Outlook for 2011-15

• The Communist Party of Vietnam will keep a firm grip on power in the forecast period, and, despite signs of factional splits between conservative hardliners and reformers, there is no prospect of any major internal instability.
• Given the generally high level of political apathy, together with the regime's determination to crack down hard on pro-democracy activists, the likelihood that Vietnam will suffer an upheaval similar to that in the Arab world is low.
• Policymakers have embarked on a process of tightening economic policy, but concerns persist over whether there is sufficient political will to implement tougher measures that may be needed to stabilise the economy.
• Real GDP growth in Vietnam is expected to average 7.1% a year in the forecast period, underpinned by strong growth in consumption, investment and exports. However, this forecast is subject to downside risks.
• Inflation will accelerate to an average rate of 14.9% in 2011, before slowing to an average of 7.9% a year in 2012-15. Policymakers are likely to face an ongoing battle to keep the dong stable against the US dollar.
• The current account will remain in deficit over the next five years, but capital and financial inflows (including official foreign borrowing) will increase from the low levels that they reached in 2009.

Monthly review

• The authorities have stepped up their efforts to curb the political impact from the country's economic problems. They have increasingly been detaining protesters and have brought fresh charges against dissidents.
• Widespread concerns have been voiced about Vietnam's nuclear-power programme in the aftermath of the earthquake and tsunami that devastated north-eastern Japan on March 11th.
• Policymakers in Vietnam have been taking more steps to slow credit growth and inflation, mainly by raising policy interest rates.
• In recent weeks the authorities have begun cracking down on unofficial trade in US dollars by enforcing long-standing but frequently ignored laws prohibiting the use of the US currency for everyday business.
• Economic growth slowed in the first quarter of 2011, with the pace of year-on-year expansion falling to 5.4%-the slowest pace since the first quarter of 2009.
• Vietnam's twin problems of rising inflation and a widening trade deficit intensified in March. Inflation poses the more immediate problem, with consumer prices rising by 13.9% year on year in March.

The ruling Communist Party of Vietnam (CPV) will maintain a firm grip on power in the next five years, and, despite signs of factional splits between conservative hardliners and relative reformers, there is no prospect of any major internal instability. Indeed, at the party's 11th national congress, in January, there were displays of unity as the party continued to espouse one-party rule. The congress did provide a chance for different factions to stake a claim to greater influence, but the spoils have been shared. The beleaguered prime minister, Nguyen Tan Dung, appears to have kept his post-his re­appointment will only be formally made following the formation of the 13th National Assembly (NA, the legislature) after national elections in May. Although Mr Dung's continuation in office appears to have been endorsed by the CPV, his reputation has been damaged by the near-collapse of one of the largest state-owned enterprises (SOEs), the Vietnam Shipbuilding Industry Group (Vinashin), and his political opponents have appeared bent on using the debacle as a way to reduce his political power. Truong Tan Sang, the head of the CPV secretariat, is in line to become president. Although the presidency is largely a ceremonial post, Mr Sang is one of Mr Dung's most formidable rivals within the party and is regarded as being a highly influential member of the party's conservative bloc. The post of party general secretary has gone to a Marxist theorist, Nguyen Phu Trong, who will stand down as chairman of the NA. The choice of Mr Trong, who is widely regarded as being a moderate, was possibly a compromise, providing some balance to the rivalry between Mr Dung and Mr Sang. However, given that Mr Trong is already 66, unlike his predecessor, Nong Duc Manh, he is not expected to serve two five-year terms. This suggests that internal power struggles could be reignited towards the end of the forecast period, ahead of the next congress.

The CPV will continue to face objections from some quarters to its long-standing claim that it has the right to govern unchallenged. However, given the generally high level of political apathy, together with the regime's determination to crackdown on activists who advocate genuine democratic reform, there is little likelihood that any opposition movement will gain traction. The likelihood that Vietnam will suffer an upheaval similar to that in the Arab world is therefore low. Protests over land seizures, however, could become more common over the forecast period. The fast pace of industrial development in Vietnam has entailed the increasingly rapid construction of factories, plants and large infrastructure projects, such as roads and dams, throughout the country. As a result, the number of displaced residents has risen, and some have been vocal about what they perceive as inadequate government compensation for the loss of their land. Meanwhile, corruption in local bureaucracies occasionally results in the embezzlement of funds earmarked to compensate people who have been evicted from their land, leaving them dispossessed and with inadequate resources to rebuild their livelihoods. Public anger over such issues will intensify unless the authorities take action to punish corrupt local officials.

