"Trong will abstain from substantial political reforms, but Dung’s departure is unlikely to have direct, negative implications for investors."
New leadership, same direction
On 28 January 2016 the Communist Party in Vietnam (CPV) concluded its 12th National Congress. Members of the National Congress, which is convened every five years, elected the new 16-member politburo (the Party’s ruling council) and set the broad policy direction for the period until 2020. Contrary to many observers’ predictions, Nguyen Tan Dung, the reformist prime minister who had been in office since 2006, failed in his bid to become party general secretary. The politburo instead reconfirmed Nguyen Phu Trong, who has held the role since 2011.
Dung had stood out during his two terms in office as an investor-friendly and charismatic leader. While the politburo’s decision effectively marks the end of Dung’s political career, it is not a reversal of Vietnam’s pro-western, pro-business course of recent years. Instead, the move appears to be aimed at reinforcing the Party’s doctrine of collective leadership. With few exceptions, top government roles are usually held by incumbents with a limited personal profile, often unheard of outside Vietnam. Dung might be replaced as prime minister by Nguyen Xuan Phuc, a long-standing party official with a negligible international profile.
During his tenure, Dung implemented economic and trade liberalisation. Vietnam experienced high economic growth and record levels of foreign direct investment. However, the collapse of state-owned shipping company Vinashin, and record high levels of non-performing loans held by under-regulated state-owned banks, tarnished his record. Dung was accused of blaming failures on the Party’s collective leadership while taking personal credit for successes.
Dung’s leadership style was criticised by the politburo and most likely contributed to his early retirement. He was also seen as not assertive enough towards China. President Xi Jinping’s visit to Hanoi and 20-minute address to the National Assembly in November 2015, for example, were not well received by Vietnamese nationalists amid the ongoing territorial dispute between the two countries in the South China Sea. The conflict occasionally resurfaces in the form of maritime encounters, but despite the lingering risk of unintended escalation the issue has not affected security in the country since substantial anti-Chinese riots in 2014.
Trong will abstain from substantial political reforms, but Dung’s departure is unlikely to have direct, negative implications for investors. Several experienced members of Dung’s cabinet are likely to remain in their posts. They include ministers who have studied at top-tier universities in the US and Europe, have experience in running the economy, and have a keen understanding of the interests and needs of foreign investors. In addition, the current course of economic reform has the Party’s blessing and is not only reliant on Dung. The Party is keenly aware that its public legitimacy is aligned with the continued success of Vietnam’s foreign investment-led economic growth model.
Committed to economic reforms, free trade
2015 was a milestone year for Vietnam that saw over 6% GDP growth amid an unprecedented pace of investor-friendly reforms. Moreover, Vietnam entered three major free-trade agreements: the US-led Trans-Pacific Partnership (TPP), the EU free trade agreement and the ASEAN Economic Community (AEC). Vietnam is one of only two countries in the region (the other being Singapore) to have signed up to all three trade pacts. Under these deals, the country has committed itself to the liberalisation of state-dominated sectors including agriculture and services.
Reforms in the last year were fast-paced. In June 2015 the number of business sectors closed to foreign companies was reduced significantly. In mid-July a government circular allowed foreign ownership of property in Vietnam for the first time, and later that month, visa-free travel for European nationals was introduced, albeit limited to 15 days. The government also relaxed regulations in several areas, in what some commentators have called the biggest overhaul of business rules in the economy since Vietnam opened to private business in the early 1990s.
These reforms triggered a sharp increase in foreign investment. In 2015 foreign direct investment rose to $22.7 billion, a 12.5% increase over the previous year. This surge is no longer based on cheap labour alone, but rather on macroeconomic and political stability, a young and relatively well educated workforce, geographical proximity to key markets and supply chains, a growing middle class and increasing consumer spending. Political instability in Thailand and Malaysia, and stalled economic reforms in Indonesia, has also redirected foreign investment towards Vietnam.
Sluggish state-owned enterprise privatisation
The momentum of last year’s reforms will slow down as new investor-friendly regulations passed by Hanoi will inevitably take time to be implemented across the county’s 58 provinces. National legislation can often be interpreted differently across the country’s provinces. Vested interests of state-owned enterprises (SOEs), representing about a third of GDP, continue to be a drag on reforms.
SOEs active in banking, insurance, real estate, food, oil and gas, engineering and construction, and telecommunications present attractive prospects for investors. A report by a UK-based brand valuation consultancy has valued enterprises in the top ten sectors in Vietnam at $54 billion. Yet, the government has failed to achieve its privatisation targets. The IPOs of several state-owned companies had a lukewarm reception. Vietnam still lacks a strong base of private domestic investors, and international investors have been cautious of becoming non-controlling shareholders in SOEs. The government is attempting to incentivise investors by gradually increasing the potential ownership stake available for the public. However, majority ownership is still not available for several key enterprises.
Several of these present ‘FCPA nightmares’, according to a Hanoi-based diplomatic source. Many SOEs have convoluted ownership structures split between provincial governments, national ministries and other state-owned companies in the sector. The owning government departments are sometimes also in charge of overseeing commercial regulations, with obvious conflicts of interest. Reform of inefficient and problematic state-owned companies had been markedly slow under Dung, who sat atop a vast patronage network. Some political commentators in Hanoi believe that Dung’s departure may reinvigorate efforts to tackle the issue.
Corruption still a fundamental concern
Corruption and nepotism, cumbersome and opaque administrative procedures, and a creaking infrastructure still present significant risks for foreign investors. Moreover, the vested interests of political actors are prevalent across industry sectors. Supply-chain fraud, whereby an expensive, sub-standard supplier is ultimately owned, directly or by proxy, by a high-level employee of the buying company, and kickbacks on procurement contracts are common.
In some SOEs, nepotism is pervasive. Senior roles are frequently given to political appointees or their family members with little industry experience. Rent-seeking government officials also install their associates at all levels of SOEs. These practices have, in some cases, resulted in opaque corporate structures and hierarchies of companies whereby key decisions are made by well connected mid-level employees, rather than figurehead executives.
In-depth due diligence on acquisition targets, joint venture partners and suppliers in the country is therefore recommended. However, publicly accessible information in the country is limited or unreliable. Corporate and other records are often outdated, sometimes inaccurate or not filed at all. The media in Vietnam is state-censored and reports on corruption and scandals involving SOEs or government officials are often biased. These conditions make comprehensive enquiries on the ground essential to understanding and mitigating the compliance risks.
Despite some potential headwinds, the growth rates and inflow of investment into Vietnam presents substantial opportunities. The newly appointed government will continue the path of economic reforms set out by its predecessors. The change of guard presents an opportunity to clamp down on patronage and corruption with greater vigour. There is a renewed chance for the government to tackle this major remaining obstacle for doing business, enabling investors to capitalise on the current momentum of growth and eroding barriers to entry.