revenues 9.2 Administration 9.1
Import-export tax 8.7 Economic expenditure 7.1
Misc revenues 13.0 Interest payment 6.7
Source: Ministry of Finance data, 2016
Government Debt: Poor fiscal management has led to rising public debt as a share of GDP. However, we expect a gradual improve-
ment in the country's fiscal position on the back of ongoing positive tax revenue and SOE reforms, which should help to limit gov-
ernment borrowing and decrease the level of public debt as a share of GDP.
Private Sector To Play An Increasingly Larger Role
Government Spending & Revenue, 2009-2027
e/f = Fitch Solutions estimate/forecast. Source: Ministry of Finance, Fitch Solutions
Government Share Of GDP: We forecast government spending as a share of GDP to gradually decline over the coming years, owing
to tax revenue constraints and our expectations for the private sector to play an increasingly larger role in the Vietnamese economy.
TABLE: FISCAL AND PUBLIC DEBT FORECASTS

2016e 2017e 2018f 2019f 2020f 2021f
Total revenue, VNDbn 1,101,377.0 1,424,065.0 1,548,969.1 1,698,982.6 1,862,251.4 2,041,496.7
Total revenue, VND, % y-o-y 10.3 29.3 8.8 9.7 9.6 9.6
Total expenditure, VNDbn 1,293,009.0 1,543,018.0 1,622,215.6 1,779,622.1 1,954,526.6 2,146,940.9
Total expenditure, VND, % y-o-y 2.2 19.3 5.1 9.7 9.8 9.8
Budget balance, VNDbn -254,000.0 -280,293.0 -242,653.5 -258,516.8 -280,825.2 -305,307.2
Budget balance, % of GDP -5.6 -5.6 -4.4 -4.2 -4.1 -4.0
Total government debt, EURbn 117.0 123.0 123.0 130.3 136.1 145.7
Total government debt, % of GDP 64.3 63.0 61.4 59.5 57.5 56.7
2022f 2023f 2024f 2025f 2026f 2027f
Total revenue, VNDbn 2,238,295.2 2,454,379.9 2,691,655.9 2,952,217.2 3,238,365.8 3,552,632.4
Total revenue, VND, % y-o-y 9.6 9.7 9.7 9.7 9.7 9.7
Total expenditure, VNDbn 2,358,639.5 2,591,578.2 2,847,912.7 3,130,019.2 3,440,517.1 3,782,294.1
Total expenditure, VND, % y-o-y 9.9 9.9 9.9 9.9 9.9 9.9
Budget balance, VNDbn -332,199.1 -361,764.4 -394,296.9 -430,124.5 -469,613.1 -513,171.1
Budget balance, % of GDP -3.9 -3.8 -3.7 -3.6 -3.5 -3.5
Total government debt, EURbn 158.4 171.4 187.0 204.1 222.7 243.1
Total government debt, % of GDP 55.9 55.2 54.4 53.7 53.0 52.3
e/f = Fitch Solutions estimate/forecast. Source: IMF, Ministry of Finance, Fitch Solutions
Currency Forecast
Near-Term Stability And Long-Term Downtrend Still Intact For Vietnam Dong
Key View
• We expect the Vietnamese dong to remain fairly stable against the dollar in the near term, and we are maintaining our forecast
for the currency to average VND23,100/USD in 2018.
• The downside impact of widening interest rate differentials vis-à-vis the US and rising risk aversion will likely be partially offset
by the robust export-oriented manufacturing sector and strong FDI inflows.
• The SBV is also likely to actively intervene to maintain currency stability in the near term.
• Over the longer term, we expect the currency to weaken against the USD gradually due to higher inflation and still-expensive REER.
Stability To Continue In The Near Term
Exchange Rate, VND/USD
Source: Bloomberg, Fitch Solutions
Short-Term Outlook (three-to-six months)

The Vietnamese dong has weakened by around 2.8% against the US dollar since the start of 2018, with the bulk of the weakness
coming in June-August, taking the year-to-date average to VND22,967/USD. Nevertheless, the dong is one of the better-performing
currencies in the region as the current account surplus and strong foreign investor interest due to its stellar growth outlook helped
to cushion the downside impact of global risk aversion and narrowing interest rates vis-à-vis the US. We expect these dynamics to
TABLE: CURRENCY FORECAST

Spot 2018 2019 2020
VND/USD, ave 23,350 23,100 23,650 24,050
VND/EUR, ave 26,645 27,726 28,262 29,221
SBV Rate, % eop 6.25 6.25 6.25 6.25
Note: Last updated: October 25 2018. Source: Bloomberg, Fitch Solutions
remain in play in the near term, and combined with the State Bank of Vietnam (SBV)'s strong foreign reserve holdings and policy of
active intervention, we are maintaining our forecast for the currency to reach VND23,400/USD by end 2018 and average VND23,100/
USD for the full year.
External Surplus To Continue Providing Support

Vietnam recorded a current account surplus of USD5.2bn (according to data from the SBV) and a trade surplus of USD3.8bn in the
January-September period, and we expect the surplus to remain intact over the coming quarters. Although trade tensions between
the US and China may lead to disruptions to the Asian value chain, we believe that Vietnam's export sector will likely remain resil-
ient and benefit from global manufacturers moving out of China to avoid the US tariffs. In our view, Vietnam is well positioned to
capture a bigger market share of the global manufacturing industry, given its proximity to China and ease of access to deep sea
ports, relatively well established and extensive free-trade networks, as well as its large, young, cheap and relatively skilled workforce.
As a testament to its strong manufacturing potential, the country saw strong foreign direct investment inflows amounting to
USD14.1bn in the first nine months of 2018, similar to the USD14.6bn registered in the same period in 2017, despite the rise in
global risk-off sentiment. The ongoing privatisation of state-owned enterprises also attracted foreign investment to the economy,
helping to negate portfolio outflows. These dollar inflows helped Vietnam's foreign reserves increase by more than USD11.0bn to
approximately USD63.5bn in H118 (latest data available), according to an announcement by SBV governor Le Minh Hung in July.
Given the SBV's track record of actively managing the exchange rate, we believe that the central bank is likely to use its new stash
of ammunition to keep the currency relatively stable over the coming months.
Long-Term Outlook (six-to-24 months)

Over the longer term, we forecast the VND to weaken gradually against the USD by about 1.7% per annum. Given that consumer
price inflation is likely to average higher in Vietnam than in the US over the coming years, we believe that the dong will likely have
to depreciate against the US dollar for the export sector to retain its competitiveness.
Expensive REER Valuations To Act As A Drag
Real Effective Exchange Rate
In our view, monetary policy and banking liquidity remain too loose in Vietnam, as seen by the high level of credit growth (of around
17-18%) relative to nominal GDP expansion (around 10%). This is despite the fact that the private sector credit-to-GDP ratio in Vi-
etnam already reached 130.7% in 2017. The SBV continues to use credit growth target as its primary monetary tool. We highlight
that the pro-growth bias of policymakers has resulted in the central bank being slow to react to changing monetary conditions at
times, which is inflationary. We therefore forecast consumer price inflation to average around 4.4% in Vietnam through 2020, versus
2.3% in the US.
The real effective exchange rate of the VND remains expensive relative to its historical average, and this has been exacerbated in
the past few months by the bouts of emerging market (EM) currency sell-off. Given the tendency for valuations to mean-revert, this
is likely to act as a drag on the VND.
Risks To Outlook
Risks to our VND forecast are weighted to the downside. A faster tightening of US monetary policy than expected could lead to
further EM currency sell-off, including the dong. A hardening of protectionist rhetoric by the US against its trade partners could
result in a deepening of global risk-off sentiment and cause a slowdown of foreign direct investment in the country, removing a
pillar of support for the Vietnamese dong.
10-Year Forecast
The Vietnamese Economy To 2027
A New Focus On Quality Growth
Key View: Vietnam's growth prospects over the next decade remain positive in our view, as reflected by our bullish forecasts for real GDP
growth to average 6.6% over 2018-2027. We foresee a more stable economic environment, with inflation averaging a benign 4.5% and
the current account remaining roughly in balance over the forecast period.
A More Stable Growth Model
Real GDP Growth (LHS) & Fixed Capital Formation
e/f = Fitch Solutions estimate/forecast. Source: General Statistics Office, Asian Development Bank, Fitch Solutions
Vietnam's growth story over the past decade has been marked by tumultuous periods of high inflation, multiple currency devalua-
tions, and widespread economic wastage as a result of inefficient state-owned enterprises (SOE) that continue to hold dominance
in key economic sectors. However, we believe that 2013 marked a major turning point for the economy. While structural factors
underpinning Vietnam's potential for long-term growth (including favourable demographics, proximity to China, and low cost of
labour relative to the region) remain largely unchanged, we highlight several developments that reinforce our bullish outlook on
the economy in the coming decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS

2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f 2027f
Nominal GDP, USDbn 240.3 261.9 287.5 317.5 351.2 388.4 429.4 474.8 525.1 580.7
Real GDP growth, % y-o-y 6.9 6.5 6.5 6.5 6.5 6.5 6.5 6.6 6.6 6.6
Population, mn 96.49 97.43 98.36 99.28 100.19 101.08 101.94 102.76 103.54 104.28
GDP per capita, USD 2,490 2,687 2,922 3,197 3,505 3,842 4,212 4,620 5,071 5,568
Consumer price inflation, % y-o-y, ave 3.7 4.8 4.8 4.8 4.7 4.7 4.6 4.6 4.6 4.6
Current account balance, % of GDP 2.1 2.0 2.2 2.4 2.5 2.7 2.8 2.9 3.1 3.2
Exchange rate VND/USD, ave 23,100.00 23,650.00 24,050.00 24,300.00 24,500.00 24,700.00 24,900.00 25,100.00 25,300.00 25,500.00
f = Fitch Solutions forecast. Source: National sources, Fitch Solutions
First, we foresee a more stable economic environment in Vietnam, brought on by a decisive shift in the government's focus towards
policies aimed at maintaining price stability, and ongoing efforts to further address macroeconomic imbalances in the economy.
In this respect, the government has made significant progress in recent years, by reversing the country's stubborn trade deficits
into a mild surplus towards the end of 2012. Looking ahead, we expect Vietnam to run a relatively balanced current account over
the forecast period out to 2027.
Rebalancing In Play
Goods & Services Balance & Current Account Balance
Inflation has also been brought down from a double-digit high of 23.0% in August 2011 to a benign rate of 2.6% by December 2017.
Price pressures will likely head slightly higher over the coming years, but we believe that inflation and credit growth are unlikely to
return to the high double-digit rates seen over the past decade (credit growth averaged 27% annually from 2002 to 2011). We see
encouraging evidence that the State Bank of Vietnam (SBV) remains fully committed to its mandate of maintaining price stability.
The SBV has also been tasked to push ahead with banking sector reforms to improve risk management and improve credit quality
over the coming years. We believe that these efforts should help to drive credit growth down towards an average of about 10.0%
over the coming decade. Accordingly, we expect headline consumer price inflation to average a benign 4.5% annually over the same
period. Given that high inflation has been a major contributing factor to Vietnam's exchange rate policy woes, the reverse would be
positive for the Vietnamese dong over the longer term.
We believe that the government's stance on maintaining macroeconomic stability, coupled with a renewed impetus to speed up
economic reforms to enhance long-term growth, will play a crucial role in attracting foreign direct investment (FDI) to Vietnam. Plans
to speed up the privatisation of SOEs to allow the private sector to assume a greater role in driving economic growth is in line with
our view that gross fixed capital formation (GFCF) growth will average a robust 7.2% over the next decade. Alongside the govern-
ment's efforts to liberalise trade and expand its free-trade agreement network, multinational companies (MNCs) have expressed
optimism about plans by the Vietnamese government to gradually lift restrictions on foreign participation in the banking industry
(and other sectors that are tightly regulated and closely supervised by the state). As the economy gradually shifts towards a more
market-oriented system by allowing for increased foreign competition, we believe that this will open up opportunities for MNCs
seeking to penetrate the Vietnamese market. Increased foreign participation in sectors that are presently dominated by SOEs should
also contribute to an overall improvement in the efficiency of the economy going forward. We believe that this will provide support
to real GDP growth, which we expect to average a robust 6.6% over the coming decade.
Although timely intervention by the SBV appears to have helped reinstall confidence and fend off a banking crisis in 2013, we
believe that the stock of bad debt due to poor lending practices and a lack of regulatory oversight will remain a daunting task for
the government to tackle going forward. We expect banks that are unable to compete effectively to be absorbed eventually by
the larger state-owned banks under a directive from the SBV or gradually exit the industry altogether. On the whole, we see this
necessary adjustment as an effective way of eliminating uncompetitive banks in the economy, and we are encouraged by the SBV's
aggressive stance towards addressing the banking sector's weaknesses. The SBV has announced plans to restructure ailing banks.
Furthermore, the Vietnamese government also established a debt management agency, known as the Vietnam Asset Management
Company (VAMC), in July 2013, which will help to strengthen risk management practices and address the high non-performing loans
(NPL) ratios among local banks over the long run. We believe that such efforts should play a significant role in boosting Vietnam's
competitiveness and economic growth over the longer term.
Moderating Population Growth
Population, '000 (LHS) & % chg y-o-y (RHS)
e/f = Fitch Solutions estimate/forecast. Source: UN, Fitch Solutions
Vietnam's favourable demographics, which present considerable scope for policymakers to unlock gains in labour productivity,
underscore the potential for labour market reforms as a powerful policy tool to drive economic growth over the long term. We
believe that Vietnam's young and cheap labour force relative to the region will remain a key distinguishing factor that makes the
country one of the most attractive investment destinations for MNCs going forward. Having said that, we point out that Vietnam is
still lagging behind its regional peers in terms of investment in education and productivity-enhancing technologies. While countries
across South East Asia are focusing on efforts to move up the manufacturing value chain by investing heavily in education, training
and new technology, the Vietnamese government has maintained its focus on attracting foreign investment in its existing indus-
Our long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most cases that growth
eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment, demographics and productivity
growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants, our forecasts also reflect analysts’ in-
depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in the composition of the economy on a GDP by
expenditure basis in order to determine the degree to which private and government consumption, fixed investment and the export sector will drive growth in
the future. Taken together, these factors feed into our projections for exchange rates, external account balances and interest rates.
tries. We believe that the government will eventually have to redirect public spending towards a greater emphasis on investment in
education and infrastructure, in order to capture even more impressive growth over the long term.
Political Outlook
Domestic Politics
Vietnam's Diplomacy Firing On All Cylinders
Key View
• Vietnam has been aggressively expanding and strengthening its diplomatic network.
• This has been partly motivated by security concerns as China has become increasingly assertive in recent years.
• We expect these diplomatic efforts to bode well for its export-oriented manufacturing sector.
Vietnam has been extremely active in forging and strengthening diplomatic relations with countries from both within and outside
the region since the start of 2018, and in particular, we noticed a surge in activities in early September. In our view, this has been
partly motivated by security concerns as the country continues to build up deterrence against an increasingly assertive China in the
South China Sea. More importantly though, this is in line with Vietnam's open-door trade policies, which we believe will continue to
attract foreign direct investment and support its ambition to become a global manufacturing hub.
Another Intensive Round Of Diplomacy