Tensions between the government and religious and ethnic-minority groups could come to the fore again in the next five years, with the state taking a harder line against minorities. The CPV tolerates religious activity as long as it does not pose a threat to the regime, although there have been flashpoints recently in the party's dealings with the Roman Catholic church. The party has warned that "social disorder" arising from land disputes over religious property will be strictly punished. The confiscation of property belonging to the Catholic church between the 1950s and 1970s remains a sore point in relations between the Vietnamese government, the local church and the Vatican. There are 6m Catholics in Vietnam, making the Catholic church the largest organisation in the country outside the orbit of the CPV. The party leadership will also remain concerned about the potential for social unrest in the Central Highlands. The area is largely populated by ethnic-minority groups, and, owing to the fact that party membership is not common, official control in the region is relatively weak.

Vietnam is a one-party communist state, and elections do not play a major role in its political life. Appointments to CPV posts take place behind closed doors, with votes conducted merely to confirm decisions that have already been made. NA delegates are chosen by popular vote, and the next such election is scheduled for May 2011. However, candidates are closely vetted by the Vietnam Fatherland Front, a CPV-controlled umbrella body that includes all of the country's "mass organisations", and only those deemed suitable are allowed to stand. The same is true of elections for members of the People's Councils, the local organs of state power that operate at the commune, district and provincial levels.

Vietnam will continue to make strides in strengthening its ties with the West, particularly with the US. Vietnamese-US diplomatic ties have been bolstered by high-level exchanges in recent years, and the economic relationship between the two countries has developed rapidly. Military links have also become dramatically closer, as highlighted by joint military exercises in the South China Sea in August 2010. Despite these positive trends, US concerns over human rights and religious freedom in Vietnam will remain a source of bilateral tensions. However, such stress will not cause anything more serious than the occasional diplomatic spat. The US views Vietnam as an important ally in Asia, while Vietnam has both an economic and a security interest in maintaining close ties with the US. Although keen to become closer to the US, the current leadership in Vietnam will also seek to maintain strong relations with China. However, the two foreign policy objectives could prove difficult to balance.

The most significant unresolved issue between Vietnam and China concerns competing claims to the Spratly and Paracel islands in the South China Sea, particularly in view of China's increasingly assertive approach to matters of sovereignty. In addition to claims by Vietnam and China of full sovereignty over the islands, the Philippines, Brunei, Malaysia and Taiwan have also made full or partial claims. The dispute is unlikely to be resolved within the next five years, but all the claimants have signed the Declaration on the Code of Conduct in the East (South China) Sea, which was initiated by the Association of South-East Asian Nations (ASEAN) and commits signatories to "resolving all disputes through peaceful negotiations in accordance with international laws and practices". However, the disputed area is becoming increasingly important strategically, as it is believed to contain oil and gas deposits and is also an important shipping route. During its chairmanship of the ten-member ASEAN last year, Vietnam was successful in bringing the topic of the South China Sea to the top of the group's agenda, and the current chair, Indonesia, has said that it would take up Vietnam's goal of establishing multilateral talks on the issue. The US government has been pushing for a multilateral solution to maritime border disputes in the area, and this has angered China. With the support of the US, smaller nations, such as Vietnam (where mistrust of Chinese motives runs deep), could be encouraged to band together to resist China's overtures and its rapidly growing military might.

Policymakers have embarked on a process of tightening economic policy, but concerns persist over whether there is sufficient political will to implement tougher measures that may be needed to stabilise the economy. The State Bank of Vietnam (SBV, the central bank) has tightened its monetary policy stance by pushing up its policy interest rates in recent months, but inflation is likely to remain in double digits in the short term-the sharp devaluation of the dong will create greater imported inflationary pressures, while the government has had to increase subsidised retail prices for fuel and electricity, owing to sharp rises in global crude oil prices recently. The government has also signalled its intention to tighten its fiscal policy stance, and further administrative measures may be introduced to slow the pace of growth in domestic credit. However, in the light of the government's general policy bias in favour of rapid economic growth rather than price stability, there is a risk that if the pace of growth does not pick up in the coming quarters (growth fell to 5.4% in the first quarter of 2011) that the authorities will return to a pro-growth policy.

