10 May, 2016
As the dust from the 12th National Congress of the Communist Party of Vietnam (“CPV”) settles, a clearer picture of the country’s direction for the next five years has started to emerge. Nguyen Phu Trong remains the CPV’s Number One and is likely to ensure that ongoing reforms to the Vietnamese economy continue, but at an unclear pace.
Continuity in Consensus
The 12th National Congress may be a perfect example of the black box that is Vietnamese politics. In the months leading up to the nine-day congress, outgoing Prime Minister Nguyen Tan Dung was widely expected to contest — and win — the General Secretary position, the top position in the CPV, over the incumbent Nguyen Phu Trong. Dung had not only accumulated more power to himself than any other CPV leader in recent history but was also widely popular for his strong stance on China. He survived an attempt by his rivals in the Politburo to unseat him in 2012, where the Central Committee rejected a recommendation by the former to censure Dung.
His chief rival, Trong, was expected to retire; an age limit of 65 applies to appointees to the Politburo, although exemptions may be granted by the Central Committee. At 71, Trong had already received an earlier exemption to the age requirement. He was also considered less popular than Dung and is often reduced to being a pro-China conservative in English language press reports.
The Communist Party of Vietnam’s Internal Hierarchy
Politburo (Policy implementation body)
Central Committee (Meets at least twice a year, elects the Politburo. Members must be approved by the Politburo)
Party Congress (Meets every five years and elects the Central Committee)
Instead, Dung, who has built a reputation over the past ten years as a reformist and charismatic party leader, withdrew his name from consideration and agreed to retire while Trong’s position as party chief was reaffirmed almost unanimously by the Central Committee. The Minister for Public Security Tran Dai Quang, and a Deputy Prime Minister, Nguyen Xuan Phuc, were nominated as President and Prime Minister respectively and have been confirmed in these positions. Depending on who you talk to and at what point in time, Quang and Phuc are allied with Trong or Dung.
While the workings of the CPV remain opaque, the message sent by these decisions is clear: the CPV will maintain its consensus-based approach towards decision-making. Exactly what this means for the pace of reforms to modernize the economy remains to be seen; Phuc is not widely known, Quang is seen as a hardliner, and the Marxist-Leninist Trong is a strong supporter of the Trans-Pacific Partnership (TPP). Predicting what the new leadership and Politburo will do is a speculative exercise, but there are some positive signs. One noteworthy new appointment to the Politburo is Vuong Dinh Hue, a noted reformer who butted heads against entrenched interests in the state-owned sector during his time as Finance Minister from 2011-2012. Hue’s rise has been championed by Trong and he may be a Deputy Prime Minister in the next government.
Other key messages sent by the Congress include a focus on combating corruption and ensuring that the Party is “clean and strong”. This could be taken as a rebuke to Dung, who was criticized for perpetuating nepotism through the rise of his two sons within the CPV, and allegedly used his position to add to his family’s wealth. Dung’s eldest son is a member of the Central Committee while his youngest son became the youngest member of the Binh Dinh province executive committee last year.
One development, which has largely escaped media attention, is a significant increase in CPV members. Between 2006 and 2016, the CPV expanded its membership base from 3.1 million to 4.5 million members, almost a 50% increase.1
Possible explanations for this growth include the party being more open towards new members and that more public servants have joined the CPV as said membership is accompanied by better prospects of promotion. Regardless of the reasons, the wider member base allows it to claim greater legitimacy in a one-party state.
A Pragmatic Ideologue
While Trong may be more ideologically aligned with China — he was previously the guardian of party ideology — he has shown himself to be a pragmatist in practice. In 2015, he became the first general secretary to visit the U.S., where he met with President Obama. Trong’s visit to the U.S. followed an earlier visit to Washington D.C. by Quang in March 2015.
Recent visits by Trong, Quang, and other party leaders to the U.S. indicate efforts to reduce Vietnam’s dependence on China, which remains the country’s largest trade partner. Vietnam’s trade deficit with China reached a record high of US$32.3 billion in 2015.2
Trong is said to have emerged from an hour-plus meeting with President Obama convinced of the merits of the TPP and has driven Vietnam’s participation in the trade pact. This is not surprising as Vietnam’s participation in the TPP will deepen economic ties with the U.S., Japan, and key members of the trade pact, reducing the country’s economic reliance on China in the process. Of all the TPP member countries, Vietnam is expected to benefit the most from measures that could boost exports by up to an estimated 28% over the 10 years to 2025. As a result, Vietnam is perhaps the only member of the TPP
The New Leadership
Nguyễn Phú Trọng General Secretary
Incumbent General Secretary
Strong ideological background
Viewed as a pro-China conservative
Seen as incorruptible
Strong proponent of the TPP
May retire mid-term due to his age
Trần Đại Quang President
Previously Minister for Public Security and Police Chief
Oversaw clampdown on public criticism of the government
Nguyễn Xuân Phúc Prime Minister
Previously Deputy Prime Minister
Deputy Head of Corruption Prevention committee Responsible for traffic safety
Not widely known but keen to prove capabilities
Nguyễn Thị Kim Ngân National Assembly Chair
Previously Deputy Chair in the National Assembly First woman to be part of the top leadership
Received the highest percentage of high confidence” votes in 2014
The 12th National Congress in Numbers
- 180 Members of the Central Committee 12 New Politburo members
- 177 Central Committee votes received by Trong
- 65 The age limit for Politburo members 53 The average age in the new Central Committee
- 45% Increase in CPV membership since 2006
- 19 Members of the Politburo
where the public discourse on the agreement is predominantly positive. The Central Committee reached a clear consensus on signing and ratifying the TPP in January and preparations to ratify the agreement at the National Assembly are underway.
