Vietnam is the fastest growing world economy with a growth rate of 7.31% in 2019.
VIETNAM OVERVIEW
Vietnam is the easternmost country on the Indochina Peninsula in Southeast Asia and is about 331.200 km2. With an estimated 98 million inhabitants as of 2021, it is the world’s 15th most populous country and the 3rd most populous Asian country. Geographically, Vietnam is a long, narrow country that extends over 1,600 km (1,000 miles) from north to south, has a coastline excluding islands of over 3,300 km (2,000 miles) and is only 50 km (30 miles) wide at its narrowest point. The country is bordered by China to the north, Laos and Cambodia to the west and Malaysia across the Gulf of Thailand to the southwest. To the east along what the Vietnamese call the “East Sea” (“South China Sea”), lie the Chinese island of Hainan at a distance of only 200 km (124 miles), the Philippines at a distance of 1,400 km (870 miles) as well as numerous islands claimed by Vietnam, China and the Philippines.
VIETNAM HISTORY
Vietnam was part of Imperial China for over a millennium, from 111 BC to 938 AD. In that year, the Vietnamese gained independence, following victory in the Battle of Bạch Đằng River. Successive Vietnamese royal dynasties flourished as the nation expanded geographically and politically into Southeast Asia until the Indochina Peninsula was colonized by the French in the mid-19th century. Following Japanese occupation in the 1940s, the Vietnamese fought French rule in the First Indochina War, eventually expelling the French in 1954. Thereafter, Vietnam was divided politically into two rival states in the north and south, then was unified in 1976 as the Socialist Republic of Vietnam (Cộng hòa Xã hội chủ nghĩa Việt Nam)
Following reunification, Vietnam was relatively isolated for the next decade, most noticeably from the United States. Then in 1986, the government set out on a program of broad external engagement. By 1995, it had restored full diplomatic relations with the U.S. and become a permanent member of the Association of Southeast Asian Nations (ASEAN). Today Vietnam has diplomatic relations with nearly 200 countries.
Vietnam is ranked 70th out of 190 countries in the World Bank’s 2020 Ease of Doing Business Index (while the U.S. is ranked 6th). A 2018 survey of AmChams in the ASEAN region regarding the trade and investment outlook reveals the following areas of concern in Vietnam:
- Corruption
- Laws and regulations
- Legal system and contract sanctity
- Tax structure
- Infrastructure
The evolving nature of regulatory regimes and commercial law in Vietnam, combined with overlapping jurisdictions among government ministries, often results in a lack of transparency, uniformity, and consistency in government policies and decisions on commercial projects. Project timelines often exceed initial projections, especially when financed using official development assistance (ODA). “Tied ODA”, which must be used to procure goods or services from the country of the aid provider, in addition to corruption, continues to be a significant challenge for U.S. firms bidding on infrastructure projects. Some companies have successfully collaborated with Japanese firms to be eligible to bid on Japanese ODA funded projects, which represents the largest source of foreign ODA in Vietnam.
Vietnam has a comprehensive anti-corruption legal framework in comparison with other Asian countries. Especially since 2017, the anti-corruption focus in Vietnam has witnessed some new milestones, with several updates to laws, regulations, and measures to strengthen the anti-corruption legal framework. In 2019, the Vietnamese government issued Resolution 02, which focuses on improving business integrity by providing measures that reduce corruption, aiming to bring Vietnam into the top four countries in ASEAN in terms of business competitiveness. The past several years have seen significant improvements in Vietnam’s anti-corruption legal framework, with the implementation of more anti-corruption actions, and the prosecution of many high-ranking officials involved in corruption cases. However, corruption and administrative red tape within the government is still a vast challenge for governmental consistency and productivity and for foreign companies doing business in Vietnam. Vietnam ranked 104 (out of 180) on Transparency International’s 2020 Corruption Perceptions Index (8 spots worse compared to 2019), placing it as one of the worst in a region infamous for its high levels of corruption. By comparison, regional neighbors ranked as follows: Malaysia at 57, PRC at 78, Indonesia at 102, Thailand at 104, Philippines at 115, Lao PDR at 134, Myanmar at 137 and Cambodia at 160.