In the wake of the Vinashin debt debacle-in late December 2010 Vinashin defaulted on the first scheduled repayment of an eight-year US$600m international syndicated loan-there is likely to be greater scrutiny of the financial health of SOEs and their role in the economy over the next five years. Although the authorities will continue to make steady progress in implementing the policy of equitisation (part-privatisation) of SOEs, as there is a large number of SOEs with an approved equitisation plan, there is unlikely to be a rapid acceleration in the number of firms undergoing such reform during the period. Perhaps more importantly, the authorities may need to reconsider the policy of encouraging some of the largest SOEs to follow a debt-driven expansion plan. Indeed, it will be more expensive and more difficult for SOEs to access funding in the wake of recent downgrades in international credit ratings.

Although there is a need for the government to rein in the fiscal deficit-to cool the economy and to avoid financing problems (outstanding public debt is estimated to have reached nearly 57% of annual GDP at end-2010)-the government will struggle to narrow the deficit during the forecast period. The government recently revealed that it would cut planned investment spending this year by D50trn (US$2.4bn), or around 7.4% of the original budget for the year. If implemented, the measure would help to lower the deficit, but it could yet prove difficult to administer such cuts in expenditure. Nevertheless, the government is still expected to record a lower deficit this year than in 2010, as high crude oil prices will boost official revenue (the authorities derive substantial tax revenue and royalties from the oil and gas sector). The Economist Intelligence Unit therefore expects the budget deficit to narrow to 4.7% of GDP this year, from an estimated 5.5% in 2010 and 7% in 2009. Government revenue will continue to be supported to some extent by strong economic growth in the remainder of the forecast period, and global prices for crude oil will remain relatively high. However, heavy spending on infrastructure and social welfare programmes will keep the budget deficit at around 5% of GDP in 2012-15.

The SBV has taken aggressive steps to tighten monetary policy in recent months, pushing up its policy rates by up to 6 percentage points since November 2010. However, the central bank's general approach to monetary policy has been somewhat inconsistent, and this is likely to remain the case in the forecast period. The SBV's main objective will be to combat inflation, but it will be under pressure to ensure that the cost of financing does not undermine economic growth. The policy tools available to the central bank include a mix of both direct and indirect instruments. In the past few months the SBV has increased its refinance and discount rates in an attempt to slow the expansion of credit. In early 2010 it removed the cap on commercial bank lending rates, which had been previously limited to 1.5 times the base rate, rendering the rate ineffective as a tool to influence monetary conditions. However, the central bank announced a cap on deposit rates in late 2010, and, in March 2011, warned that it would double reserve requirements for banks that fail to reduce the ratio of lending to non-productive activities (as a percentage of total lending), to below 16% by the end of the year. The measures that have been taken so far are unlikely to be sufficient to cool an overheated economy, and, with the CPV endorsing a five-year plan targeting annual real GDP growth of 7­7.5% and maximum inflation of 7% a year, the SBV could come under pressure to loosen its policy stance if there is a risk that growth will remain below the target rate.

Download the numbers in Excel

Despite growing anxiety about short-term risks to the economy stemming from high inflation and the weak dong, economic growth in Vietnam is expected to average 7.1% a year in 2011-15, underpinned by strong growth in consumption, investment and exports. The impact of the recent devastating earthquake and tsunami in Japan on Vietnam is not expected to be severe, but there could be some short-term disruption to the supply chain and trade. Private consumption growth will be driven by an improvement in the labour market and a consequent increase in real wages. Although global economic growth will slow in 2011, demand for Vietnamese goods is likely to hold up, and the manufacturing sector is expected to ramp up production. This will require more workers, and this stronger demand for labour will in turn encourage growth in wages. In addition, remittances from overseas Vietnamese will remain high, while the development of the financial services industry will make consumer credit more widely available, thus providing an important boost to private consumption. As demand for exports revives, investment in the form of purchases of capital goods for the manufacturing sector will pick up. Despite concerns about the quality of Vietnam's business environment and a recent downturn in planned foreign-invested projects, foreign investor interest remains strong. Demand for Vietnamese goods-particularly in the US, China and Europe-will remain strong, but import expansion will also be significant, and net exports will consequently act as a drag on real GDP growth.

