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FACTBOX-Key political risks to watch in Vietnam By John Ruwitch 870 words 9 January 2012 12:42 Reuters News LBA English (c) 2012 Reuters Limited HANOI, Jan 9 (Reuters) - Tension with China over competing claims to portions of the South China Sea remain the top political risk in Vietnam. India has now apparently been drawn into the long-standing dispute over territory, potentially raising the stakes. Meanwhile, authorities still face one of the world's highest inflation rates -- 18.58 percent in 2011 -- and will have to decide when to start loosening tight monetary conditions back to minimise the damage to growth. All three major ratings agencies cut Vietnam's credit ratings in 2010, highlighting economic risks and underscoring the problems in the southeast Asian country's economy, once a favoured frontier investment destination. RATINGS: (Unchanged from December unless stated) S&P: BBMOODY'S: B1 FITCH: B+ The cost of insuring against default on 5-year sovereign debt started 2012 at around 420 basis points, up 120 points from the start of 2011. Following is a summary of key risks to watch in Vietnam: SOUTH CHINA SEA FRACAS In the South China Sea, the risk of unintentional escalation and even hostilities has been elevated since Vietnam and China exchanged fresh accusations of sovereignty violations at one another in late May, although the issue has come off the boil. In late December, China's Vice President Xi Jinping, widely expected to take over as top leader from late 2012, called for better relations with Vietnam, saying the two countries should properly handle their differences and do more to build trust.

In mid-October, the two countries signed an agreement aimed at containing the dispute, though later in the month Hanoi and Manila agreed to expand non-military cooperation in the South China Sea. Neither Hanoi nor Beijing has an interest in a naval clash about the sea, which is home to important fisheries and potentially deposits of oil and gas, and the rhetoric has been toned down, but the issue is complicating relations. India has also been drawn into the fray, raising the stakes, with New Delhi reporting in early September that a naval ship sailing between two Vietnamese ports was told by an unidentified caller it was entering Chinese waters. Later in the month, a joint Vietnam-India energy project brought verbal condemnation from Beijing. The government's challenge is to keep its most important but perhaps most fraught diplomatic relationship on an even keel while being seen as sensitive to pressure from a population that is highly suspicious of China. What to watch: -- China's actions in the South China Sea, and moves by other claimant countries: Brunei, Malaysia, the Philippines and Taiwan. -- Involvement of the United States. China wants the United States to stay out of the dispute, and was unhappy that President Obama raised the issue during an Asia-Pacific summit in November. Soon after that, China said it would conduct naval drills in the western Pacific. POLICY, INFLATION AND PUBLIC RESPONSE Vietnam's economic policymaking, far from transparent, is a big concern for economists and investors. After letting prices soar with little action other than anti-inflation rhetoric, and allowing the dong to languish far outside its official trading band for months, the authorities started to clamp down last February by devaluing the currency. A cycle of policy rate hikes followed, with the State Bank of Vietnam, the central bank, lifting key rates several hundred basis points. The SBV also implemented a range of new administrative measures, backed by fines and penalties, to stop the use of the dollar and force lenders to follow rules regarding lending and deposit rates. Meanwhile, the government pledged tighter management of fiscal policy. The effect of the policies has been felt, although economists say inflation will continue to be a problem for months. In late July, Prime Minister Nguyen Tan Dung was elected to a second five-year term, as had been widely expected, and economists have urged him to stay the course on the macrostabilisation strategy. In recent months, consensus among policymakers coalesced around the need for structural changes to the economy. Namely, the authorities have identified the need for reforms in the

banking sector, state-owned enterprises and public spending. Critics worry, however, that converting these plans into action could prove difficult, given the entrenched interests in the status quo. What to watch: -- Growth. Vietnam's finance minister said in November he saw GDP growth next year at 6 to 6.5 percent, with annual inflation below 10 percent. Growth slowed to 5.9 percent in 2011 from 6.78 percent in 2010, government figures showed. -- Follow-through on the raft of measures to bring down inflation and stabilise the economy. -- The gap between black market dollar/dong rates and interbank rates, which are a key gauge of pressure on the currency. After a crackdown on the black market and the imposition of a cap on dollar deposit rates, the gap has been largely eliminated. -- Steps taken by the authorities to cut the trade deficit. -- Measures taken by the central bank to restructure ailing domestic banks. This process is expected to start in the second quarter of 2012. (Editing by Daniel Magnowski) VIETNAM-RISKS (FACTBOX) 2. Vietnam: Country risk summary English (C) 2012 The Economist Intelligence Unit Ltd. Vietnam: risk assessment February 2012 Sovereign risk Stable. Although the budget deficit will widen in 2012, reasonably healthy nominal economic growth will ensure that public debt remains essentially steady as a proportion of GDP. Moreover, much of the government's borrowing has been provided on a concessional basis. Currency risk Stable. The dong is oscillating between periods of stability and weakness. The exchange rate will remain under downward pressure until there are clear signs inflation is being brought under control. Banking sector risk Stable. The rapid pace of credit expansion in the past few years has raised concerns over the potential for a sharp increase in non-performing loans. There are also worries about the accuracy of official data on the subject. Political risk

The Communist Party of Vietnam exerts a tight grip on power, ensuring a high degree of political stability. Economic structure risk Vietnam's dependence on imports of intermediate and capital goods has contributed to the large trade deficits that have been recorded in recent years. Transfers from overseas workers will continue to support the current account. EIU ViewsWire 15 Feb 2012 (T14:05), Part 26 of 36