Investing in Reforms
Vietnam’s gains from the TPP cannot be fully realised without first dealing with significant challenges. The agreement will require extensive structural and economic reforms covering the critical state-owned enterprise and agriculture sectors, banking system, labour and environmental standards, tighter regulations on intellectual property rights, and labour rights, in addition to removing tariff barriers. Executing these reforms will be a test of the CPV’s commitment to the trade pact.
The Doi Moi4 reforms and more recent developments including Vietnam’s participation in the TPP, the conclusion of negotiations on other free trade agreements, and the removal of foreign ownership limits for most listed companies send a clear signal: Vietnam is open for business.
And business has come. The number of M&As and inward investment in Vietnam over the past decade has increased. In 2015 alone, the number of M&A transactions increased by 23%, with an estimated US$5.2 billion in value. Inward M&A transactions reportedly accounted for close to half of this number.5 Foreign direct investment into Vietnam has increased by more than 600% since 2004, reaching US$22.3 billion in 2015.6 By opening up access to more markets for Vietnamese goods, the TPP and other free trade agreements are likely to boost investment and acquisition numbers further.
Three Challenges for Investors: Connections, Culture, and Corruption
Vietnam’s attractions for investors are well-documented.7 Perhaps less-documented are the challenges that foreign investors face as they prepare to invest, and for some, after an investment in the country.
One such example comes from a planned investment in a medium-sized family-owned manufacturing facility by a foreign company. The Vietnamese company was a pioneer in its sector and the first to receive an internationally recognised license from the Vietnamese government. While preparing for the investment, the investor came to understand that family which owned the company had good relationships with a number of government departments, including those involved in the granting of key licenses and business contracts. The questions that followed are obvious: Did the company deserve the licenses? Would it be able to maintain these licenses after the family sold out of the company?
In another case, a multinational corporation which had already acquired a majority stake in a leading local company, also family-owned, had to deal with bringing governance standards at its latest acquisition up to international standards. Cultural differences and poor corporate governance at the family-owned company, made it necessary for the investor to educate its Vietnamese employees on matters such as ethics and compliance, and to impress upon them that conflicts of interest and fraud were no longer acceptable.
Other common practices in Vietnam have more severe implications for foreign multinationals.
As attractive as Vietnam may be…these challenges highlight the importance of understanding both the macro- and micro-environments, as well as the stakeholders involved in a potential transaction in the country.
Of the 12 countries in the TPP, Vietnam ranks the lowest on Transparency International’s Corruption Perceptions Index,8 with a scorecard of 31/100. According to businesses in Vietnam, corruption is most prevalent in the land administration, customs, and construction sectors. The majority of respondents in a World Bank survey also highlighted taxation, mining and minerals, transport, and traffic police as corrupt sectors. Paying bribes to government officials is often seen as a way to expedite processes when dealing with an otherwise cumbersome bureaucracy.
The case of Japanese overseas development aid to Vietnam provides an unfortunate but illustrative example of how deeply entrenched corruption is. In 2008, Japan, which is Vietnam’s largest donor country, suspended aid to Vietnam after discovering a Japanese consultancy paid US$800,000 to a government official to receive an official development assistance (ODA) funded contract. The government official had his assets seized, was forced to return the bribe and received a stiff jail sentence — life imprisonment. This proved to be an insufficient deterrent. History repeated itself six years later, when a Japanese contractor was found to have bribed officials at the state railway company to secure contracts for another ODA-backed project. Aid was suspended once again.
Congress may have emphasized combating corruption as the CPV’s continued priority but whether this will translate into concrete and substantial action to clean up the Party and, by extension, the state, is another uncertainty. The family of incoming Prime Minister, Phuc, is rumored to have accumulated extensive properties and assets in Vietnam and abroad, denting his public image as a corruption-fighter. Yet these rumors failed to deter his appointment as Prime Minister.
As attractive as Vietnam may be, particularly with the signing of the TPP, these challenges highlight the importance of understanding both the macro- and micro-environments, as well as the stakeholders involved in a potential transaction in the country.
1 http://www.shanghaidaily.com/article/article_xinhua.aspx?id=317058
2 http://english.vietnamnet.vn/fms/business/151464/trade-ministry-presses-to-
trim-import-dependence-on-china.html
3 World Bank databank, media reports for 2015 data
4 The Doi Moi reforms refer to Vietnam’s ongoing economic reforms that were initiated in 1986. The reforms aim to create a socialist-oriented market economy.
5 http://www.dealstreetasia.com/stories/vietnams-ma-hits-5-2b-bolstered-by-fta-
commitments-and-warming-property-market-33512/
6 http://vietnamnews.vn/economy/280482/fdi-reaches-23-billion-in-2015.html
7 For a brief discussion of these attractions please refer to an earlier FTI article, “Vietnam: The Ascending Dragon”.
8 Brunei is not ranked
For further information, please contact:
Jason Liew, Managing Director, FTI Consulting
jason.liew@fticonsulting.com