Macroeconomic risks are intensifying

The Economist Intelligence Unit's economic growth forecast is subject to downside risks. On the domestic front, if the government fails to adopt a clear macroeconomic policy agenda that gives sufficient attention to economic stabilisation, there are concerns that inflation will remain in double digits and that the downward pressure on the dong will intensify. The authorities have recently taken steps to tighten both monetary and fiscal policy, but there are concerns that this is a case of too little, too late. Owing to the fact that inflation has accelerated in recent months and that the currency has been devalued sharply over the past few years, confidence in the dong has diminished, and there is increased demand for safe havens for US dollars and gold. Part of the problem is that the authorities have failed to damp down inflationary expectations, and as a result drastic measures, such as direct controls on prices, may yet be needed to bring down inflation rather than indirect measures, for example increases in policy interest rates. However, in a move that suggests that the government's fiscal position is too weak to support mechanisms to keep prices artificially low, the authorities have recently been forced to raise prices for electricity and fuel at a time when several Asian economies are increasing or expanding their subsidy programmes in response to rising global commodity prices.

On the international front, there is a risk that the global economic recovery will be weaker than we currently expect. Not only would this damage exports, but it would also have a knock-on effect on consumer and business spending in Vietnam, thereby inhibiting economic growth. Given the precarious nature of the country's international reserves-as indicated by the difficulty that the State Bank of Vietnam (the central bank) has had in managing the level of the dong:US dollar exchange rate-there is cause for concern over the country's ability to finance a widening trade deficit. Vietnam has already had its international credit ratings downgraded. Citing concerns over an external payments crisis, partly owing to the sharp fall in Vietnam's foreign-exchange reserves in the past year or so, an international credit-ratings agency, Moody's Investors Service, downgraded Vietnam's sovereign debt rating in mid-December 2010 to BB- from BB. This was followed shortly after by a downgrade by another credit-ratings agency, Standard & Poor's, which lowered Vietnam's long-term foreign-currency sovereign credit rating to B1 from Ba3, stating that it was concerned that the Vietnamese banking sector had become more vulnerable to shocks. In July 2010 a US-based credit-rating agency, Fitch, downgraded Vietnam's sovereign debt rating, citing concerns over contradictory economic policymaking. Such downgrades and growing concerns over economic stability and the country's diminished international reserves has raised speculation that a support package from the IMF may be needed.

Download the numbers in Excel

Consumer price inflation is forecast to accelerate to 14.9% in 2011, from 9% in 2010, before slowing to an average rate of 7.9% a year in 2012-15. The acceleration this year partly reflects supply-side pressures stemming from rising international commodity prices. We expect crude oil prices (dated Brent Blend) to rise by nearly 27% this year and global food prices to rise by 29%. Global commodity prices will fall in 2012, however, and are expected to remain relatively stable in 2013-15, and this will help to calm supply-side price pressures. However, strong demand-side pressures will continue to push up the overall price level. Although the authorities appear intent on slowing the pace of growth in domestic credit, the target for this year has been lowered only slightly from 23% to below 20%. We therefore still forecast that the stock of domestic credit will rise by an average rate of around 20% a year in 2011-15. The continued depreciation of the dong against the US dollar over the next five years will also serve to make imports more expensive.

Maintaining stability in the exchange rate between the dong and the US dollar will remain a challenge for policymakers, and we forecast that the dong will depreciate by 4.6% a year in 2011-15, dropping from D19,127:US$1 in 2010 to D24,287:US$1 in 2015. In the face of strong downward pressure on the dong, the SBV has devalued the currency on four occasions since November 2009, most recently in February 2011. The devaluations have resulted in a cumulative drop of almost 14% in the currency's value against the US dollar. Further such measures are likely to be necessary in the coming years as the dong will remain under pressure until there are clear signs that the trade deficit is narrowing and inflationary pressures are receding. Moreover, Vietnam's meagre foreign-exchange reserves mean that the central bank will not be able to stem any downward pressure by intervening in the currency markets. According to the latest available data from the IMF, foreign-exchange reserves stood at US$14.1bn (equivalent to around eight weeks of imports) in October 2010, down from a high of US$26.4bn in March 2008. Recent media reports have quoted a government minister as saying that reserves stood at more than US$10bn in December 2010, although the exact level of reserves was not specified.

