In this article, we give an overview of the key challenges Vietnam faces. The article is an extract from our latest publication Vietnam 2016: Frontier in Transition, available to download here.
Vietnam is still far from an easy place to do business, though it is improving. Ranked 90th out of 189 jurisdictions by the World Bank’s Doing Business 2016 report, Vietnam had seen significant improvements in ease of starting a business, access to electricity and paying taxes.
It is ranked as one of the easiest markets in the world to obtain a construction permit, in 12th place. However, it is one of the most challenging jurisdictions to pay taxes in, with 770 hours of time needed per year to make the 30 annual payments. This is improving, and the government is making an effort to reduce tax and social insurance payment time to the ASEAN average of 171 hours per annum.
Ease of starting a business varies according to lines of business. For an unrestricted business line, it takes around 20 working days to complete the 10 necessary procedures.
Global Headwinds
Vietnam is not immune to global headwinds. It too has been hit by the commodity slump, and China’s managed currency depreciation has led to increased competitiveness across sectors. As global commodity prices remain at lows, deflationary pressures are evident in the low prices of manufacturers’ inputs and outputs.
Sources: Caixin, HSBC, JP Morgan, Nikkei, Markit
In the past decade, Vietnam has been subject to two shocks; the global financial crisis beginning in 2007, and a domestic crisis spurred on by its repercussions. Inflation had been hit by rising global food and commodity prices, domestic education, transport and hosing prices, service sector growth and expansion in the money supply, which went hand in hand with credit growth.
Sources: Asian Development Bank, World Bank
Vietnam is confident in its future. When the twelve months following November 2015, 56 percent of respondents to the ANZ-Roy Morgan Vietnam Consumer Confidence Index survey expect their families to be ‘better off’ financially, and only three percent ‘worse off’, the lowest figure on record.
A sturdy 55 percent of respondents expected Vietnam as a whole to have ‘good times’ financially, with only nine percent expecting ‘bad times’. We expect this optimism to be tested over the coming year, as the commodity slump and rebalancing Chinese economies play their part in stilting emerging market growth.
Source: ANZ-Roy Morgan
Vietnam’s sovereign debt is rated BB- by Standard & Poor’s, B1 by Moody’s, and BB- by Fitch. Its outlook is stable across the board. It is still a frontier market with a way to go before it can be upgraded to MSCI’s emerging market status.
The Dong is now permitted to trade up to three percent above or below the official reference rate, but facing pressure from the devaluing Chinese Yuan and looming Fed rate hike. The State Bank of Vietnam devalued the Dong beyond the pledged limit of two percent in 2015, and we expect further managed devaluation in 2016.
Source: Investing.com (15 Dec 2015)
Vietnam’s Developing Legal System
The pace of change in the country creates a need for laws and regulations to be updated regularly in order for the legal system to adapt. However, there are still problems of implementation.
Investors can be left in unfortunate circumstances when insufficient guidance is released with new legislation. When the 2014 Investment Law came into effect in mid-2015, investors had trouble establishing a company for months, and some aspects of the law are still unclear.
In the World Justice Project’s 2015 Rule of Law Index, Vietnam was ranked 64th out of 102 jurisdictions for its legal system, 11th out of the 25 lower-middle income jurisdictions surveyed.
Vietnam was ranked above other lower-middle income jurisdictions and the regional average for its independent auditing, absence of crime, and lack of discrimination in its civil and criminal justice systems. It ranked above its lower-middle income peers in effective regulatory enforcement, but the Index ranked it below its peers for alleged corruption in the judiciary. Foreign investors should bear in mind anti-bribery compliance obligations in home jurisdictions.
This article is an extract from our latest publication ‘Vietnam 2016: Frontier in Transition’. Download a free copy by filling in your details below:
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