Many firms operating in Vietnam, both foreign and domestic, found ineffective protection of intellectual property to be a significant challenge. Online piracy is rampant in Vietnam, and increasingly, Vietnam is host to some of the most egregious piracy sites and services in the world with no clear or effective enforcement path available against these sites or their operators. Illegal content generally can be accessed via online and mobile network piracy such as download sites, peer-to-peer networks, linking sites, streaming sites, search engines, cyberlockers, apps and on social media networks.
While Vietnam has reduced tariffs on many products in line with its WTO commitments, high tariffs on selected products remain. The U.S. industry has identified a range of products, which include agricultural products, processed foods, and nutritional supplements, which have significant export growth potential if Vietnam’s tariffs could be reduced further.
Vietnam plays a critical role in strengthening diverse and secure U.S. supply chains. With its strategic location, young and tech-savvy workforce, welcome approach to foreign investment and a broad network of free trade agreements, the country has become a top destination for global manufacturing, as firms seek to increase supply chain resilience and decrease reliance on China. As a result, Vietnam is a key node in U.S. supply chains for apparel and footwear, furniture and electronics, including critical goods like semiconductors.
However, Vietnam faces serious challenges in both the short and long-term. Amid a fast-growing fourth COVID-19 outbreak, Vietnamese authorities in the summer of 2021 established some of the strictest manufacturing protocols in the world, especially in Ho Chi Minh City and surrounding areas of Southern Vietnam. These protocols required factories to house workers on-site or isolate them in hotels. The pandemic and accompanying restrictions have severely curbed industrial production, impacting supply chains and the U.S. industrial base. Consumer goods have also been impacted, as apparel, footwear and furniture factories have been forced to close. The Government has directly pledged support to help resolve the supply chain resiliency issues, and directed local governments to implement consistent directives. These measures will take time to adopt and enforce, however, and have been slow to roll out.
Furthermore, investors often run into poorly developed infrastructure, high start-up costs, unexpected tax assessments, arcane land acquisition and transfer regulations and procedures, and a shortage of skilled personnel. On a positive note, Vietnam remained steady with a ranking of 70 among 190 countries in the World Bank’s Doing Business 2020 report, putting it in the middle of the regional average. Of note, the World Bank reported that reforms in trading across borders and enforcing contracts are making it easier to do business. Lack of financial transparency and poor corporate disclosure standards add to the challenges U.S. companies face in performing due diligence on potential partners and clients.
Resources
Toward Transparency: https://towardstransparency.org/en/
Transparency: https://www.transparency.org/en/cpi/2020/index/nzl
ECON’s IIPA _2021 Special 301 Report on Copyright Protection and Enforcement:https://www.iipa.org/files/uploads/2021/01/2021SPEC301REPORT.pdf
Both the business sector (manufacturing and services) and the finance sector (banking and securities) in Vietnam are evolving rapidly, driven by the quite different development of state-owned and privately held enterprises and financial institutions. At a macro level, privatization is advancing noticeably. Looking at subcomponents, the dynamics of this trend are quite different and complex.
The business sector consists of three main segments: state-owned enterprises (SOEs), publicly traded companies and privately held small to medium-sized enterprises (SMEs). For several years, the government has declared a policy of reducing the large role of SOEs and set annual targets for listing on public exchanges. While results have fallen short of ambitious targets, the trend over the last ten years has moved steadily towards the private sector. In terms of GDP, SOEs now account for 35% and the private sector for 50%, with the balance of 15% going to rapidly rising foreign direct investment. Access to capital is quite different by segment, with the state sector still absorbing a disproportionate share of capital in comparison to the private sector. This is partly due to an underdeveloped banking sector that still relies strongly on asset-backed financing and less on cash flow financing. For companies whose trade-related business is growing rapidly, the challenge is to finance the longer cycle of export revenues. For foreign companies, the task is easier—they draw upon internal resources or obtain financing from their banks and equity providers outside of Vietnam.