The current account will stay in deficit during the next five years, averaging the equivalent of 5.1% of GDP a year. Despite a recovery in exports, imports will rise in line with strong growth in consumption and investment, and this means that the merchandise trade deficit will remain wide. In addition to the deficit on the merchandise trade account, the services and income accounts will also stay in the red throughout 2011-15. Tourism receipts are expected to rise steadily in the forecast period, boosting services exports. However, Vietnam will remain reliant on a host of imported services, and there will be particularly strong growth in payments for trade-related services. Outflows on the income account will rise in line with the repatriation of profits by the growing number of foreign-invested enterprises in the country. But the combined deficit on the services and income accounts will continue to be offset by a large surplus on the current transfers account. Capital and financial inflows (including official foreign borrowing) will increase from the low levels that they reached in 2009. The country's international reserves position will therefore improve over the forecast period, having deteriorated in 2009 and early 2010.

Download the numbers in Excel

The authorities have stepped up their efforts to curb any negative political impact from the country's economic woes, given that quickly rising inflation is prompting many Vietnamese to question the government's stewardship of the economy. The more conservative approach to dealing with dissidents in recent weeks is also aimed at preventing any contagion from the political upheavals that have erupted throughout the Middle East and North Africa (MENA). A number of prominent dissidents have drawn parallels between modest protests in Vietnam and the much larger revolts underway in the MENA region. But the comparisons are largely misplaced. Despite rates of inflation accelerating faster, reaching 13.9% year on year in March, ordinary Vietnamese, especially younger people, do not face the same threat of unemployment and stagnation that has bred demonstrations elsewhere in the world. The economy is still growing strongly and there continues to be demand for workers. Despite this, strikes and other labour disputes are increasing as prices rise further.

Nevertheless, political groups such as the outlawed Viet Tan (the Vietnam Reform Party) are stepping up their activities in the country, partly hoping to trigger a larger revolt against the ruling Communist Party of Vietnam (CPV). As a loose network of pro-democracy activists drawing on support bases in the US, Australia, France and other countries with big ethnic-Vietnamese communities around the world, Viet Tan has succeeded in unnerving the CPV's leaders for years. The CPV regards Viet Tan as a terrorist organisation, but the group says it promotes non-violent means to turn Vietnam into a multiparty democracy. Viet Tan also tries to insert itself into causes that might prove popular in Vietnam, and has launched an Internet-freedom campaign against the government's efforts to block subversive material circulating online, in addition to spreading information on how to circumvent officials' periodic efforts to prevent access to Facebook (a social networking website). Similarly, Viet Tan has also been vocal in its opposition to the mining of bauxite ore in the Central Highlands region, a cause that has attracted a broad support within the country's environmentalist community and has even drawn the blessing of one of Vietnam's most prominent war heroes, General Vo Nguyen Giap. More recently, on March 16th three Viet Tan activists, all of whom are US citizens, were arrested in the country's largest city, Ho Chi Minh City, after lending their support to Vietnamese farmers who were protesting the government's confiscation of their land. Two of the three activists, Nguyen Ly Trong and Nguyen Quang Khanh, were released after several days' detention and returned to the US. The third activist, Jennifer Truong, continues to be detained by the Vietnamese authorities. Also, a French-Vietnamese Viet Tan activist, Pham Minh Hoang, is being held after he was accused of plotting to overthrow the government.

The authorities are also cracking down on home-grown dissidents. A legal scholar, Cu Huy Ha Vu, was brought to trial in late March after he was arrested in 2010 for allegedly spreading anti-government propaganda by calling for multiparty democracy. The trial is significant, in large part because of the stature of Mr Vu's father, Cu Huy Can, who was a member of the first cabinet of Vietnam's former long-time leader, Ho Chi Minh, in the years following the second world war, as well as a celebrated poet. The trial is notable for being another example of how the state moves quickly to rein in anyone using the Internet to criticise the government. Mr Vu actively used technology to discuss Vietnam's political climate. He also filed a lawsuit against the prime minister, Nguyen Tan Dung, in 2009 for pursuing the mining of bauxite ore in the Central Highlands. Mr Vu could face a jail term of between three and 12 years.