There were at least five high-level bilateral exchanges between Vietnamese officials and their counterparts from other countries,
including state visits, in early September. This was somewhat similar to March, when Vietnam engaged in a string of diplomatic ac-
TABLE: POLITICAL OVERVIEW

System of government Single-Party Socialist Republic
Head of state President Nguyen Phu Trong
Head of government Prime Minister Nguyen Xuan Phuc
Last election Parliamentary – April 2016
Presidential – April 2016
Composition of current govern- Communist Party of Vietnam (CPV)
ment
Key figures The 16-person Communist Party Politburo, elected by the 175-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 and President Nguyen Phu Trong, Prime Minister Nguyen Xuan Phuc, and National Assembly Chairman Nguyen Thi
Kim Ngan.
Other key posts Minister of National Defence – Ngo Xuan Lich, Minister of Planning and Investment – Nguyen Chi Dung, Vice President – Dang Thi
Ngoc Thinh, Central Bank Governor – Le Minh Hung.
Main political parties (number of Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North Vietnam since independ-
seats in parliament) ence 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.
Next election Presidential and Parliamentary – April 2021
Ongoing disputes Ongoing dispute with China, Malaysia, Philippines and Taiwan over the Spratly Islands in the South China Sea.
Key relations/treaties ASEAN and WTO Member
Short-Term Political Risk Index 82.5
Long-Term Political Risk Index 59.7
Source: National sources, Fitch Solutions
tivities to strengthen relations with India, the US, New Zealand and Australia. This time round, General Secretary of the Communist
Party of Vietnam Nguyen Phu Trong went on an official visit to Russia between September 5-8, before heading to Hungary from
September 8-11.
Likely To Remain On A Firm Uptrend
Net Foreign Direct Investment Inflows, USDmn
More Energy Collaboration With Russia

Vietnam and Russia have bilateral ties dating back to January 1950, when the Soviet Union established an embassy in North Vietnam,
and currently maintain cordial economic and political relations in the form of a comprehensive strategic partnership. Party leader
Trong met with Russian President Vladimir Putin and Prime Minister (PM) Dmitry Medvedev separately during his visit and both sides
reiterated their long-standing friendship. We expect this visit to result in deeper collaboration between both sides, particularly on
the economic front.
Vietnam and Russia have seen rapid growth in bilateral trade, particularly after the Vietnam-Eurasian Economic Union Free Trade
Agreement (FTA) took effect in October 2016. Total trade grew by 25.4% to USD2.7bn in 2016, and increased by another 33% to
USD3.6bn in 2017. Even though this represented less than 1% of Vietnam's total trade, the aim is to increase bilateral trade to
USD10.0bn by 2020 as set by leaders of both countries previously. One of the key focus of discussions between Putin and Trong
was cooperation in the energy sector, and there were suggestions for more collaboration on new projects between the national oil
and gas companies from both sides.
Upgraded Ties With Hungary Mark Foray Into Central Eastern Europe
Vietnam and Hungary have officially ramped up diplomatic ties to a comprehensive partnership following the visit by Party Leader
Trong to Hungary. This marked Vietnam's foray into Central and Eastern Europe (CEE) as it seeks to expand its trade network to
support its export-oriented manufacturing sector. Trong's Hungary visit holds historical significance, as it was the first trip by a
Vietnamese Party leader to a CEE country since institutional transformation in the region, and we expect the region to become a
key focus for Vietnam's diplomatic efforts going forward. The CEE region is a promising and sizable market for Vietnam's exports,
boasting real GDP growth of 4.4% in 2017 in simple average terms and a relatively high GDP per capita. The 11 countries combined
also have more than 102mn people.
During the visit, both sides also inked several cooperation agreements, including an inter-government agreement on judicial as-
sistance in civil matters, a memorandum of understanding (MoU) on defence cooperation, another MoU on collaboration between
the Vietnamese Ministry of Health and the Hungarian Ministry of Innovation and Technology, and a plan on education cooperation
in the 2019-2021 period. The Hungarian Prime Minister also pledged to advocate the early signing, ratification and full implementa-
tion of the EU-Vietnam FTA.
Promising Market For Vietnam's Exports
CEE – GDP Per Capita, USD & Real GDP Growth, % chg y-o-y
Source: National sources, Fitch Solutions. GDP Growth = 2018 and 2019 average forecast
Defence Ties With Indonesia To Improve

Concurrently, Vietnamese President Tran Dai Quang welcomed the first Vietnam visit by Indonesian President Joko Widodo on Sep-
tember 11. Some of the key takeaways from the meeting between the two heads of state include increasing bilateral exchanges
at all levels of the government, lifting two-way trade to USD10.0bn per annum (from around USD6.8bn at present) by easing trade
barriers, and enhancing cooperation in national defence and security.
In our view, the key focus was on security, as seen from the lengthy discussion on the topic, with both presidents stressing the
need to deepen the strategic partnership 'for the sake of peace, cooperation and prosperity in the region'. This is understandable
given that Vietnam and Indonesia are both ASEAN members and two of the main claimants in the South China Sea (laying claims
to different parts), making them natural allies against an increasingly assertive China in the contested waters. The two sides agreed
to enhance cooperation between their navies and air forces, and partnership in the defence industry and crime prevention. They
also discussed the implementation of the MoU on strengthening cooperation between defence officials signed in 2010 and the
Declaration on Joint Vision on Defence Cooperation for the 2017-2022 period.
Looking To Deepen Economic Linkages With Japan And Sri Lanka

At the same time, Vietnamese PM Nguyen Xuan Phuc met his Sri Lankan counterpart Ranil Wickremsinghe and Japanese Foreign
Minister Taro Kano in Hanoi on September 11 on the sidelines of the World Economic Forum on ASEAN 2018, which Vietnam was
hosting. During the meeting, PM Phuc appealed to the top Japanese diplomat to increase economic linkages between Vietnam and
Japan, and for the latter to play a more active role in the Mekong region. With Sri Lanka, PM Phuc also asked for closer economic
cooperation and mentioned that the two countries should sign an MoU on fishery cooperation for the next three years. They agreed
to facilitate the expansion of partnerships in certain fields. These areas include education training, telecommunications, information
and digital technology, oil and gas, aviation, maritime, processing of agricultural and aquatic products, cultural and art exchange,
Buddhism, sports, and youth exchange.
Long-Term Political Outlook

Monopoly On Power Unsustainble
Key View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Viet-
nam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario
envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which, if mismanaged, could
lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp
of Asian nations with close relations with the US.
Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam (CPV)'s monopoly on political
power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a
more pluralistic society over the coming decade and beyond. The CPV's strict control of the media and political opinion is already
cracking, with a growing number of internet users becoming increasingly critical of and vocal about government policy on social
media platforms.
Public Unrest A Major Risk
Long-Term Political Risk Index, Out Of 100
Source: Fitch Solutions
Challenges And Threats To Stability

Inflation And Devaluation As Drivers Of Discontent: As in neighbouring China, economic growth has brought sizeable mate-
rial gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led
to high levels of inflation and repeated devaluations of the dong in recent years, which have eroded the real value of wages and
savings. Although inflation was brought down from a double-digit high of 23.0% in August 2011 to a more benign rate of 2.6% by
end 2017, a failure by the Vietnamese government to contain inflation at a reasonable level and uphold the real value of the dong
could undermine consumer and investor confidence in the regime.
Divisions Within The Communist Party: Elevated levels of public debt and high fiscal deficits have opened schisms within the CPV
leadership between proponents of continued economic reform and a more conservative wing, which believes that a deceleration
or even a reversal of reform policies would benefit macroeconomic stability.
Ethnic And Regional Tensions: Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population.
Ethnic minorities in the Central Highlands have previously objected to government policies promoting the migration of ethnic Viet
into the highland region. While protests have died down, they could emerge in future.
There are also continued cultural differences between the population of the Red River Delta around the capital Hanoi in the north
and the population of the Mekong Delta in the south, where Ho Chi Minh City (formerly Saigon, the ex-capital of South Vietnam)
remains the commercial capital. While the general perception is that northerners are more supportive of socialist rule and the
southerners more inclined to support continued economic reform, a strong concept of national unity nevertheless exists in both
parts of the country.
Demands For Increased Religious Rights: One of the most concerted challenges against the CPV in recent years has come from
Catholics wishing for a stronger recognition of their right to worship in what is still a nominally secular country. Hanoi has ceded to
pressure from the US to allow a higher degree of religious freedom, but is wary of the Catholic Church becoming a rallying point of
political opposition, as was the case in Communist Poland and Philippines during the Marcos dictatorship. The Vietnamese govern-
ment has slapped heavy sentences on Catholic activists who have extended their fight to encompass increased political freedom.
Relations With China: Relations with China have become increasingly strained in recent years as Beijing has expanded its economic,
political and military influence southwards. The main point of contention is the conflicting territorial claims for the Paracel and Spratly
Islands in the South China Sea. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with
its northern neighbour, and criticism of a Chinese-financed bauxite mining project in the central highlands.
That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respec-
tive politburos have decreased tensions between them. Nonetheless, we believe that Vietnam will seek increasingly close relations
with the US – and potentially India and Japan – in the defence sphere, as a hedge against China's rising power in the region.
Vietnam's Long-Term Political Risk score of 59.7/100 is weighed down by a score of 30.7 in the 'characteristics of polity' sub-
component. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV, and severe
limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South
East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up
three scenarios for Vietnam's political future.
Scenarios For Political Change

Core Scenario – CPV Turns Into A Technocratic Regime: Our core scenario is for the CPV to shift increasingly towards a techno-
cratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the
population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather
than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating
from older and more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy
activists and other government critics are a strong indication that political liberalisation is not in the offing.
Best-Case Scenario – Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual
move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within
the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a
one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia and Singapore, where elections are
held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experi-
ences of South Korea, Taiwan, Japan, and more recently Malaysia have shown that even dominant-party systems eventually give
way to opposition rule. However, in Vietnam's case, this may be more than a decade away.
Worst-Case Scenario – Mass Unrest And Violent Suppression: Our worst-case scenario involves severe policy missteps that lead
to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly
strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests
and an all-out challenge to the one-party rule, we believe that at least part of the CPV leadership would support a crackdown on
demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in
Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so,
Vietnam would likely face diplomatic isolation and economic weakness as exports and foreign direct investment tumble.
Operational Risk
Our Operational Risk report series provides a comprehensive overview of potential risks facing investors operating in a country, as well as
a cross-country regional evaluation of threats and advantages. The Operational Risk service evaluates Logistics Risk, Trade and Investment
Risk, Labour Market Risk and Crime and Security Risk. Below are sections from these reports.
Emerging Among The Most Promising Destinations For Manufacturers
Vietnam & Regional Average – Operational Risk Scores
Note: 100 = Lowest risk; 0 = highest risk. Score shown in brackets is the country-specific score. Source: Fitch Solutions
Operational Risk Index
Vietnam is emerging among the most promising destinations for manufacturers in Southeast Asia on account of the country
gradually leaning towards a market-oriented economic model, thereby steadily integrating with the global economy. The country
also offers a number of strategic advantages including a relatively stable political environment, the absence of terrorist attacks in
addition to large-scale transport and utility infrastructure development projects underway, which will boost Vietnam's connectivity
both regionally and globally over the medium-long term. Meanwhile, a large population size, rising incomes together with increas-
ing regional integration create attractive opportunities for consumer-oriented businesses. Nevertheless, we caution that Vietnam's
years of rapid growth strategy premised on low labour cost is coming to an end as upward pressure is building on wages which will
need to keep up with the cost of living. The risk is elevated for those businesses seeking to expand or involved in more advanced
sectors of the economy who will be required to import foreign labour or invest in training at additional cost owing to the shortage
TABLE: OPERATIONAL RISK