The finance sector still faces significant challenges, in particular the quality of assets. Many analysts believe that the true level of non-performing loans is much higher than reported. The government has recognized the important role a healthy banking sector can play and has taken steps to improve the situation such as the establishment of an entity to absorb the bad debt. The securities sector is still quite small, as indicated by a total market capitalization to GDP ratio of about 21% vs. much higher levels for its emerging market neighbors such as Malaysia (156%), Philippines (106%) and Thailand (105%). At the same time, the finance sector has substantial opportunities, particularly in the development of a well-managed trade finance business.
The politics of the Socialist Republic of Vietnam are defined by a single-party socialist republic framework, where the President of Vietnam is the head of state and the Prime Minister of Vietnam is the head of government, in a one-party system led by the Communist Party of Vietnam. Executive power is exercised by the government and the President of Vietnam. Legislative power is vested in the National Assembly of Vietnam (Vietnamese: Quốc hội). The Judiciary is independent of the executive. The parliament adopted the current Constitution of Vietnam; its fourth, on 15 April 1992, and it has been amended once since then.
The Communist Party of Vietnam is the ruling political party of the Socialist Republic of Vietnam according to the current Constitution (amended in 2013). The legitimacy of the Party is guaranteed by Article 4 of the Constitution, which states that “The Communist Party of Vietnam […] is the force assuming leadership of the State and society”.
Every five years, the Communist Party holds a National Congress, with the latest one taking place in January 2021. Participants include all members of the Central Committee and representatives from local levels. Important functions of the National Congress are:
– Evaluate the results of past terms.
– Set the guidelines and policies of the Party in the next 5-year term.
– Elect the new Central Committee
– Make additions and amendments to the Political Platform and Charter of the Party if necessary.
After decisions are ratified, the National Congress is dissolved and the new Central Committee implements the decisions of the National Congress for a 5-year term.
The Central Committee is the key authority within the Party, which currently has 180 full members and 20 alternate members. Membership of the Committee usually includes high ranking officials at both central and local levels such as President, Prime Minister, Chairman of the National Assembly, deputies to these positions, Ministers and the equivalent, Deputy Ministers of key Ministries such as Public Security and Defense, provincial Party Chiefs and all other important organs of the Party and the State.
The Committee implements the decisions made by the National Congress regarding important matters of the nation including both internal and external affairs.
The Central Committee elects the Politburo, the Party’s General Secretary and the Party’s Secretariat.
The Central Committee also nominates candidates for key positions, including Chairman of the National Assembly, President and Prime Minister, who are then approved by the National Assembly.
The President (Chủ tịch nước) serves for a five-year term and acts as the commander-in-chief of the Vietnam People’s Armed Forces and Chairman of the Council for Defence and Security. The government (Chính phủ), the main executive state power of Vietnam, is headed by the Prime Minister, who has several Deputy Prime Ministers and several ministers in charge of particular activities. The executive branch is responsible for the implementation of political, economic, cultural, social, national defense, security and external activities of the state. The National Assembly is a unicameral legislative body. The National Assembly has 500 members, elected by popular vote to serve four-year terms. The legislature is, according to the Constitution, the highest organ of the state. Its powers include the enactment and amendment of the Constitution and laws; the adoption of the government budget; supervising the Government of Vietnam and other holders of public powers responsible to the National Assembly; and appointing members of the judiciary. The Vietnamese Constitution and legislation provide for regular elections for the office of the President of the Socialist Republic, the National Assembly and the People’s Councils.
According to the Constitution, Vietnam has an independent judicial system and legislative branch under the National Assembly. The Supreme People’s Court (Tòa án Nhân dân Tối cao) is the highest court of appeal in Vietnam. There are other special courts in Vietnam, including the Central Military Court, the Criminal Court, the Civil Court and the Appeal Court. The Supreme People’s Procuracy monitors the implementation of state organs and ensures compliance with the law.