Further arrests of dissidents are likely in the coming months as Vietnam struggles to bring inflation under control, and this could bring it into conflict with the US, which is keen to fold Vietnam into a new free-trade grouping, the Trans-Pacific Partnership, along with countries such as Singapore, New Zealand, Malaysia and Chile. Human-rights issues threaten to stall that process, and Vietnam has already served notice that it will not relent. On March 10th the Ministry of Foreign Affairs stated that Vietnam would not hesitate to return a prominent Roman Catholic priest, Thadeus Nguyen Van Ly, to prison if his health condition improves. Father Ly was temporarily freed in March 2010 from an eight-year prison sentence (for spreading propaganda) to seek medical treatment for a brain tumour. US officials regularly call for Father Ly's release and a human-rights advocacy, Amnesty International, describes the priest as a "prisoner of conscience". (A prisoner of conscience is a term coined by Amnesty that includes any person "imprisoned solely for the peaceful expression of their beliefs or because of their race, gender or other personal characteristics.")

Widespread concerns have been voiced about Vietnam's nuclear-power programme in the aftermath of the earthquake and tsunami that devastated north-eastern Japan on March 11th. Vietnam is counting on nuclear energy to help meet an expected surge in domestic power demand in the coming decades, and the government therefore intends to bring eight nuclear reactors on stream over the next 20 years. In October 2010 Russia and Vietnam signed a deal to build the latter's first nuclear complex, while Japan and Vietnam have also planned to co-operate on the construction of two more nuclear-power plants. Many other fast-growing Asian countries have also considered turning to nuclear energy as a way of addressing their power-generation shortfalls and reducing their dependence on imported crude oil and other fossil fuels.

The problems surrounding the damaged reactors at the Fukushima Daiichi complex in Japan are raising questions among the Vietnamese public about the suitability of nuclear power and the issue has the potential to add further momentum to the country's increasingly vocal environmentalist movement. Vietnam's green lobby has loudly criticised bauxite mining (although officials are continuing with the project) and the controversy surrounding the use of nuclear power could provide the movement with additional leverage. Nerves were jangled further after tremors from a March 24th earthquake in Myanmar were felt as far away as Vietnam's capital, Hanoi. The government has stated that Vietnam will continue working to develop its capacity to generate nuclear power, but it is also going to some lengths to reassure its citizens that it will be following stringent safety rules as it presses on with the project.

Policymakers in Vietnam have continued with efforts to recalibrate their short-term policy goals by taking more steps to slow credit growth and contain inflationary pressures. Officials' policy agenda for years has reflected a growth-at-all-costs attitude, with the government prioritising a rapid expansion of the economy above price stability. However, with inflation rising to double figures and with many Vietnamese expecting a further round of local-currency devaluation, the country's financial authorities are taking greater steps to revive confidence in both the dong and price stability. The State Bank of Vietnam (SBV, the central bank) began reshaping its policy in February by increasing two policy interest rates, the refinance rate (the lending rate on one of two main lending facilities of the central bank, used on short-term loans) and the reverse repo rate (the rate of interest charged by the SBV during open-market operations) in a bid to slow inflation and keep growth in the outstanding stock of domestic credit this year below 20%, compared with over 37% last year. The SBV has since tightened its monetary policy stance further by increasing the refinance rate by 1 percentage point to 12% on March 8th and to 13% on April 1st, and the discount rate by 5 percentage points to 12% on March 8th.