Operational Risk Labour Market Trade And Investment Logistics Risk Crime And Security
Risk Risk Risk
Vietnam score 53.4 52.6 55.5 54.5 51.3
East and South East Asia average 55.3 56.5 55.7 54.4 54.4
East and South East Asia position (out of 18) 10 11 9 9 10
Asia average 48.9 50.6 47.7 47.1 50.1
Asia position (out of 35) 10 13 9 11 16
Global average 49.7 49.8 50.0 49.3 49.9
Global position (out of 201) 78 80 80 73 91
Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Operational Risk Index
of advanced skills in the local labour market. Overall, Vietnam receives an Operational Risk score of 53.4 out of 100, ranking 10th
out of 18 states in East and South East Asia – ahead of Cambodia, Laos, and Myanmar, but behind Thailand and China.
Crime And Security (51.3/100): Vietnam offers a generally safe location for foreign businesses and expatriates, boosting its appeal
as an investment destination. The government has successfully maintained internal law and order since the end of the Vietnam War,
and there is minimal risk of terrorist attacks from domestic or international groups, though this threat is growing underpinned by the
increasing presence of the Islamic State (IS) militancy in the Southeast Asia region. In addition, while our core scenario envisages
the government slowly transforming itself into a technocratic administration, the recent uptick in social protests which used to be
rare under the repressive regime of Vietnam's communist government indicates growing discontent of the political establishment,
which will become more pronounced over the next decade. These protests may become even more violent, disrupting business
operations while exposing foreign employees to injuries. There is also a considerably large shadow economy in Vietnam, allowing
for the presence of criminal gangs and the proliferation of financial crimes, where risks are exacerbated by weak law enforcement
– underpinned by low prosecution and conviction rates.
Labour Market (52.6/100): While Vietnam's labour market is appealing to labour intensive businesses due to the presence of a
large working-age population, we caution that a business strategy of riding the country's low wage cost curve to derive competi-
tiveness will soon cease to be attractive. As with many countries in the region, minimum wages in Vietnam are rising undermining
the country's status as a low labour cost destination for manufacturers. In addition, the shortage of advanced skills in the domestic
market owing to low education attainment levels will force businesses with sophisticated production processes to invest in train-
ing or/ and import workers at an additional cost. The competitiveness of Vietnam's labour market receives a major boost from the
generally flexible labour market regulation, including the absence of statutory notice periods for redundancy dismissal, which allows
businesses to easily streamline their workforce in line with economic fundamentals.
Logistics (54.5/100): Vietnam's strong trade outlook and export-focused industrial base make it a sought-after destination for
investors; however, companies breaking into or expanding in the country will face logistics challenges. Supply chains are over-reliant
on a sub-par road network with congestion levels increasing from the rapid rate of economic growth, urbanisation and increasing
demand from the export-focused industrial base. The utility sector is geographically biased in terms of internet connectivity, and
water and fuel are costly. Cheap electricity costs have, however, made Vietnam an attractive destination for energy-intensive indus-
tries, and inexpensive import and export costs are convenient for all sectors.
Trade And Investment (55.5/100): Firms benefit from a high level of economic openness, which has enabled robust expansion in
both trade and foreign investment. However, productivity and competitiveness are hindered by a range of factors, including high
levels of government intervention in the economy through regulation and the dominance of state-owned enterprises in key sectors
such as banking and mining,as well as pervasive corruption that adversely impacts the efficacy of the legal system and the onerous
bureaucracy surrounding paying taxes and opening and closing a business.
Economic Openness
Vietnam has become a rising star in East and South East Asia through its rapid growth and increasing foreign direct investment.
Imports and exports have exhibited robust growth, facilitated by the country's efforts to liberalise trade and expand the scope of
regional and international trade agreements. Government reforms have opened up the economy, boosting FDI and bringing about
a steady recovery in real GDP growth. Vietnam receives an Economic Openness score of 70.6 out of 100. This places it fourth out
of 18 states in the region, behind Singapore, Malaysia and Hong Kong.
Regional Trade Integration And Robust

Manufacturing Expansion Boost Score
East & South East Asia – Economic Openness
Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Trade and Investment Risk Index
Latest Economic Openness Analysis
• Vietnam posted real GDP growth of 7.5% y-o-y in Q317 and cumulative growth of 6.4% y-o-y in the first nine months of 2017,
making it one of the fastest growing economies in the world. We believe that Vietnam will continue to enjoy robust growth over
the coming years, underpinned by relative political stability, strong FDI inflows, high productivity, higher savings and favourable
demographics. Growth will be further buttressed by greater economic and trade liberalisation, which should see the export-
oriented manufacturing, construction and services sectors continue to outperform. There is a slight risk that economic policy
slippages could dent investor confidence and result in a slowdown in FDI inflows and manufacturing growth.
• In Q118, Vietnam's Ministry of Finance announced 10 draft decrees on preferential tariff rates for 2018-2020 related to its 10
Free Trade Agreements (FTAs). The trade deals include the ASEAN Free Trade Area, as well as FTAs between ASEAN and Japan,
India, Australia-New Zealand, South Korea and China. Also included are FTAs between Vietnam itself and Korea, Japan, Chile
and the Eurasian Economic Union. Most of the goods will enjoy a 0% import tariff (in effect from January 1 2018), in line with
the country's commitments within the FTAs' frameworks, while others will go through a gradual reduction until 2022. Exporters
will continue to benefit from the reduced tariffs, leading to greater economic integration. This will further lead to an increase
in foreign investments, competition, production, and business efficiency. In addition, this will also reduce the input cost for
domestic firms. With reduced tariffs leading to a reduction in import tax revenues, the state will likely offset it by an increase in
domestic tax collection in the medium term.
• US President Donald Trump's tariffs on imported washing machines, aimed at stemming the flow of appliances from East and
South East Asian and Chinese companies into the American market, may put pressure on Vietnam's manufacturing exports.
The overall short-term effect, however, is likely to be limited. Targeted companies such as South Korea-based LG Electronics
Inc. and China's Midea Group Co. can get around the import duty (of as much as 50%) by raising prices or re-routing produc-
tion to countries that are exempt from the new taxes. Should the Donald Trump administration introduce additional specific
tariffs on Vietnamese (and/or Asian) exports to the US, this would pose a more salient risk to Vietnam's export sector, given the
manufacturing sector's strong base.
• Vietnam boasts a strong infrastructure development project pipeline, particularly in transport and power, as it seeks to improve
logistics and address electricity shortages. The government is seeking to draw in foreign private sector expertise, given the
high technical requirements of these projects. Ongoing regulatory reforms intended to privatise and break up state-owned
enterprises and encourage private-sector participation in the infrastructure space and wider economy bodes well for continu-
ing levels of investment in infrastructure expansion projects.
• In H217 key developments in Vietnam's economic and business environments add further weight to our positive view on its
agribusiness sector. The industry holds strong growth opportunities in terms of production, exports and retail sales, particularly
with regard to the rice, coffee, livestock and dairy sectors. Moreover, economic and financial integration in South East Asia will
benefit Vietnam's exports of agricultural products. However, Vietnam faces growing competition in its key markets. The fulfil-
ment of its promising potential will only be achieved if the country steps up its competitiveness and improves product quality
and supply chain efficiency. Vietnam will have to significantly ramp up investments on crop productivity and domestic value
addition in the sector.
• Vietnam stands to benefit from increased FDI due to its relative macro-stability, low wages and a large and youthful workforce,
which help retain its appeal as a regional manufacturing base. Vietnam's government expects that inward FDI flows will rise in
2018-2020 in line with increased efforts to attract factories by building a more pro-business environment.
Trade Openness
The export and investment-led growth model that the Vietnamese government is pursuing has drawn significant investor interest
and spurred trade. The increasing pace of regional integration presents many lucrative opportunities that businesses can enjoy –
particularly in manufacturing industries. By expanding trade relations and lowering tariffs between key trade partners, the country
is poised to continue experiencing robust trade growth over 2018-2022. As a result, we give Vietnam a score of 88.0 out of 100 for
Trade Openness, ranking it in first place in the world.
The Vietnamese economy is dominated by its manufacturing and services sectors, and both are becoming increasingly diversified,
advanced and integrated with regional and global value chains. The country has enjoyed robust growth over the past decade with
nominal GDP in 2018 expected to reach USD239.6bn, up from an estimated USD219.2bn in 2017 and USD201.3bn in 2016. Aggre-
gate annual growth for the period 2018-2022 will be an estimated 6.5%, making the country one of the fastest growing economies
in the world.
The tertiary sector in GVA terms stood at an estimated USD111bn in 2017 up from 101.1bn in 2016 – representing 57.2% of total
GVA, while the secondary sector registered GVA value of USD52.2bn in 2017. The total primary sector value also reached an esti-
mated USD53.6bn in 2017, though we expect this sector to contract in terms of its share of GDP over the next decade. Medium-term
growth will likely be driven by robust expansions in the industrial and services sectors which are supported by steady FDI inflows, a
diversified and resilient export sector and a fast-rising tourism industry. Moreover, increasing economic and financial integration in
East and South East Asia will benefit Vietnam's exports.
Despite transitioning to a more service and industrial base, agriculture remains a key sector in Vietnam, employing just under half
(46.5%) of the population. Up until the early 1990s, Vietnam was a large exporter of wood, particularly sandal wood. However, in
1992, in response to concerns over the dwindling forests, the government imposed a ban on the export of logs and raw timber. This
was extended to include all timber products except wooden artefacts. Agricultural exports are now dominated by coffee, rice and
fish. Vietnam is one of the top rice-exporting countries in the world, though the limited sophistication of small-scale Vietnamese
farmers signals below-potential output levels. The country is also one of the world's largest exporter of coffee.
Going forward, we expect continued improvements in the agriculture, forestry and fisheries sectors as the impact from adverse
weather conditions fades but note that expansion in this segment of the economy will remain considerably below headline growth.
Mining also faces headwinds from low commodity prices and environmental concerns. According to the General Statistics Office
(GSO), the mining industry contracted by 3.6% y-o-y in the first three quarters of 2017 but that overall industrial growth was buoyed
by the processing sector, which grew by 11.2% y-o-y and the construction sector which expanded by 9.1%.
Manufacturing And Service Sectors Drive Growth
GVA By Sector, 2014-2018
e/f = Fitch Solutions estimate/forecast. Source: National Statistics Office, Fitch Solutions
Recent developments in Vietnam's economic and business environments add further weight to our positive view on its secondary
sector (see Investment Openness section). The agricultural and agro-processing industries hold some growth opportunities in terms
of production, exports and retail sales, particularly with regard to the rice, coffee, livestock and dairy sectors. However, Vietnam faces
growing competition in its key markets. The Mekong River is one of the key elements behind our positive outlook for Vietnam, as it is
the cornerstone behind its fertile lands. However, two key risks are hovering over the river and its impact on the region's agriculture.
The most pressing risk to water-sharing is linked to the upcoming boom in hydropower along the river, as the planned construction
of multiple dams in the region (mainly Laos) will drastically change river flow and, therefore, the ecosystems, irrigation and land
profile of the regions alongside the river. Climate change is also posing a more insidious and long-term risk to the future prospects
of agriculture in the Mekong region, as it will lead to a significant increase in average temperatures and to the reduction in the size
of the Mekong delta via coastal erosion, rising sea levels and the growing salinity of arable land.
Vietnam's industrial manufacturing sector growth will remain robust, supported by steady inflows of investment and a well-diversified
export basket in terms of both export markets and types of goods. In recent years, Vietnam's economy has benefited from multi-
national companies ranging from tech giants such as Samsung Electronics and Intel, to automobile companies such as Toyota
and Ford, and many textile, apparel and shoemakers including Nike setting up plants in the country. This has raised Vietnam's trade
profile to become one of the largest South East Asian exporters to the US and EU. Vietnam's trade resilience and economic success
are underpinned by strengthening efforts in diversifying its export products and export markets.
The manufacturing sector is a key export driver and this has allowed total goods and services exports to reach an estimated
USD210.5bn in 2017, despite a sluggish in global trade trends in that year. We still forecast resilient aggregate real export growth of
12.4% annually over the period 2018-2022. Vietnam's major product exports have attracted significant investment from international
companies. In 2016, and according to Trademap, the country exported USD76.6bn worth of electrical machinery, parts and equip-
ment, whereas exports in this sector have been growing at an average pace of 21% over 2012-2016. Another key sector, textiles,
is an important export growth node for the country as, in 2016, the exports of textiles (and articles thereof) stood at USD18.3bn.
Vietnam is a rapidly growing market for manufactured intermediate goods, vehicles parts, textiles, chemicals and derivatives. A
lack of strong integration between its primary and secondary sectors, however, means that domestic conversion and end-product
manufacturing operations are reliant on imports, which have grown fast in recent years in tandem with export growth. With indus-
trial growth likely to remain strong, driven by fixed investment, Vietnam's forthcoming capacity growth will be insufficient to cover
demand and the South East Asian economy will remain a major destination for regional fuel exports and intermediate goods (such
as electrical parts) needed for manufacturing over the medium term. In 2016, the country imported USD45.7bn worth of electri-
cal machinery, parts and equipment, and USD20.9bn worth of machinery, mechanical equipment and parts – the imports in these
sectors have been growing at an average pace of 21% and 12% respectively over 2012-2016.
Heavy Industries Dominate Trade
Goods Exports & Imports, USDbn (2015)
Source: Trade Map, Fitch Solutions
Vietnam will continue to enjoy strong trade growth over the coming years, with both imports and exports expanding at double-
digit rates. The manufacturing sector is a key import driver as many of the inputs used in the production process are imported
predominantly from regional peers such as China, South Korea, Singapore and Japan. Consequently high fuel demand and the
need for intermediate manufactured products and other capital inputs meant total imports reached an estimated USD153.6bn
in 2017 and, in line with export growth, we still forecast resilient aggregate real import growth of 13% annually over the period
2018-2022.
The country is establishing itself as a key manufacturing hub, driving trade in both directions. Over the medium term, we maintain
a constructive outlook on the Vietnamese economy, expecting the manufacturing sector to benefit from multinationals relocating
away from established hubs – such as China – in search of lower production costs, supported by Vietnam's increasing openness
to trade and investment, political stability, and growing reform momentum. At the same time, a growing consumer base, business
services and tourism sectors are also likely to support steady growth in the services sector, informing our view that Vietnam will
continue ranking among the world's fastest-growing economies globally over the medium term. We forecast private consumption
as a share of GDP to decline very gradually over the coming years as more resources go to capital building. However, the country's
large population, rising affluence and sustained remittance inflows (USD13.2bn in 2015) are some factors that will keep private
consumption growth robust at an average of 6% per annum over the next decade, lending further support to our outlook for imports.
Vietnam's historical self-sufficiency in crude oil is set to come to an end by H219 as low oil prices, upstream investment pullbacks,
natural declines at mature fields and a massive expansion of refining capacity significantly expand Vietnam's need for crude feed-
stock that will need to be sourced via imports. The increase in oil demand will primarily be driven by a significant increase in refining
capacity, alongside positive macroeconomic and demographic factors. Vietnam's natural gas consumption is poised to surpass
production when the country's first LNG import terminal, the Son My, comes online in 2020. Availability of additional gas supplies
will fuel greater uptake in the transportation, power, manufacturing and petrochemicals sectors, driving long-term consumption
growth. The country will continue to remain dependent on refined fuels imports as, even with a dramatic upsurge in domestic fuels
production capacity, a stronger demand-side response will necessitate imports. Our Oil and Gas data show that the country will
require an average of about 202,000b/d of fuels imports annually over the next decade. This will ensure Vietnam continues to rely
on traditional fuels trade partners, the largest of which is Singapore, that supply about half of its annual fuels requirements.
Manufacturing Sector Drives Robust Trade Growth
Total Imports & Exports, USDbn (2012-2016)
e = Fitch Solutions estimate. Source: Asian Development Bank, Fitch Solutions
Vietnam has the seventh largest market regionally in terms of total trade values, ranking between Thailand and Malaysia out of 18
states in East and South East Asia. We expect total trade to reach an estimated USD402bn in 2018, with exports leading the way
at USD231.2bn, while imports will reach USD170.8bn. We expect robust growth in terms of trade volumes over the medium term
(hovering around 13% y-o-y over 2018-2022) backed by a number of factors, including a large, rapidly growing population of around
96mn that provides a sizeable labour force to satisfy production needs. In turn, economic growth and prosperity have increased de-
mand for imports while a rebalancing of global trade signals increasing global demand for goods that are key to Vietnam's export mix.
Vietnamese exports performed well over the last two decades, and rapid export growth in recent years, has supported the country's
trade balance that will remain in surplus over 2018-2022, reaching USD60.4bn in 2018, up from USD56.9bnin 2017. The reason
for Vietnam's export sector boom is largely due to foreign firms increasingly moving their manufacturing facilities into Vietnam to
take advantage of demographic advantages and trade openness. While sustained growth in the export-oriented manufacturing
sector will keep exports as a share of GDP rising (estimated to reach 99% of GDP in 2018), firm domestic demand conditions and
high import-content of manufactured goods will result in elevated levels of imports.
Over the coming years, we believe that improvements in Vietnam's productive capacity and growth in its manufacturing and service
exports will continue to support the country's trade balance, despite strong import growth due to growing domestic demand. In
addition, strong remittances growth and investment inflows will also help to shore up the country's external position. In 2018, the
current account balance is set to reach USD9.1bn (3.8% of GDP) up from USD8.7bn in 2017.
We hold a positive outlook on Vietnam's trade competitiveness and growth over the medium term as Vietnam's major trading
partners (such as China, South Korea and the EU) are experiencing a return to growth, bolstering export prospects. Export growth
to the US will, however, remain uncertain in the short- to medium-term due to the US administration's movement towards more
protectionist policies, with Asian products in focus. The US is Vietnam's largest export partner, accounting for an estimated 19.9%
of Vietnamese exports in 2016. The US also accounted for 5% of Vietnam's imports in 2016.
China Dominates Export Mix
Top Five Trade Partners For Product Exports (2015), USDmn
In addition, the country remains vulnerable to growth slippages, in a scenario where the Chinese economy significantly falters.
China represents the largest source market for Vietnam (accounting for 30.3% of goods imports in 2016) and the second largest
export market (accounting for 16.9% of total exports in 2016). We believe that any significant growth slippages in China will weigh
on growth and investment dynamics in the wider region, particularly Vietnam. After China and the US, South Korea and Japan are
also key export and import markets, accounting for a significant share of total trade.
Fueling Vietnam's exports is a continued focus on further integration in the regional and global economy. In regard to these ends,
the country's average tariff rate stands at a low 3.4%. Vietnam has been a member of WTO since January 2007 and the government
has to notify all the WTO Committee on Technical Barriers to Trade on all draft technical regulations. Firms dependent on imports
and exports have benefited from the government's consistent efforts to liberalise foreign trade since the 1980s, which has lowered
the cost of trade while increasing the competitiveness of local products. Trade has been facilitated by Vietnam's membership of the
Association of South East Asian Nations (ASEAN) and the ASEAN Free Trade Area (AFTA), which significantly lowered import tariffs
and regional manufacturing costs for ASEAN members.
China And Asian Peers Play Critical Feeder Role
Top Five Import Partners, Imports In USDmn (2011-2015)
Vietnam has signed the European Union Free Trade Agreement (EU-FTA), and is party to agreements such as the Korea FTA, Eurasian
Economic Union (EAEU) FTA, the ASEAN-Australia-New Zealand FTA, the Vietnam-Japan FTA, the ASEAN-China FTA and bilateral trade
agreements with South Korea and the EU. Vietnam also improved trade relations with the US by signing a bilateral trade agreement
in 2001 which saw to the reduction of export tariffs on Vietnamese products to the US from roughly 40% to 3-4%. The agreement
also lowered tariff and non-tariff trade barriers for US products arriving in Vietnam. The future of trade with the US, however, has
become uncertain due to US President Donald Trump's stance on trade protectionism. It remains to be seen whether any bilateral
trade agreements between the two states will be amended.
Vietnam is looking to lower preferential tariff rates for 2018-2020 related to its main Free Trade Agreements (FTAs), which provides
significant upside to export growth. Exporters will continue to benefit from the reduced tariffs, leading to a deeper economic integration.
In addition, this will also reduce the input cost for domestic firms. With reduced tariffs leading to a reduction in import tax revenues, the
government aims to offset it by an increase in domestic tax collection. The trade deals include the ASEAN FTA, FTAs between ASEAN
and Japan, India, Australia – New Zealand, South Korea, and China. Also included are FTAs between Vietnam and Korea, Japan, Chile and
the Eurasian Economic Union. Similarly, under the ASEAN – India (AIFTA), items having current import tax rates between 1% and 3%
will be subjected to 0% import tariffs by 2019. Most of the goods will enjoy a 0% import tariff in effect from January 1, 2018, in line with
the country's commitments within the FTAs framework, while others will go through a gradual reduction until 2022.
In 2017, Vietnam also commenced hosting the Asia Pacific Economic Cooperation (APEC) which puts a spotlight on regional eco-
nomic integration and improvements to the business climate. While the Trans Pacific Partnership (TPP) is no longer a powerful tool
to accelerate economic reforms, internal pressures (including a sustained budget deficit, a weak domestic sector that has low link-
ages to the global supply chain, productivity challenges amid rising wages, and a financial sector overburdened by non-performing
loans) remain and will continue to drive the reform process.
Investment Openness
Vietnam is focused on attracting foreign investment, especially in sectors that will bring advanced technology, increase the labour
market skills and improve Vietnam's labour productivity. Vietnam's attractiveness as an FDI destination has grown as the country
continues to make key legal reforms related to the business climate. Other FDI pull-factors are Vietnam's stable political system, its
strategic location near global supply chains and China, and an abundant labour force that is less costly relative to China. However,
the state's role in the economy remains significant and some sectors are restricted for 100% foreign ownership, including energy,
transport, mining, utilities and agriculture. Indeed, taking these factors into consideration, Vietnam scores 53.1 out of 100 for In-
vestment Openness, ranking it 10th out of 18 states in East and South East Asia.
TABLE: FREE TRADE AGREEMENTS

