Viet Nam’s urban transport projects to support growth

02 January 2019

Viet Nam will remain one of Southeast Asia’s fastest-growing economies, and the infrastructure sector will be supported by investment in urban transport projects. However, the launch of public-private partnerships has been complicated by regulatory uncertainty, while the prospect of anti-China protests poses risks to foreign firms operating in Viet Nam.

SECURITY ENVIRONMENT

Relations between Viet Nam and China are sometimes strained by their competing territorial claims in the South China Sea. While military conflict over the issue remains unlikely, a significant escalation of the dispute could disrupt key shipping lanes and Viet Nam’s import supply chains. Assets associated with China therefore face an elevated risk of property damage in Viet Nam. In May 2014, dozens of foreign-owned factories were severely damaged during anti-China violence near Ho Chi Minh City. German and US businesses were also targeted as the violence spread, and over a thousand foreign firms were affected by acts of vandalism.

Following largely peaceful protests across Viet Nam in June 2018, the government has put on hold a bill that would allow foreign investors to acquire 99-year land leases. However, any attempt to advance the legislation would increase the risk of property damage facing foreign-owned commercial assets. Protests over environmental issues and land acquisition are becoming more frequent but are generally peaceful and are likely to remain localised. However, protesters may block access to infrastructure assets.

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TRADING ENVIRONMENT

As the government continues to pursue economic liberalisation, high levels of foreign investment are enhancing the external position. Real GDP growth is forecasted to expand by 6.7% in 2018 and 6.5% in 2019, supported by growth in the manufacturing and tourism sectors. Viet Nam’s external debt remains sustainable due to its concessional nature and long-tenor, while foreign reserves stood at a relatively robust USD 55.9 billion by the end of March 2018.

General government debt-to-GDP is set to remain steady at 52% in the 12-month outlook. However, weaknesses in some state-owned entities and in the banking sector pose contingent liability risks and could increase the debt burden. The government fiscal deficit is also set to remain wide but stable at around 4.0% of GDP.

Rising global trade protectionism poses downside risks to Viet Nam’s export-dependent economy. The manufacturing sector could benefit as Chinese firms relocate to their southern neighbour in order to avoid higher US tariffs, but Viet Nam’s economy is very open and is therefore particularly exposed to trade disruption. In addition, the US could also raise tariffs on Viet Nam if it is seen to be failing to control the export of Chinese-origin goods as a means of avoiding the levies.

INVESTMENT ENVIRONMENT

The transport infrastructure sector is set to perform well over the coming years, with growth forecasted at 6.2% in 2019 and 6.1% in 2020. Both Hanoi and Ho Chi Minh City are constructing metro lines as rapid urbanisation continues to drive investment in urban transit projects. Due to capacity issues, Noi Bat International Airport in Hanoi and Tan Son Nhat International Airport will be expanded. However, the government’s attempts to attract investment via public-private partnerships have been complicated by regulatory uncertainty. In April 2018, the government cancelled the Dau Giay-Phan Thiet Expressway, a USD 750 million project, after investors withdrew their interest due to a lack of loan guarantees.

Viet Nam provides a broadly stable investment environment for international firms and the risk of expropriation or contract alteration is relatively low. However, the government exerts considerable influence over the judiciary, and arbitration involving state-owned entities is unlikely to be impartial. The government has prosecuted a growing number of business figures as part of anti-corruption crackdown. In September 2017, dozens of former officials of OceanBank, one of Viet Nam’s largest private banks, were sentenced to prison for their involvement in a multi-million dollar fraud case. The government’s political opponents appear to have been the primary targets of the investigations, and there is therefore a risk that local counterparties could be caught up in anti-corruption campaign.

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In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for India, Viet Nam, Angola and Ethiopia all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review January 2019

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