But the central bank's steady policy tightening might not be enough to stall inflation. In February the authorities devalued the dong by 9% and increased subsidised fuel prices by between 18% and 24%. These moves were followed in March by a rise of 15% in electricity prices, and another round of increases in fuel prices. The impact of these moves has yet to be fully reflected in consumer prices, and the authorities seem to be aware of the depth of the problems that are facing them. On March 18th the CPV's Politburo issued a rare statement following a meeting on the economy. It warned that consumer prices could continue to rise quickly before the government's tightening policies begin to show some impact. This year's target of keeping credit growth below 20% does not appear to be sufficiently stringent. If inflation continues to rise, companies may find it increasingly difficult to service debt in addition to paying higher wages and paying for rising energy and materials prices. Some companies have resorted to borrowing in US dollars because of the lower interest rates on dollar loans, of around 6%, compared with 18% for one-year dong loans. However, such loans could be difficult to repay if the dong is devalued further.

The big question going forward is whether Vietnam will persist with an inflation-targeting policy. Although in theory the SBV has some leeway in terms of adjusting policy to contain inflationary pressures, the reality is that central bank officials are often frustrated by the authorities, who frequently pursue high economic growth rates in order to expand their power bases within the CPV. In July 2010 Vietnam's policymakers loosened policy when inflation appeared to be receding, only for the rate of inflation to accelerate a few months later. This time the Vietnamese government appears to have taken the mistakes of 2010 to heart, and it seems intent on containing inflation owing to its harmful impact on the dong and confidence in the economy. However, it is worth noting that the Politburo statement highlighted that the government was struggling to meet both its goals of rapid economic growth and slower price rises. At some point, Vietnam's political leaders will have to make a difficult choice, and in the past they have always chosen the pro-growth path.

The government is trying to confront the lack of confidence many Vietnamese have in their country's economy. Much of that distrust is expressed through the black market for US dollars as well as in the gold market. It is not unusual for US dollars that are traded in the black market to fetch a 10% premium over official exchange rates, and plenty of people opt to buy US dollars even at these rates to preserve the value of their savings. In recent weeks, however, the authorities have begun to crack down on the unofficial trade in US dollars by enforcing long-standing but frequently ignored laws prohibiting the use of US dollars for everyday business. The government is also attempting to shut down the black market, and it began by arresting four people in Hanoi for attempting to exchange US$400,000 for dong on the unofficial market. Now many of the gold shops in Hanoi's old quarter, the centre of the illicit dollar trade, are saying they no longer trade foreign currencies. The idea behind the crackdown is that by shutting down the informal market, officials are reducing the number of ways in which Vietnamese can speculate against the local currency, forcing them to come to terms with the dong's weakness and potentially stabilise its value after a series of devaluations. The move also increases the amount of the local currency in bank deposits, which could also serve to help to firm up the financial sector.

Economic growth slowed in the first quarter of the year, with the pace of year-on-year expansion dropping to 5.4%-the slowest pace since the second quarter of 2009. Growth had accelerated to 7.6% in the fourth quarter of 2010, and the economy posted an overall expansion of 6.8% in 2010 as a whole, according to the official data agency, the General Statistics Office (GSO). Although the impact of recent policy tightening efforts are unlikely to have been felt fully yet, they may have had some impact in contributing to the slowdown, but Vietnam has typically recorded a relatively slow pace of growth in the first quarter of recent years, with growth accelerating in subsequent quarters. Unfavourable weather conditions are thought to have hampered the agricultural sector somewhat, with the sector expanding by 2.1% year on year, while industry (including construction) grew by 5.5%. Manufacturing posted growth of 6.1% year on year in the first quarter, which was slightly above the rate of expansion recorded in the first quarter of 2010 (of 5.9%), but construction growth slowed markedly, dropping to 4.4% from 7.1% in the first quarter of 2010 and from 10.1% in 2010 as whole. Services, meanwhile, grew by 6.3%, supported by a 6.3% expansion in retail and wholesale trade and 6.9% growth in the hotels and restaurants sector.

The slowdown in GDP growth in the first quarter of 2011 is not necessarily evidence that the recent tightening measures are biting yet. Indeed, Vietnam's twin problems of rising inflation and a widening trade deficit intensified in March. Inflation poses the more immediate problem. The consumer price index (CPI) rose by 13.9% year on year in March, compared with 12.3% in February, according to the GSO. On a month-on-month basis the CPI rose by 2.2%, the biggest monthly increase since May 2008, as rising fuel and energy prices have pushed up the cost of a wide range of products. In the breakdown of CPI, food prices rose by 18.3% year on year, while prices for beverages and cigarettes rose by 10.8%. Garments and footwear prices rose by 9.9%, and housing and construction material costs soared by 16.9%. Meanwhile, education costs, an important part of the index, rose by 24.3% year on year.