Country Bloc Status Positive Effect On Businesses
ASEAN Free Trade Zone Active • High: ASEAN is a 10-member regional organisation working together to advance economic integration through
cooperation in economic, social, cultural, technical, scientific and administrative fields.
• Within ASEAN is the ASEAN Economic Community (AEC). While the AEC's goal is to establish a single market
across ASEAN nations (similar to the EU), it has a long way to go in order to achieve this goal. To date, the great-
est success of the AEC has been tariff reductions. As a result, more than 70% of intra-ASEAN trade is tariff-free,
and less than 5% is subject to tariff rates above 10%.
• From 2015, almost all tariffs between member states were removed. Many member states are significant trade
partners for Vietnam.
• Under the ASEAN Trade in Goods Agreement (ATIGA), Vietnam has already cut 6,900 tariff lines, or 72% of all tar-
iff lines, to 0% in 2014. It reduced more than 1,700 other lines to 0% in 2015. By 2018, Vietnam is committed to
removing all import tariffs. Items to be subjected to 0% import tariff include automobiles, motorcycles, vehicle
components, vegetable oil, tropical fruits, home electronic appliances, milk, and dairy products.
• Certain agricultural products such as poultry, chicken, citrus fruits, brown rice, processed meat, and sugar will
continue to have a tariff rate of 5%.
ASEAN-China Active • High: China is a major trade partner of Vietnam.
• Items to attract 0% import tariffs from 2018 include chicken, coffee, raw tea, processed food, textiles and ap-
parel, some machinery and electronic equipment.
• Vietnam is negotiating Regional Comprehensive Economic Partnership (RCEP) agreement.
ASEAN; Australia; New Active • Moderate: Both Australia and New Zealand are important trade partners for Vietnam.
Zealand
Japan Active • High: In 2016, Japan was Vietnam's third largest export and import partner.
• Under the Vietnam-Japan Economic Partnership Agreement (VJEPA) a 0% rate will be applied to 456 tariff lines
for items such as construction stones, steel, aluminium, sugar, machinery, equipment, and vehicle parts.
South Korea Active • High: South Korea is Vietnam's second largest import partner and fourth largest export partner (accounting
for 5.7% of total exports). The Korea-Vietnam Free Trade Agreement (FTA), which came into effect in 2016, was
estimated to increase Vietnam's 2016 exports to South Korea by 28% since 2015, to USD12.5bn.
• From 2018, import tariffs for 704 tariff lines will be reduced to 0% for items such as seafood, wheat, confection-
ery, diesel fuel, machinery and electronic equipment.
Eurasian Economic Active • Moderate: Under the Vietnam-Eurasian Economic Union FTA, 5,535 tariff lines have been reduced to 0% in
Union 2018 for items such as milk, dairy products, automobile and spare parts, iron and steel, and steel products. In
addition, in 2016 the Vietnam-Russia and the Eurasian Economic Union (EAEU) FTA boosted Vietnam exports to
the EAEU by 20% to USD USD1.6bn.
EU Under negotiation • High: Nearly all tariffs are being removed. This agreement is likely to boost trade for both regions.
• In Q118, Vietnam and the EU had concluded negotiations on the EU-Vietnam FTA, which was (at the time of writ-
ing) pending review and approval from both sides.
Investment Trends: Recent changes to the Investment Law and the development of special economic zones have demonstrated
Vietnam's open attitude to investment. Total FDI stock in Vietnam stood at USD115.4bn in 2016 (up from USD102.8bn in 2015),
representing 57.3% of GDP, which ranks the country above most of its East and South East Asian neighbours, in eighth place out
of 18 states, on this metric. Manufacturing and processing activities account for the majority of FDI, at 69.9% of Vietnam's total
registered capital.
Vietnam's growth story over the past decade has been marked by tumultuous periods of high inflation, multiple currency devalua-
tions and widespread economic wastage as a result of inefficient state-owned enterprises (SOE) that continue to hold dominance
in key economic sectors. We believe, however, that 2013 marked a major turning point for the economy. While structural factors
underpinning Vietnam's potential for long-term growth (including favourable demographics, proximity to China and low cost of
labour relative to the region) remain largely unchanged, we highlight several developments that reinforce our bullish outlook on
the economy over the next decade.
First, we foresee a more stable economic environment in Vietnam, brought on by a decisive shift in the government's focus towards
policies aimed at maintaining price stability and ongoing efforts to further address fiscal imbalances. Vietnam is one of the few coun-
ties in Asia that has been able to sustain manufacturing growth. Fuelled by a growing economy with a young, increasingly urbanised
population and inexpensive labour, Vietnam will maintain its manufacturing powerhouse status in Asia. Vietnam as it made great
strides in integrating into the global economy due to increased efforts to integrate in regional value chains.
FDI Contributes Significantly To Growth, More Reforms Needed
East & South East Asia – Inward FDI Stock (2016)
Source: National statistics, Fitch Solutions
Vietnam continues to work to improve its business climate in order to attract FDI and has sustained registered FDI inflows of roughly
USD18.5bn annually since 2012. The manufacturing sector dominated FDI inflows (particularly since 2013) as investors continued
to move large scale operations from other developing countries to Vietnam. Since 2015, the investment influx to the textiles and
apparel industries has remained robust. However, over the medium term as wages rise, the manufacturing focus will shift to higher
value add production. As such, Vietnam is attracting new and additional investment in the ICT and energy sectors.
The government encourages investment in: the production of new materials, new energy sources, metallurgy and chemical indus-
tries, manufacturing of high-tech products, biotechnology, information technology, mechanical engineering, agricultural, fishery and
forestry production, salt production, generation of new plant varieties and animal species, ecology and environmental protection,
research and development, knowledge-based services, processing and manufacturing, labour-intensive projects (using 5,000 or
more full-time labourers), infrastructure projects, education, training, and health and sports development.
Information technology (IT) has drawn investments from companies such as Samsung (USD3bn), LG (USD1.5bn), and Microsoft
(USD500mn) in recent years. The FDI inflows to the IT sector are in line with Vietnam's strategic efforts to shift FDI from low-end
manufacturing to the high tech sector. Vietnam currently has two high-tech industrial parks: Hoa Lac High-Tech Park (located in
Hanoi) and Saigon High-Tech Park.
Vietnam also continued to attract investment in infrastructure projects such as power generation, roads, railways and water
treatment. Vietnam needs an estimated USD170bn in additional infrastructure development in order to meet growing economic
demand. In energy alone, the Vietnam's General Statistics Office (GSO) estimates that electricity demand will continue to grow
at a rate of 10-12% annually, through to 2030. If the government further liberalises the sector, this presents highly lucrative op-
portunities for investors.
The legal environment for foreign investment is enshrined in the 2005 Investment Law, which offers protection to foreign investors
against the nationalisation or confiscation of property or assets, defines investment incentives and rules and outlines government
policies for other notable investment issues. Foreign ownership is prohibited or restricted in certain sectors; for example, investors
are unable to participate in sectors integral to areas such as national defence and security. Foreign participation is particularly en-
couraged in agriculture, labour-intensive industries, hi-tech industries and infrastructure development.
Under the current laws of Vietnam, There are various investment preferences and incentives to investors who have investment
projects enjoy a range of incentives. Preferential tax rates of 10% or 17% may be available to eligible projects in industries or loca-
tions encouraged via government policies. A 10% rate for the 15-year period beginning with the first year of revenue may be avail-
able for income from new investment projects in areas with especially difficult socioeconomic conditions, and in economic zones
and high-technology zones and projects in hi-tech, research, environmental protection, education, and energy sectors. Incentives
for research and development (R&D) have been consistently among the most favourable in Vietnam, given that R&D activities are
important to the country's development. Eligibility requirements for obtaining incentives, however, are strictly set out. Incentives
for science and R&D include tax exemptions, tax holidays, financial support and preferential land lease fees.
There are also import duty exemptions available on the importation of equipment, materials, means of transportation and other
goods for implementation of investment projects in Vietnam in accordance with the Law on Export and Import Duties. Exporters
will continue to benefit from the reduced tariffs, leading to a deeper economic integration, particularly over 2018-2023. This will
further lead to an increase in foreign investments, competition, production, and business efficiency. In addition, this will also reduce
the input cost for domestic firms. The increase in imports/exports and subsequent reduction in import tax revenues will, however,
be offset by an increase in domestic tax collection – such as corporate and personal income tax.
The Vietnamese government's gradual liberalisation of industry regulation and embrace of public-private partnerships (PPPs) bode well
for the country's construction and infrastructure industries, which in turn will boost the country's logistics profile. Liberalisation efforts,
including decisions in 2014 and 2015 to lift restrictions on foreign real estate investments and ownership of several industries will help
improve the attractiveness of Vietnam for PPPs; according to our Infrastructure Key Projects Database, there are 45 PPP projects worth
nearly USD127bn in the planning phase, mostly in the road, rail and power sectors. Furthermore, our key projects database shows that
half of all ongoing projects involve a foreign partner. However, we note that the appeal of PPPs to foreign investors may be dented by
the lack of transparency in the processes.
The government has been making efforts to break up state monopolies and privatise SOEs, and although progress has been slow
on this front, we expect this will also offer investment opportunities in the future. An example is in the power market; after the
government started allowing independent producers to sell electricity to state operator EVN in 2012, IPPs now control 40% of the
country's installed capacity. Similar efforts are underway to introduce further private-sector participation in the road and rail sectors.
High Production Potential And Structural

Reforms Momentum Draw FDI Inflows
Inward FDI Stock, 2007-2016
Source: UNCTAD, Fitch Solutions
Sustained FDI inflows will be supportive of economic growth over the coming years. In addition, considering that Vietnam has been
running current account surpluses for the past few years, this implies that the private sector has accumulated savings. Unlocking
these savings would allow for greater private sector participation in the country's economic development and provide an immense
boost to growth over the long term.
Much of the country's FDI flows come from regional peers such as China, South Korea, Japan and Malaysia. Vietnam's Small and
Medium Enterprise Development Fund (SMEDF) is also partnering with South Korea's Small and Medium Business Corporation (SBC)
to encourage SME development in the two nations. South Korea is currently one of the largest foreign investor in Vietnam, with
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES

Free Trade Zone/Incentive Programme Main Incentives Available
270 industrial zones and export processing Foreign investors are exempt from import duties on goods imported for their own use and which cannot be procured
zones across the country. Country divides locally, including: machinery, vehicles, components and spare parts for machinery and equipment, raw materials, inputs
into three key economic zones (KEZs), each for manufacturing, and construction materials that cannot be produced domestically. Remote and mountainous prov-
of which has its own economic development inces are allowed to provide additional tax breaks and other incentives to prospective investors. In addition, projects in
plan. high tech, research and development, new materials, energy, clean energy, renewable energy, energy saving products,
automobile, software, waste treatment and management, primary or vocational education; or projects located in difficult
areas or economic and projects in industrial zones are entitled to investment incentives such as lower corporate income
tax, exemption of import tariffs, or land rental.
Source: Government websites, Fitch Solutions
specific investments going into the electronics, energy and manufacturing sectors. This investment flow has boosted SME growth
in Vietnam, enabling them to gain access to advanced technologies and the global supply chain.
Special economic zones in Vietnam are well developed. The Vietnamese government has divided the country into three key eco-
nomic zones, each of which has its own economic development plan. The country has around 300 industrial zones (IZs) and export
processing zones (EPZs) which allow investors to enjoy a range of investment incentives. Additional services located within the zones
allow businesses to streamline the business registration and export processes. For example, the presence of customs warehouse
keepers provide transportation services and act as distributors for goods deposited. However, investors should be aware that in
practice the time involved for clearance and delivery can be lengthy and unpredictable. This is because additional services relat-
ing to customs declaration, appraisal, insurance, reprocessing, or packaging require the approval of the provincial customs office.
TABLE: BARRIERS TO FDI

FDI Barrier Sectors Affected Business Impact
Regulatory barriers All • Moderate: The overall administrative burden negatively affects investment decisions. Under the new Invest-
and administrative ment Law, businesses must apply for an investment license when establishing a new company and update their
burden business license when they: make significant changes to an ongoing enterprise (such as increasing investment
capital), restructure the form of investment or investment ratios between foreign and domestic partners,
change the foreign management structure, or add new business activities.
• Foreign investors are subject to different business licensing processes and restrictions. Vietnamese companies
which have a majority foreign investment are subject to foreign investor business license procedures.
• In general, the new Investment Law has not provided clearer and speedier processes for investors to complete
necessary investment license paperwork. Efficiency of procedures in construction and environmental permit-
ting is insufficient, while corruption raises risk for investors.
• In addition, the lack of substantive regulations on merger and acquisition activities makes such transactions
risky. It is difficult to determine which business lines the acquired company is allowed to maintain.
• The reason for the lack of clarity is due to the fact that while Vietnam allows foreign investors to invest in all but
six prohibited sectors, and regulates investment in 267 sectors, there are more than 6,400 conditions relating
to these sectors.
Dominance of SOEs Oil and gas, energy • Moderate: There are approximately 2,000 SOEs where the state controls a majority interest, and 781 SOEs
where the state controls 100% of operations. Vietnam does not, however, publish a full list of SOEs. SOEs oper-
ate in most industries and areas, including those such as apparel, banking and mobile phone services where the
private sector would operate more efficiently.
• Privatisation drives have been slow. In several key sectors – including transportation, agriculture, utilities, finan-
cial services, manufacturing, and construction – Government linked corporations continue to dominate the
market. For one, the resource industry in Vietnam is largely state-led and heavily regulated by the government.
• According to a recent draft decree released by the Ministry of Planning and Investment, the Vietnamese gov-
ernment will retain a 75% stake in companies operating in the oil, natural gas, coal, bauxite, iron ore and copper
industries going forward.
Localisation require- Agriculture and forestry, • High: Foreign investors have maximum ownership restrictions on some sectors deemed to be strategic. Elec-
ments and foreign mining, electricity, waste tricity, transport, mining, banking and telecoms infrastructure sectors have maximum foreign ownership have
ownership limits management and water foreign ownership limits (ranging from 49%-65%).
supply, transportation, real • This has effectively stunted the growth potential of these sectors as it shuts FDI out. Foreign investors may pos-
estate, media, banking, sess majority shares in securities or fund management companies in Vietnam only if they possess the required
telecoms and financial licence in their home country and have at least two years of experience in the financial sector in their country
services of origin.The new decree on securities also introduces a requirement for real estate investment funds to invest
at least 65% of their net assets into qualifying Vietnamese real estate or shares of real estate companies with
revenues of at least 65% in their core business.
• In 2010, Vietnam restricted bidding by foreign firms on government-issued procurement tenders to those
cases where domestic bidders cannot provide the necessary services or supplies.
Conformity with All • Moderate: FDI projects must conform to one or more sectoral master plans. Master plans are economic devel-
Economic Master opment policies that set five- to ten-year targets for an industry.
Plans • The requirement for projects to conform to relevant master plans can be problematic for foreign investors, as
the grounds for assessing compliance with a particular plan are unclear, and master plans may overlap as they
are issued by both ministries at the national and provincial level.
Source: Government websites, Fitch Solutions
As the economy gradually shifts towards a more market-oriented system by allowing for increased foreign competition, we believe
that this will open up opportunities for foreign investors seeking to penetrate the Vietnamese market. Indeed, continued state ef-
forts to implement reforms and streamline bureaucracy will likely benefit businesses by increasing transparency, accountability and
fair competition. Increased foreign participation in sectors that are presently dominated by SOEs should also contribute towards an
overall improvement in the efficiency of the economy over the next decade.
Investment Barriers: There remain some barriers to FDI that can largely be attributed to the slow liberalisation of the investment
space in sectors dominated by the state, legal risks, as well as the existing restrictions on 100% of FDI in all sectors. Firms still face chal-
lenges applying for investment licences, for which the procedures are complex and lengthy, increasing delays and operational costs.
Utilities Network
Vietnam offers an attractive market for investors, with impressive import and export growth supported by the country's expanding
manufacturing capacity and large population. Although planned utility price hikes will marginally increase operating costs in the near
term as domestic demand grows, energy costs are regionally competitive for investors in energy-intensive industries. Rising internet
penetration bodes well for e-commerce firms and business communications, and this is further enhanced by the improving quality of
telecommunications services. Though energy infrastructure development is slowly gaining traction, demand continues to outweigh
supply such that, at present, the benefits of low-cost utilities are partially offset by the additional variable costs that businesses incur
due to the need to mitigate risks stemming from sporadic electricity blackouts, variable water quality and supply chain risks surrounding
fuel imports. Overall, Vietnam scores 54.5 for its Utilities Network, ranking ninth regionally out of 18 states in East and South East Asia.
Utilities Reliability Risks Weigh Down Competitiveness
East & South East Asia – Utilities Network
Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Logistics Risk Index
Latest Utilities Network Analysis
• The growth outlook for Vietnam's power sector is strong, with a broad range of projects in the pipeline that are set to add to
capacity and generation over the next decade. Some of the fastest growth will be seen in the coal-fired power segment, where
the availability of coal reserves and the comparatively low cost of developing new power plants will see the sector make rapid
gains. This will be a boon for energy-intensive businesses operating in the country over the medium-to-long term as power
plants slowly come online.
• In 2017, the Government of Vietnam announced a new policy for the development of solar power projects that incentivises
investments in these projects. As part of the investment package, the policy provides import duty exemption on fixed assets
imported for the projects and on supplies, raw materials and semi-finished that are not produced domestically.
• In 2018, Vietnam increased the reliability of power supply by rolling out a Supervisory Control and Data Acquisition (SCADA)
automatic energy management system for the monitoring of outages and the restoration of service.
• The Dak Lak Power Company has reportedly invested some USD35.2mn in grid improvements since 2011 and in August
2017 confirmed that all communities in the country's remote central highlands region are now connected to the national grid.
• Kuwait Petroleum International (KPI) sent its first crude oil shipment (2mn barrels) to its USD9.2bn, 200,000b/d Nghi Son
refinery in Vietnam, due to begin commercial operations in 2018. Vietnam will become increasingly dependent on energy
imports in the years ahead, as domestic hydrocarbons production falls and low oil prices drag on investment in new projects.
This will see Vietnam's historical self-sufficiency in crude oil and natural gas come to an end by 2019 and 2020 respectively.
• Vietnam's decision to match cost advantages enjoyed by international sellers under free trade agreement (FTA) terms by
lowering the tariff placed on the Dung Quat refinery's gasoline to 10.0% and lifting the tax on diesel helped improve the cost-
competitiveness of domestic fuel output versus imports. This contributed to Vietnam's fuels imports over H117 declining 0.6%
y-o-y. However, robust growth in domestic consumption will continue to deepen Vietnam's dependence on imports, even as
new refineries expand domestic production capacity.
• Growth in Vietnam's energy and utilities sector will hit 4.5% in 2017 and average 4.7% over the next decade, largely driven by
investments in the power and water sectors. The government is seeking to add new power capacity from coal and natural gas
plants, while urbanisation and climate change trends will prompt investment in water supply, treatment and flood-prevention
facilities. The number of people living in urban areas has ballooned from 19mn in 2000 to 31mn in 2015, according to the
World Bank. The effects of rapid urbanisation in Vietnam will be strongly felt in the utilities sector as the rising populations of
cities strain existing utility systems.
• Demand-side growth for fuel continues to outpace that of refinery output due to strong economic performance and rising
consumption of automotive fuels and LPG. According to our Oil and Gas team, the country will require an average of about
180,000b/d of fuels imports annually over the next ten years, signalling high import reliance – which is broadly sustainable in
a low-oil price environment. This will ensure Vietnam continues to rely on traditional fuels trade partners, the largest of which
is Singapore, that supply about half of its annual fuels requirements.
Utilities Costs And Availability

Vietnam offers cheap electricity, but we expect prices to increase as the country's own energy sources deplete and demand grows.
Though the country boasts a strong project pipeline for utilities infrastructure development, demand may continue to outrun supply
(compounded by transmission and distribution losses in the grid) as cumbersome decision-making and slow investment negotiations
can hamper speedy progress. Consequently, over the short-to-medium term, the benefits of low-cost utilities are partially offset by
the additional variable costs that businesses incur due to the need to mitigate risks stemming from sporadic electricity blackouts and
variable water quality. This is also true for its oil refining capacity, which means that it must import refined oil products at a premium.
We score the country 72.2out of 100 for Cost of Utilities, placing it third out of 18 states in the region, ahead of Thailand and Malaysia.
Meanwhile, water sanitation and supply have improved over the past decade, although companies in rural areas will lack access to
piped water. While internet penetration rates are growing, the government heavily monitors content, restricting the extent of busi-
ness operations. Vietnam receives a score of 36.8 out of 100 for Availability of Utilities in our Logistics Risk Index, ranking 15th out
of 18 states in East and South East Asia. The country's score is dragged down significantly by its overreliance on energy (mainly oil
and gas products) imports, which exposes firms to supply chain risks and exogenous price shocks. Over the medium-to-long term,
the availability of reliable electricity supply is set to significantly improve as the government is keen to attract more foreign invest-
ment to the power sector in order to drive forward a number of large-scale power projects, particularly coal- and natural gas-fired
power projects. This will ensure the country can keep up with rising consumption demands.
Electricity: While Vietnam offers some of the cheapest electricity costs in the region, the variable quality and reliability of its supply
has major implications for supply chains. Looming electricity shortages present both near- and medium-term risks for businesses.
TABLE: ELECTRICITY RISKS