The merchandise trade deficit remains wide. In the first quarter export revenue increased by 33.7% year on year, to US$19.2bn, but the import bill stood at US$22.3bn, a year-on-year increase of 23.8%. The deficit of US$3.1bn was only slightly lower than that recorded in the year-earlier period, of US$3.3bn.

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

Please see graphic below

Please see graphic below

Please see graphic below

Land area

331,051 sq km

Population

86m (2009, General Statistics Office estimate)

Main towns

Population (of province) in '000 (2009)

Ho Chi Minh City: 7,165

Hanoi (capital): 6,472

Haiphong: 1,842

Climate

Tropical monsoon; north cool and damp in winter (November-April), hot and rainy in summer; south more equable; centre most subject to typhoons. The rains are highly unpredictable

Weather in Hanoi (altitude 216 metres)

Hottest month, June, 26-33°C; coldest month, January, 13-20°C; wettest month, August, 343 mm average rainfall; driest month, January, 18 mm average rainfall

Weather in Ho Chi Minh City (altitude 9 metres)

Hottest month, April, 24-35°C; coldest month, January, 21-32°C; wettest month, September, 335 mm average rainfall; driest month, February, 3 mm average rainfall

Language

Vietnamese (spoken by about 90% of the population); English (increasingly favoured as a second language); some French; a little Russian and German; minority languages such as Hmong, Thai, Khmer in more remote rural areas

Weights and measures

Metric system. Local land measurement: 1 mau = 3,600 sq metres (north); 1 mau = 5,000 sq metres (centre)

Currency

Dong (D). Average exchange rate in 2010: D19,127:US$1

Time

7 hours ahead of GMT

Public holidays

January 1st (New Year's Day; holiday taken on January 3rd); February 2nd-7th (Tet, Lunar New Year); April 12th (Gio To Hung Vuong Day); April 30th (Liberation of Saigon; holiday taken on May 2nd); May 1st (Labour Day; holiday taken on May 3rd); September 2nd (National Day)

Official name

Socialist Republic of Vietnam

Form of state

One-party rule

The executive

The cabinet is constitutionally responsible to the National Assembly, which is elected for a five-year term

Head of state

The president, currently Nguyen Minh Triet

National legislature

The unicameral 493-member Quoc Hoi (National Assembly) meets biannually and typically serves a five-year term. The assembly appoints the president and the cabinet

Local government

Centrally controlled provinces and municipalities are subdivided into towns, districts and villages, which have a degree of local accountability through elected People's Councils

Legal system

The regional people's courts and military courts operate as courts of first and second instance, with the Supreme Court at the apex of the system

National elections

Elections for the National Assembly took place in 2007; the next are due in May 2011

National government

The Communist Party of Vietnam, and in particular its politburo, controls both the electoral process and the executive

Main political organisations

The Communist Party of Vietnam (general secretary: Nguyen Phu Trong); the Vietnam Fatherland Front

Main members of the cabinet

Prime minister: Nguyen Tan Dung

Deputy prime ministers:

;Nguyen Sinh Hung

;Pham Gia Khiem

;Hoang Trung Hai

;Nguyen Thien Nhan

;Truong Vinh Trong

Key ministers

Agriculture & rural development: Cao Duc Phat

Construction: Nguyen Hong Quan

Culture, sports & tourism: Hoang Tuan Anh

Education & training: Nguyen Thien Nhan

Finance: Vu Van Ninh

Foreign affairs: Pham Gia Khiem

Industry & trade: Vu Huy Hoang

Information & communications: Le Doan Hop

Interior: Tran Van Tuan

Justice: Ha Hung Cuong

Labour, war invalids & social affairs: Nguyen Thi Kim Ngan

National defence: Phung Quang Thanh

Natural resources & environment: Pham Khoi Nguyen

Planning & investment: Vo Hong Phuc

Public health: Nguyen Quoc Trieu

Transport: Ho Nghia Dung

Central bank governor

Nguyen Van Giau