Source
Energy mix (BAsed on our 2017 estimates): ther- • Vietnam's power generation is dominated by natural gas-fired power and hydropower; however, these sources
mal (58.4%), hydropower (41.1) non-hydropower will play a slightly reduced role in the medium to long term due to the frequency of droughts disrupting hydro-
renewables (0.5%) power supplies and more limited natural gas resources.
• As coal affords a certain measure of reliability in generation (due to extensive natural resource reserves), we
expect coal capacity and generation will grow the fastest over the next decade. Coal generation is forecast to
increase from an estimated 22% of total electricity generation in 2017 to 28% by 2026.
• With sunshine throughout the year and exposure to ocean winds, the country is an obvious candidate for renew-
able energy sources; however, with few wind farms and no significant solar investment, Vietnam lags behind its
neighbours Indonesia and Thailand.
• Vietnam is moving toward the privatisation of its power plants – owned by state utility companies Vietnam Elec-
tricity (EVN) group, PetroVietnam and mining group Vinacomin – with a goal of cutting government ownership
by 2020. The state groups will need to cut their ownership to below 50% within two years of the privatisation
date, though the government will still maintain control of power transmission and the building and operating of
major power plants. This move is expected to improve the participation of the private sector in energy projects,
which could have a positive impact on the management of energy assets, thereby boosting quality and reliability
of power supply, benefiting the supply chain for businesses.
Availability
99% of the population has access to electricity • Investors face limited risks from access to the grid, as some 97% of the population have access to electricity.
This means that investors can locate in most places and gain access to the electricity grid.
• Vietnam currently operates a power distribution system of about 115,659 km of 6kV, 10kV, 15kV, 22kV and
35kV lines with a total capacity of 3,662 megavolt-amperes (MVA), as well as 109,199 km of 220V lines with a
total capacity of 32,061 MVA. The country is trying to develop a rural electrification programme in an attempt to
raise its rural electrification rate to nearly 100% by 2020.
• The start-up process is efficient by regional standards, taking on average 46 days to obtain a permanent electric-
ity connection, compared to the East and South East Asia average of 66 days, ranking well ahead of China, where
it takes on average 143 days.
Reliability
9.1% of total output is lost through transmission • Supply chains are impacted by the quality of electricity supply. Power cuts can cause disruption to business op-
and distribution2.2% of annual sales lost due to erations, with 25.2% of manufacturing firms reporting that they own private generators to mitigate productivity
power outages0.2 power outages per month losses, according to a World Bank survey in 2015. Blackouts last up to 7.5 hours on average.
• Our Power Team expects per-capita electricity consumption in Vietnam to more than double by 2026. To meet
this demand, the government is in the midst of a plan to add nearly 24,000MW of new capacity by 2020.
Source: Fitch Solutions, International Energy Agency, national sources
Nevertheless, the growth outlook for Vietnam's power sector is strong, with a broad range of projects in the pipeline that are set
to add to capacity and generation over the next decade. The government is keen to attract more foreign investment to the power
sector in order to ensure the country can keep up with rising consumption demands.
TABLE: ELECTRICITY RISKS (CONTINUED)

Cost
USD0.06 per kilowatt hour (KWh) • The current low electricity prices of just 0.06USD per kWh offer an attractive environment for investors in indus-
tries that consume a lot of electricity, such as the technology and garment manufacturing sectors.
• This figure, which is on par with Mongolia and Indonesia, increases Vietnam's competitiveness as it is one of the
lowest in the region. We caution that with increasing liberalisation in the energy sector, costs for end-users may
rise over time in order to be more reflective of the generation and distribution costs as the country pursues its
infrastructure development plans.
Other Risks
• Coal and natural gas are sourced more readily at home, but supply is often restricted due to export demand.
Renewable energy sources are limited in Vietnam.
• According to government plans, by 2030 coal will contribute 56% of Vietnam's power mix, up from 36% in 2017;
however, environmental concerns and public opposition may disrupt the development of coal-fired power
plants.
• The rapid development of new coal-fired power plants could leave Vietnam vulnerable to supply issues. Official
forecasts put coal consumption at 100mn tonnes annually by 2030. In July 2017 the government tasked the
Ministry of Industry and Trade with developing a roadmap for the coal mining sector to ensure sustainable sup-
plies and a more competitive marketplace.
• Hydropower will remain a key component of Vietnam's electricity mix, but future growth will be hampered by a
lack of additional sites and growing environmental concerns among provincial governments. This was reflected
in the cancellation of nine planned hydropower projects in the province of Thua Thien Hue by the provincial
People's Committee in late 2012.
Planned Projects
• The outlook for the electricity sector in Vietnam is broadly positive. The project pipeline is expansive as the
country works towards ambitious capacity targets to ensure generation can keep up with growing consumption
demands. The investment environment is gradually improving and the use of public-private partnerships (PPPs)
is expanding as Vietnam attempts to attract more private investment (and overseas expertise) to the power mar-
ket. Coal-fired power, supported by generation national reserves, is attracting the largest share of investment,
though we are also seeing developments in natural gas and hydropower. The nascent renewables sector is also
expected to expand rapidly, albeit from a very low base.
• In January 2017, ExxonMobil and PetroVietnam agreed to jointly develop a USD10bn natural gas project featur-
ing a pipeline, treatment plant and 3,000MW power plant. The project would increase Vietnam's natural gas-
generating capacity, which we expect will maintain its share of the power generation mix over the long term.
• Vietnam's small renewable energy sector is gradually attracting more international investment. Ireland-based
Mainstream Renewable Power and US-based GE Renewable Energy are partnering with Vietnam-based operator
Phu Cuong Group in a USD2bn joint venture (JV) deal to build and operate the 800MW Phu Cuong Wind Farm
in Sóc Trăng. The first phase of the project will have capacity of about 200MW and construction is expected to
begin by early 2019.
• Construction is expected to start on the USD2.8bn Nghi Son 2 coal-fired power plant in Thanh Hoa by 2018. The
new power plant is being developed by a consortium led by Japan-based Marubeni Corporation. Once complete,
the plant will have capacity of 1,200MW via two 600MW units.
• Progressively lower transmission and distribution (T&D) losses are forecast as several major grid projects have
been completed. Projects such as the 500kV Pleiku-My Phuoc – Cau Bong will utilise higher 220/500kV lines
and will be reinforced by new substations and transformers that are also in the works. The Master Plan VII also
outlines the improvement and installation of transmission lines with neighbouring countries to meet electricity
import needs.
• We believe that a loan approved by the Asian Development Bank (ADB) could prove crucial in ensuring that Viet-
nam's power plant projects are able to effectively address the country's electricity shortages. The ADB announced
in December 2011 that it would provide Vietnam with up to USD730mn to upgrade its electricity transmission
network until June 2020. This decision highlights the importance of multilateral financial institutions in channelling
financing and technical expertise into critical sectors in emerging economies. The ADB multi-tranche loan facility
would be used to finance the construction of more than 860km of power lines and to provide funds for training
and other activities to Vietnam's state-owned National Power Transmission Corporation (NPT).
Source: Fitch Solutions, International Energy Agency, national sources
While some projects have been subject to delays, many are gaining traction and will boost installed capacity substantially over the
coming years. Some of the fastest growth will be seen in the coal-fired power segment, where the availability of coal reserves and the
comparatively low cost of developing new power plants will see the sector make rapid gains. This will be a boon for energy-intensive
businesses operating in the country over the medium-to-long term as power plants slowly come online.
Low Tariffs Do Not Offset Reliability Risks
East & South East Asia – Electricity Costs (USD per KWh)
Source: World Bank 'Doing Business'
Fuel: Fuel costs in Vietnam are competitive considering the country's natural resource wealth. However, its relatively small refining capac-
ity means that it imports refined products. This increases costs and exposes supply chains to exogenous production and price shocks.
Low Fuel Costs Benefit Investors
East & South East Asia – Cost Of Fuel (USD per Diesel Litre)
Source: National Sources, Fitch Solutions
Tension with China over territory in the South China Sea curtails exploration activities in the disputed areas, though we are seeing
considerable growth in the downstream oil sector. Vietnam's refining capacity is set to more than triple over the coming years, with
two new refineries set to begin commercial operations. However, Vietnam will continue to rely on fuel imports as rampant growth
in consumption exceeds domestic supply, even after adding new capacity.
TABLE: FUEL RISKS

Source
Considerable oil reserves, limited refin- • Vietnam has historically been self-sufficient in crude oil and natural gas.
ing capacity • Vietnam will become increasingly dependent on energy imports in the years ahead, as domestic hydrocarbons produc-
tion falls and low oil prices drag on investment in new projects. This will see Vietnam's historical self-sufficiencies in crude
oil and natural gas come to an end by 2019 and 2020 respectively.
• The country's refining capacity is small but growing. At present, nearly all of the country's refining capacity is provided
by PetroVietnam's 148,000b/d capacity Dung Quat refinery. The much smaller Ba Ria-Vung Tau refinery has additional
processing capacity of 2,000b/d.
• Vietnam's refining capacity is set to more than triple over the next five years, from 150,000b/d in 2017 to around
510,700b/d by 2020, with two new refineries – the Nghi Son (200,000b/d) and Vung Ro (160,720b/d) – expected to com-
mence operation in 2018.
Availability
Refined petroleum net exports: • Vietnam is set to become a net importer of crude oil and natural gas from 2019 and 2018 respectively, as a result of fall-
-243,300 b/d ing production and rising demand.
• While the country's refining capacity is growing and will increase threefold in the next five years, this will not be sufficient
to alleviate Vietnam's large deficit in refined fuels.
• Consequently, reliance on fuel imports will pose a risk to supply chains.
Reliability
• Vietnam's refining capacity is expanding and expected to triple with the opening of new refineries (Vung Ro and Nghi
Son).
• The start of Nghi Son and Vung Ro will be accompanied by a comparable upsurge in Vietnam's refined fuels produc-
tion from 2018 and beyond, with annual growth averaging 12.0% over the next decade (though the bulk of the growth
concentrated within the 2018-2020 period).
• The largest production gains will be made in the automotive fuels segment, as the production slates at domestic refiner-
ies will be largely geared towards producing gasoline and diesel. This will allow Vietnam to partially offset rising demand
for these fuels in the rapidly expanding domestic transportation sector where rising car ownership and increasing road
mileage among drivers will exacerbate demand for gasoline and diesel.
• Combined gasoline and diesel output is set to nearly double over the next 10 years, from about 122,000b/d in 2017 to
318,000b/d by 2026, equivalent to almost 75% of the total fuels mix.
• LPG output will also increase, from 18,000b/d in 2017 to 52,000b/d by the end of the decade, in line with growing de-
mand for the fuel in the residential, power, agriculture and petrochemicals sectors.
• However, Vietnam will increasingly have to rely on fuel imports to cope with rising demand, creating a greater risk of
disruption to supply.
Cost
USD0.61 per diesel litre • Fuel costs USD0.61 per diesel litre in Vietnam, which is competitive by regional standards, the fourth lowest in East and
South East Asia, on par with the Philippines.
• The weakness in the oil price will benefit the country as it starts to import fuel, which will lower costs for incoming busi-
nesses.
Other Risks
• Currently, nearly all of Vietnam's proven crude oil and natural gas reserves lie offshore, mostly in the Cuu Long and the
Nam Con Son basins off the southern coast.
• Petroleum basins that straddle the South China Sea are believed to hold sizable oil and gas reserves. However, explora-
tion and development of assets in the area remain stunted due to an ongoing maritime dispute with regional claimants,
led by China. Latest estimates by the EIA place proven and probable oil and gas in the South China Sea at about 11bn bbl
for oil and 5.7tcm for natural gas.Cancellations and delays to proposed LNG import terminals may lead to a gas shortage,
leading the country to turn to other energy sources.
• Due the postponement of the Thi Vai terminal, Vietnam's first LNG imports will only start in 2020, which is when the Son
My terminal is expected to come online. Ample supplies in the global LNG market suggests that Vietnam will not be short
of procurement options, including portfolios of major firms such as Shell, Gazprom and even Iran.
Planned Projects
• Kuwait Petroleum's 200,000b/d Nghi Son oil refinery is set to begin commercial operations in 2018, and exert further
pressure on Vietnam's crude exports, which are already in decline. The refinery received its first crude cargo from Kuwait
in August 2017.
• The Son My LNG import terminal is set to come online in 2020 and allow for Vietnam's first LNG imports. However, the
outlook is less clear on the smaller Thi Vai (1.3bcm) terminal. In particular, anticipated gas output from Blue Whale has
significantly reduced Vietnam's need for additional regasification capacity.
Source: Fitch Solutions, Global Petrol Prices
Water: Water resources in Vietnam are primarily reserved for agricultural use, which limits the supply for other industries. Vietnam
has 2,360 rivers which should, in theory, provide rich water supply; however, due to the lack of physical infrastructure and financial
capacity there is a low utilisation rate. In addition, an uneven distribution of rainfall results in water shortages in some parts of the
country, thereby inhibiting the security of supply.
Water Quality And Availability Risks Set To Mount
East & South East Asia – Renewable Internal Freshwater Resources (cubic metres per capita)
Source: World Bank
Moreover, mass industrialisation has increased pollution in the country's waters, and waste water management infrastructure is
inadequate to deal with it. With rising urbanisation trends across the country, we expect to see robust demand for electricity and
TABLE: WATER RISKS

Source
Renewable internal freshwater • In regional terms, per capita freshwater resources are less than the average (9,380cu m per capita for East and South East
resources per capita: 3,961cu m Asia), with Vietnam's internal renewable resources at 3,961cu m per year.
• Despite the presence of the Mekong River, Vietnam faces severe droughts periodically, with the drought in early 2010
reportedly one of the country's worst in 100 years. We believe that these droughts have the potential to increase in severity
over the long term.
• Rapid industrialisation throughout Vietnam is polluting the country's water supply at an increasing rate and reducing the
availability of potable water.
• On the upside, various multilateral financial institutions are keen to finance water utility projects, with the ADB having agreed
to provide USD1bn in funds to improve the country's water supply system between 2011 and 2020.
Availability
97.6% of the population has access • 97.6% of the population have access to an improved water source. However, most Vietnamese water is received from public
to improved water sources taps in villages from where water has to be carried.
• There are differences in access to improved water sources between urban and rural areas (where 70% of the Vietnamese
live). In urban areas, 99.1% of residents have access to water, compared with 96.9% in rural areas. This has cost implications
for businesses as it increases the difficulty in providing a potable water source for employees in rural areas.
• In addition, it is estimated that 80% of common diseases are waterborne, which increases health risks for the labour force
and consequently the time spent on sick leave.
• Vietnam has significant potential for large-scale water treatment facilities. The effects of climate change and urbanisation
in Vietnam will drive investment in water infrastructure, especially as cities cope with growing numbers of people living in
flood-prone areas or in buildings without proper connections to water supply and treatment facilities (see 'Water Infrastruc-
ture Demand Offers Growing Project Opportunities', October 11 2016). Many upcoming water utility projects are being
planned under PPP frameworks, which will generate opportunities for foreign enterprises that have experience in water
treatment technologies.
Source: Fitch Solutions, CIA World Factbook
water. The growing populations of many cities are placing strain on existing water supply and treatment facilities, which has also
prompted increased investment in the sector.
Rising Broadband Penetration Bodes

Well For E-Commerce And ICT Development
East & South East Asia - Broadband Subscribers (per 100 people)
Telecommunications: In previous years, internet service in Vietnam has been below average for the region, which reduced ac-
cessibility for supply chains and limited the type of industries that could locate in the country to low-tech and primary production
sectors. However, the tide is turning as Vietnam looks to improve high-speed connectivity, which will be attractive to investors
looking to operate in higher value-add sectors. In Q416, Vietnam's government finally licensed 4G services and the first services
were launched within weeks.
TABLE: WATER RISKS (CONTINUED)

Reliability
• Inadequate management of resources increases competition for access to supply. Agriculture is the largest burden on water
resources in Vietnam, taking up 95% of total water withdrawals.
• Rice is the primary crop and takes up a majority of the total irrigated area, with fisheries and aquaculture also contributing
to demand in this arena. Irrigation schemes facilitate the distribution of water, with irrigation capacity developed such that
water scarcity is not a major concern for the agriculture sector.
• However, this has effects for other sectors requiring water, as the infrastructure is not developed to the same extent, thereby
driving up the risks of supply and disruption to operations. This will be a major cause for concern to businesses in the indus-
trial sector, which uses just 3.8% of freshwater withdrawals.
Cost
Approximately USD0.30 per cu m for • Urban water tariffs in Vietnam are set by the Provincial Water Supply Company (WSC), subject to review every year.
industrial users
Planned Projects
• Water supply and flood mitigation remain pertinent concerns in quickly urbanising Vietnam, especially as many parts of Ho
Chi Minh City lie close to sea level and are flood-prone. As these issues become more apparent in the coming decade, we
expect that investment and construction activity in the water infrastructure segment will accelerate over the medium term.
Source: Fitch Solutions, CIA World Factbook
TABLE: TELECOMMUNICATIONS RISKS

Source
Vietnam Posts and Telecommunications (VNPT), VinaPhone, • Vietnam Posts and Telecommunications (VNPT) is the leading telecoms operator, dominating the
MobiPhone, Viettel, Vietnamobile, Gmobile fixed-line sector. VinaPhone and MobiPhone have a strong presence in the mobile broadband mar-
ket and Viettel is the overall mobile market leader.
Availability
12.0 fixed broadband subscribers per 100 people69.1 • The broadband rate has grown in the past few years, and together with and uptake in 3G services,
fix3G/4G subscribers per 100 people (Based on our 2016 internet penetration is rising.
estimates) • Nonetheless, the country still lags behind regionally in terms of both broadband and 3G subscrip-
tions, in 12th and 15th place respectively.
• Internet user rates are high in major urban areas such as Ho Chi Minh City, Hanoi, Da Nang and
Haiphong. The Vietnamese mobile market is highly saturated, with about 142% penetration, and
3G adoption has been on the rise as operators have countered criticisms of inefficiencies and
wasted investments by expanding networks and innovating at the service level. Improvements have
been sufficient to persuade the government to finally award 4G concessions; initial services were
launched before the end of 2016.
• The number of fixed broadband subscribers grew by 19.2% from 8.032mn in Q116 to 9.571mn in
Q117. There were 1.65mn xDSL subscriptions at the end of March 2017, 620,692 cable internet
subscriptions and 7.11mn fibre-to-the-home (FTTH) subscriptions.
• With the limited availability of traditional fixed-line infrastructure, and with around 70% of Vietnam's
population living in rural areas, a number of Vietnamese telecoms operators – including mobile
operators – have looked to fixed-wireless access as a way of providing fixed-line connectivity. Fixed-
wireless services can be launched on existing mobile networks and, therefore, incur few start-up
costs. They are widely regarded as a cost-effective way of providing telecoms services to low-income
households.
Reliability
• Internet quality is competitive by East and South East Asian standards, with faster download speeds
than in Cambodia and Laos. Therefore, for the limited few that have access to high-speed internet,
the quality is relatively good.
• This also assists businesses in communications with other businesses, which are most likely to have
superior connections, and also to engage directly with both domestic and international consumers.
• Business-to-consumer internet use is growing in Vietnam, as e-commerce has expanded beyond
established frameworks.
Cost
Fixed broadband internet tariffs USD2.60 per month • Increasing competition in broadband provision has reduced the cost of subscriptions, reducing
operating costs for businesses and increasing affordability for the general public.
• Despite robust adoption of FTTH, affordability and coverage remain key concerns in this emerg-
ing market. Demand for traditional fixed broadband services is outweighed by demand for mobile
alternatives due to a lower cost structure.
• Price campaigns linked to LTE/4G rollouts have the potential to further lower mobile connectivity
costs.
Other Risks
• One of the major risks to all internet users in Vietnam is the level of government interference in
telecommunications.
• The internet is still heavily monitored by the government, restricting the content firms are able to
display. The government monitors conversations on mobile devices and tracks the calls of citizens
who are targeted as 'activists' or 'reactionaries'.
• As a result, some have had their telephone or internet service cut off. This presents risks for business
continuity as e-commerce is set to grow in the medium term.
Planned Projects
• In Q416, Vietnam's government finally licensed 4G services, which bodes well for e-commerce and
business communications. VNPT-VinaPhone and Viettel have indicated that services will be priced
lower than 3G offerings which will boost uptake among consumers. Businesses are also expected to
benefit from growing smart technology in Vietnam as a draft plan for Ho Chi Minh City's smart city
project was approved in September 2016, aiming to develop the southern part of the metropolis
into a smart city. The plan is to be carried out from 2017 to 2020, where projects will include devel-
oping water supply and drainage as well as smart electricity meters.
• Foreign investment could reinvigorate the competitive landscape at a time when 4G launches
provide new service monetisation potential.
Source: Fitch Solutions, World Economic Forum's Global Information Technology Report
Global Macro Outlook

Inflation And Policy Risks Rising
Our growth forecast for the global economy remains unchanged at 3.4% in 2018 and 3.1% in 2019, but as we have been flagging
up in recent months, there is a growing divergence in terms of economic performance, which is leading to greater market volatility
and poses downside risks to growth. The US is posting strong growth, while the eurozone, China and many emerging markets (EMs)
continue to feel downside pressure. That said, we note that over the past few months high frequency data have started to point to
a deceleration in some of the major economies, and we have revised down our growth forecasts for several economies in Africa, as
well as emerging Europe. Our forecasts for global growth remain below consensus estimates of 3.8% (2018) and 3.6% (2019) and
are also below the IMF's recently lowered global growth forecast of 3.7% for both years.
Over the past month, we revised our forecast for US monetary policy and now forecast three 25 basis points (bps) interest rate hikes by
the US Federal Reserve (Fed) in 2019, up from our previous expectation of only two hikes. The interest rate hikes would take the US Fed
funds rate to the 3.00-3.25% range. The combination of strong growth, low unemployment, a positive output gap, rising oil prices and the
potential for a supply-side-type price shock for US consumers from rising tariffs on Chinese imports points to upside risks to inflation in
the US. As mentioned in our outlook last month, we are seeing an increased divergence in terms of global monetary policy, with the pace
of US tightening in stark contrast to a still-accommodative European Central Bank (ECB) and slightly more accommodative policy in China.
TABLE: GLOBAL ASSUMPTIONS

2017e 2018f 2019f 2020f 2021f 2022f
Real GDP Growth (%)
US 2.2 2.9 2.5 2.0 1.9 1.9
Eurozone 2.4 2.0 1.8 1.7 1.5 1.6
Japan 1.7 1.0 0.5 0.5 0.4 0.4
China 6.9 6.7 6.5 5.8 5.4 5.4
World 3.3 3.4 3.1 2.9 2.9 2.9
Consumer Inflation (ave)
US 2.1 2.3 2.3 2.1 2.1 2.1
Eurozone 1.5 1.8 1.7 1.8 1.8 1.8
Japan 0.5 1.2 1.6 1.9 2.1 2.4
China 1.6 1.9 2.0 2.0 2.2 2.3
World 2.7 3.1 3.1 2.9 2.8 2.7
Interest Rates (eop)
Fed funds rate 1.25 2.25 3.00 3.00 3.00 3.00
ECB refinancing rate 0.00 0.00 0.25 0.75 1.25 1.50
Japan overnight call rate -0.10 -0.10 -0.10 0.00 0.25 0.50
Exchange Rates (ave)
USD/EUR 1.13 1.20 1.20 1.22 1.24 1.24
JPY/USD 112.15 109.50 110.00 109.00 108.00 107.50
CNY/USD 6.76 6.62 7.10 7.00 6.90 6.75
Oil Prices (ave)
OPEC basket (USD/bbl) 52.43 72.00 79.00 82.00 86.00 88.00
Brent crude (USD/bbl) 54.75 75.00 82.00 85.00 89.00 91.00
e/f = estimate/forecast. Source: Fitch Solutions
As the global economy moves along the later stages of its business cycle, we see the potential for greater policy challenges over
the coming months, and thus the potential for policy missteps in 2019, which would result in heightened financial market volatility
and more acute risks to growth. One theme we have been outlining for several months is that of policy challenges for EMs as several
economies face a trade-off between managing financial risks without negatively impacting growth, particularly as many countries
head towards elections. However, policy trade-offs are becoming increasingly evident on a global basis. For example, a fiscal/mon-
etary policy dilemma could emerge for countries at risk from the end of quantitative easing (QE) in Europe, as countries such as
Italy are forced to focus more on fiscal consolidation in order to anchor bond yields as the ECB stops its bond-buying programme.
Another example is the growing trade-off that China and the US will be forced to make as trade tensions escalate. The potential for
an inflation surprise in the US could force US President Donald Trump to slow the pace of new tariffs or, alternatively, force the Fed
to hike more aggressively, particularly as Trump's recent criticisms of the Fed could raise questions about the Fed's independence.
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y

2017e 2018f 2019f 2020f
Developed States Aggregate Growth 2.3 2.4 2.1 1.8
G7 2.1 2.2 1.9 1.6
Eurozone 2.4 2.0 1.8 1.7
EU-27 2.4 2.1 1.9 1.8
Selected Developed States

Australia 2.3 2.8 2.5 2.3
Austria 3.0 2.2 1.8 1.7
Belgium 1.7 1.6 1.5 1.5
Canada 3.1 2.3 1.9 1.8
Czech Republic 4.4 3.6 3.0 2.8
Denmark 2.2 2.0 2.0 1.7
Finland 2.6 2.5 2.0 1.8
France 2.2 1.9 1.8 1.7
Germany 2.2 1.8 1.7 1.7
Hong Kong 3.8 3.6 3.0 3.0
Ireland 7.2 6.3 3.4 3.1
Italy 1.5 1.2 1.1 1.0
Japan 1.7 1.0 0.5 0.5
Netherlands 2.9 2.4 1.7 1.5
Norway 1.8 2.2 2.3 2.0
Portugal 2.7 2.1 1.9 1.3
Singapore 3.6 3.3 2.8 3.1
South Korea 3.1 2.7 2.7 3.1
Spain 3.1 2.7 2.5 2.3
Sweden 2.4 2.8 2.2 1.9
Switzerland 1.1 2.0 1.8 1.7
Taiwan 2.9 2.9 2.6 3.2
UK 1.8 1.4 1.5 1.6
US 2.2 2.9 2.5 2.0
e/f = estimate/forecast. Source: Fitch Solutions
On the Chinese side, policymakers are trying to balance the difficult task of offsetting the slowdown in the external sector without
resorting to a sharp increase in spending and debt creation.
Developed Markets
We expect growth in developed markets to peak in 2018 at 2.4% and to gradually decelerate thereafter, coming in at 2.1% and
1.8% in 2019 and 2020 respectively. The deceleration in the pace of economic expansion will largely reflect weakening growth mo-
mentum in the US, the UK and the eurozone, due to various factors. These include recently-introduced trade measures which will
weigh on economic activity going into 2019, rising bond yields and uncertainty over the Brexit outcome and the post-Brexit EU-UK
relationship. Leading indicators support our view that growth may have started to lose steam. The eurozone composite purchasing
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % y-o-y

2017e 2018f 2019f 2020f
Emerging Markets Aggregate Growth 4.8 4.9 4.7 4.6
Latin America 1.8 1.9 2.8 2.9

Argentina 2.9 -1.3 2.0 3.6
Brazil 1.0 1.6 2.5 2.3
Mexico 2.0 2.3 2.7 2.8
Middle East 0.7 2.2 1.7 2.7

Saudi Arabia -0.9 1.9 3.4 2.2
UAE 0.8 3.2 3.6 3.6
Egypt 4.2 5.4 5.3 5.5
Sub-Saharan Africa 2.7 2.9 3.8 4.2

South Africa 1.3 0.7 1.7 2.1
Nigeria 0.9 2.4 3.3 3.9
Emerging Asia 6.6 6.5 6.3 5.8

China 6.9 6.7 6.5 5.8
India* 6.5 7.3 7.1 6.6
Indonesia 5.1 5.3 5.4 5.6
Malaysia 5.9 5.1 4.5 4.4
Philippines 6.7 6.3 6.3 6.3
Thailand 3.9 4.5 3.9 3.7
Emerging Europe 3.9 3.1 1.8 2.6

Russia 1.6 1.9 1.7 1.5
Turkey 7.4 3.6 -2.0 3.5
Hungary 4.5 4.4 3.4 2.7
Romania 7.0 4.2 3.9 3.5
Poland 4.7 4.0 3.2 2.9
e/f = estimate/forecast; *Fiscal years ending March 31 (2018 = 2018/19). Source: Fitch Solutions
managers' index (PMI) reading declined to 54.1 in September, down from 54.5 in August, largely reflecting a poor performance of
the manufacturing sector, which recorded the slowest rise in output since May 2016. In the same month, the weakest expansion of
services sector output since March 2017 pushed the US composite PMI down to 53.4, from 54.7 the month before.
As we highlighted last month, monetary policy across developed economies is diverging and this decoupling will remain a significant
trend into 2019. We have revised up our end-2019 Fed funds forecast to 3.00-3.25%, from 2.75-3.00% previously, while leaving our
interest rate forecasts for the eurozone and Japan unchanged. Meanwhile, in the eurozone, the end of the ECB's bond-buying pro-
gramme will leave high-indebted peripheral economies vulnerable to a gradual widening of yields. Italy, in particular, will be highly
exposed to yield fluctuations due to its large stockpile of public debt, currently at 130% of GDP, and the large amount of bonds in the
banking sector's portfolio, approximately 17% of total assets. Against this backdrop, Brexit headwinds seem to be gradually subsid-
ing. After an acrimonious UK meeting with EU leaders in Salzburg in September, policymakers have made more positive comments
on the UK reaching a Brexit deal in recent weeks. However, an impromptu meeting between the two parties on October 14 aimed
at tackling the major outstanding issues ended in a stalemate, reversing some of the earlier optimism. We believe the latest devel-
opments reinforce our view that the UK government faces two stark choices with regard to Brexit: on the one hand, it capitulates
and agrees to a very soft 'Brexit in name only', while on the other hand the prospects of a 'no-deal' Brexit are clearly more elevated.
There is therefore clearly still some way to go in the talks, with a marked dampening in some of the recent optimism over the UK
agreeing to the terms of its EU exit at either an EU Council Summit later in October, or a potential emergency summit in November.
Emerging Markets
Developments in EMs have been mixed over the past month and while the outlook has weakened overall, we maintain our 2018
real GDP growth forecast at 4.9%, while clipping 2019's forecast by a modest 0.1 percentage points (pp) to 4.7%. Notable downward
revisions to our growth forecasts since last month have occurred in Turkey and South Africa. In Turkey, the economy is slowing
more rapidly than previously anticipated given the collapse in credit growth in the aftermath of the currency devaluation and sub-
sequent interest rate hikes. We therefore see lower Turkish growth in 2018 and forecast a recession in 2019, revising our forecasts
lower to 3.6% and -2.0% respectively, from 4.2% and 3.0% in the prior month. In South Africa, we forecast lower growth in 2018,
predominantly due to declining output from the agricultural sector coupled with rising inflation. We have accordingly revised down
our growth forecasts from 1.3% to 0.7% in 2018 and from 2.1% to 1.7% in 2019.
Pressures are returning to EMs following a brief period of relief in September, driven predominantly by resurgent US yields and US
dollar strength following the US Federal Open Market Committee meeting in September as well as Fed Chairman Jay Powell's hawk-
ish comments in early October. At the same time, further headwinds come in the form of higher oil prices since mid-September
– primarily for oil importers – and a re-intensification in US-China trade tensions. With US financial markets under increased pres-
sure as well, we expect global volatility to remain in place over the short term, which will weigh on investor appetite for EM assets.
Given these pressures, the People's Bank of China (PBOC) cut its reserve requirement ratio (RRR) for a fourth time this year on Octo-
ber 1, bringing it lower by 100bps, in response to declining business sentiment and in an attempt to cushion the Chinese economy
from mounting risks from tighter monetary policy engineered as part of the deleveraging cycle, as well as the escalating trade war
with the US. The October RRR cut followed a similar reduction by 50bps in June, as authorities became increasingly concerned with
growth. Aside from monetary stimulus, the Chinese government has become more proactive in its use of fiscal levers in a bid to
support the economy by front-loading some already-planned expenditure and implementing more cuts to import tariffs, income
taxes and increasing export rebates.
Index Tables
Short-Term Political Trend Regional Rank Global Rank
Singapore 94.8 = 1 2
Brunei Darussalam 90.8 = 2 6
Japan 86.0 + 3 10
New Zealand 82.7 = 4 18
Vietnam 82.5 = 5 19
Hong Kong 81.0 = 6 22
Laos 80.4 = 7 23
China 80.2 = 8 24
Macau 79.6 = 9 26
Taiwan 76.9 = 10 35
India 75.0 = 11 40
Australia 74.0 - 12 45
Malaysia 72.5 = 13 52
Kiribati 72.1 = 14 54
South Korea 72.1 = 14 54
Indonesia 70.6 = 16 65
Thailand 70.2 = 17 68
North Korea 66.9 = 18 79
Sri Lanka 65.4 - 19 86
Mongolia 64.6 = 20 89
Philippines 63.1 = 21 96
Cambodia 62.1 = 22 101
Bhutan 60.4 = 23 108
Bangladesh 58.1 = 24 120
Myanmar 57.9 = 25 121
Timor-Leste 53.8 = 26 136
Fiji 50.8 = 27 146
Pakistan 48.3 = 28 156
Papua New Guinea 46.5 = 29 161
Nepal 44.0 = 30 170
Afghanistan 35.8 = 31 177
Regional ave 68.4/Global ave 63.1/Emerging markets ave 59.4
Long-Term Political Trend Regional Rank Global Rank

Australia 88.4 = 1 10
Japan 87.3 = 2 14
New Zealand 85.8 = 3 16
Taiwan 75.1 = 6 39
Kiribati 74.5 = 7 42
India 73.4 = 8 45
Hong Kong 71.3 = 9 54
Mongolia 69.9 = 10 63
China 66.4 = 11 75
Malaysia 65.2 = 12 78
Brunei Darussalam 65.1 = 13 79
Macau 64.9 = 14 80
Sri Lanka 63.6 = 16 86
Bhutan 59.9 = 19 105
Vietnam 59.7 = 20 106
Thailand 58.9 = 21 107
Cambodia 57.4 = 22 114
Laos 56.5 = 23 117
North Korea 54.6 = 24 125
Pakistan 53.3 = 25 134
Nepal 49.5 = 27 145
Timor-Leste 48.3 = 28 149
Fiji 47.9 = 29 150
Myanmar 44.3 = 30 162
Short-Term Economic Trend Regional Rank Global Rank

South Korea 84.0 - 1 1
Hong Kong 80.2 = 2 5
Taiwan 79.4 - 3 7
China 77.3 = 4 10
Malaysia 72.3 - 6 23
Thailand 72.3 = 6 23
New Zealand 72.1 + 8 26
Australia 71.7 + 9 28
Bangladesh 70.0 - 10 35
India 69.8 = 11 36
Vietnam 67.5 - 14 44
Macau 66.9 = 15 46
Japan 64.8 + 16 54
Nepal 56.5 = 17 70
Fiji 56.3 = 18 71
Sri Lanka 55.2 + 19 77
Timor-Leste 52.1 - 21 90
Brunei Darussalam 51.9 + 22 92
Myanmar 50.2 - 23 99
Cambodia 49.8 + 24 100
Kiribati 49.4 = 25 101
Pakistan 46.3 - 26 113
Mongolia 45.0 = 27 121
Bhutan 42.1 = 28 140
Laos 34.6 + 30 171
North Korea 31.3 = 31 -
Long-Term Economic Trend Regional Rank Global Rank

New Zealand 77.2 - 2 8
China 77.1 = 3 9
Taiwan 77.1 - 3 9
Hong Kong 76.5 = 5 13
Australia 74.3 = 6 19
Malaysia 73.0 = 7 24
Philippines 71.6 - 9 30
Thailand 70.1 = 10 31
Japan 69.2 + 11 34
Vietnam 66.7 = 13 40
India 62.6 = 15 56
Fiji 58.8 = 16 67
Macau 56.3 = 17 73
Sri Lanka 55.6 = 18 77
Brunei Darussalam 53.5 + 19 85
Pakistan 52.0 - 20 94
Nepal 51.0 = 21 102
Myanmar 50.6 - 22 107
Cambodia 47.8 = 24 119
Timor-Leste 42.9 - 25 142
Kiribati 41.2 = 26 148
Laos 40.7 - 27 154
Mongolia 39.7 = 28 156
Bhutan 35.3 = 30 176
North Korea 30.1 = 31 -
TABLE: VIETNAM – MACROECONOMIC DATA AND FORECASTS
2017e 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f 2027f
Nominal GDP, USDbn 220.5 240.3 261.9 287.5 317.5 351.2 388.4 429.4 474.8 525.1 580.7
Nominal GDP, EURbn 195.1 200.2 219.1 236.6 257.1 283.2 310.7 343.5 379.9 420.1 464.6
GDP per capita, USD 2,307 2,490 2,687 2,922 3,197 3,505 3,842 4,212 4,620 5,071 5,568
GDP per capita, EUR 2,042 2,074 2,249 2,405 2,589 2,826 3,074 3,369 3,696 4,056 4,455
fitchsolutions.com
Real GDP growth, % y-o-y 6.8 6.9 6.5 6.5 6.5 6.5 6.5 6.5 6.6 6.6 6.6
Private final consumption, % of GDP 68.0 68.1 68.3 68.5 68.7 68.8 69.0 69.2 69.3 69.5 69.6
Private final consumption, real growth % y-o-y 7.3 7.0 6.8 6.8 6.8 6.8 6.8 6.8 6.8 6.8 6.8
Government final consumption, % of GDP 6.5 6.5 6.4 6.4 6.4 6.3 6.3 6.2 6.2 6.2 6.1
Government final consumption, real growth % y-o-y 7.3 6.2 6.2 6.1 5.8 5.8 5.8 5.8 5.8 5.8 5.8
Fixed capital formation, % of GDP 23.8 24.3 24.7 24.8 24.9 25.0 25.1 25.2 25.3 25.4 25.5
Fixed capital formation, real growth % y-o-y 10.2 9.3 8.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0
Population, mn 95.54 96.49 97.43 98.36 99.28 100.19 101.08 101.94 102.76 103.54 104.28
Consumer price inflation, % y-o-y, ave 3.5 3.7 4.8 4.8 4.8 4.7 4.7 4.6 4.6 4.6 4.6
Lending rate, %, ave 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0
Central bank policy rate, % eop 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25
Exchange rate VND/USD, ave 22,715.29 23,100.00 23,650.00 24,050.00 24,300.00 24,500.00 24,700.00 24,900.00 25,100.00 25,300.00 25,500.00
Exchange rate VND/EUR, ave 25,668.13 27,725.78 28,261.75 29,220.75 30,010.50 30,380.00 30,875.00 31,125.00 31,375.00 31,625.00 31,875.00
Budget balance, USDbn -12.3 -10.5 -10.9 -11.7 -12.6 -13.6 -14.6 -15.8 -17.1 -18.6 -20.1
Budget balance, % of GDP -5.6 -4.4 -4.2 -4.1 -4.0 -3.9 -3.8 -3.7 -3.6 -3.5 -3.5
Goods and services exports, USDbn 229.0 252.0 277.2 304.9 335.2 368.5 404.8 444.5 488.2 536.1 588.8
Goods and services imports, USDbn 232.8 256.4 282.2 309.9 340.2 373.4 409.6 449.1 492.5 540.2 592.4
Balance of trade in goods and services, USDbn -3.8 -4.4 -5.1 -5.0 -5.0 -4.9 -4.8 -4.6 -4.3 -4.0 -3.6
Balance of trade in goods and services, % of GDP -1.7 -1.8 -1.9 -1.8 -1.6 -1.4 -1.2 -1.1 -0.9 -0.8 -0.6
Current account balance, USDbn 4.7 5.0 5.3 6.3 7.5 8.8 10.3 12.0 13.9 16.1 18.5
Current account balance, % of GDP 2.1 2.1 2.0 2.2 2.4 2.5 2.7 2.8 2.9 3.1 3.2
Foreign reserves ex gold, USDbn 49.1 68.5 88.2 109.4 132.2 156.8 183.4 212.2 243.4 277.2 314.0
Import cover, months 2.9 3.6 4.2 4.8 5.2 5.6 6.0 6.3 6.6 6.8 7.0
e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions
Page 65
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Vietnam Country Risk Report Q1 2019

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IMPORTANT NOTICE:

Country Risk Summary................................................................................................................................................................. 6

Currency Forecast ............................................................................................................................................................................................22

Global Macro Outlook..................................................................................................................................................................59

Country Risk Summary

Economic Risk Index

Political Risk Index

Economic – SWOT Analysis

Political – SWOT Analysis

Export-Oriented Manufacturing To Continue Powering Ahead

Source: WTCC, Fitch Solutions

Services Sector To Be Supported By Strong Tourism

GDP By Expenditure Outlook

TABLE: GDP GROWTH FORECASTS

TABLE: PRIVATE CONSUMPTION FORECASTS

TABLE: GOVERNMENT CONSUMPTION FORECASTS

TABLE: FIXED INVESTMENT FORECASTS

TABLE: NET EXPORTS FORECASTS

Outlook On External Position

TABLE: CURRENT ACCOUNT BALANCE FORECASTS

TABLE: MAIN EXPORT AND IMPORT PARTNERS

TABLE: MAIN EXPORTS AND IMPORTS

TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE

Source: SBV, Fitch Solutions

SBV Is Tightening Even Though Benchmark Rate Is Still Unchanged

Monetary Policy Still Too Accommodative

Source: World Bank, Fitch Solutions

Monetary Policy Framework

Source: GSO, Fitch Solutions

TABLE: MONETARY POLICY FORECASTS

Fiscal Policy And Public Debt Outlook

2019 Budget Expected To See Smaller Deficit Versus 2018's

Fiscal Improvement Partly Due To Lower Than Expected Capital Spending…

…But Strong Revenue Growth Also Helped

Privatisation Remains Below Target, But Pace Has Accelerated

Structural Fiscal Position

TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES

e/f = Fitch Solutions estimate/forecast. Source: Ministry of Finance, Fitch Solutions

TABLE: FISCAL AND PUBLIC DEBT FORECASTS

Source: Bloomberg, Fitch Solutions

Short-Term Outlook (three-to-six months)

TABLE: CURRENCY FORECAST

External Surplus To Continue Providing Support

Long-Term Outlook (six-to-24 months)

Source: Bloomberg, Fitch Solutions

TABLE: LONG-TERM MACROECONOMIC FORECASTS

e/f = Fitch Solutions estimate/forecast. Source: UN, Fitch Solutions

Another Intensive Round Of Diplomacy

TABLE: POLITICAL OVERVIEW

Source: Bloomberg, Fitch Solutions

More Energy Collaboration With Russia

Defence Ties With Indonesia To Improve

Looking To Deepen Economic Linkages With Japan And Sri Lanka

Long-Term Political Outlook

Source: Fitch Solutions

Challenges And Threats To Stability

Scenarios For Political Change

TABLE: OPERATIONAL RISK

Regional Trade Integration And Robust

Latest Economic Openness Analysis

Source: Trade Map, Fitch Solutions

e = Fitch Solutions estimate. Source: Asian Development Bank, Fitch Solutions

Source: Trade Map, Fitch Solutions

Source: Trade Map, Fitch Solutions