Vietnamese President Nguyen Xuan Phuc resigned from his government and party positions on 17 January 2023. This ostensible reason was to take responsibility for corruption by senior officials under his watch as prime minister (2016-2021). He is the most senior official so far to be removed under General Secretary Nguyen Phu Trong’s anti-corruption campaign. Vice President Vo Thi Anh Xuan has taken over as the interim president as per constitutional procedure, until a successor is formally appointed by a National Assembly vote (the next session is scheduled for May 2023).

Why did it happen?

Phuc’s forced retirement may have been a high-level political power play by Trong’s faction to eliminate political rivals. The timing of the leadership shakeup before the festive period (lunar new year, or “Tet” holidays) is unusual but recent scandals in which two deputy prime ministers under Phuc were brought down may have provided an opportunity. There had also been talk that Phuc’s family members were implicated in corruption scandals. These circumstances probably helped Trong’s supporters garner consensus in the Politburo to remove Phuc, who may have then agreed to step down in return for avoiding prosecution for him and his family.

Removing Phuc would help Trong’s faction consolidate power in the Politburo. The top four officeholders (general-secretary, prime minister, president and chairperson of the national assembly) will be selected from the next iteration of the 18-member body, of which two spots now need to be filled, vacated by Phuc and Standing Deputy Prime Minister Pham Binh Minh, who was removed for corruption about three weeks before Phuc. Trong is widely expected to step down at the 2026 party congress after an unprecedented third term, but the identity of his successor is up in the air. Phuc is probably still seen as a threat although he had failed to garner enough support at the 2021 congress to succeed Trong as general-secretary.

What does it mean for business?

Vietnam’s economic policy is unlikely to fundamentally change under party chief Trong’s leadership. The office of the president has less direct influence over party decision-making and economic policy, and it would not have a major impact on policymaking even if Phuc’s replacements hail from security rather than technocratic backgrounds (Public Security Minister To Lam is reportedly one of the leading candidates to replace Phuc, followed by Defense Minister Phan Van Giang).

Business should consider what Phuc’s removal says about future of Vietnam’s anti-corruption campaign and how it can impact them. The removal of top politicians like Phuc is an indicator that the party leadership clearly distrusts leaders who are more directly involved in business, and weeding out corruption remains an existential threat to the party’s legitimacy. This has several implications laid out below. First, a more politically cautious climate will ensue as politicians draw lessons from these developments and business dealings and government approvals like licenses and permissions proceed more slowly. Second, businesses need to be prepared to steer clear of and/or increase risk mitigation plans given a potential wave of politicized anti-corruption investigations in the coming weeks and months after the lunar new year holidays. Third, businesses also need to be watchful of a possible longer-term trend of the party becoming more focused on internal control, manifested in areas like purging political rivals and internal censorship, which creates operational, regulatory, and possibly also reputation risks for businesses. Two of the four top positions may be staffed by leaders with security backgrounds –  Pham Minh Chinh, the current prime minister, and To Lam, if he replaces Phuc. Both Pham and To were former public security officials.

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Most analysts expect the growth trajectory for Vietnam to continue. This will depend on some of the following factors. For one, Vietnam’s growth has been led mostly by the external sector; thus, its ability to maintain investor confidence will be key to maintaining its growth.

Politics

With the once-per-five-years National Party Congress underway in early 2021, clarity on who emerges from the internal power tussles as party chief (general secretary of the Communist Party of Vietnam) will be important for markets and investors alike. The least disruptive scenario is for incumbent party chief Nguyen Phu Trong to remain in charge while signaling a future leadership transition process. This could happen if the Politburo installs Trong’s protégé, Standing Member of the CPV Secretariat Tran Quoc Vuong, as president while current Prime Minister Nguyen Xuan Phuc stays on for second term, or if Phuc takes the president post. (This would effectively restore the “four pillar” leadership structure, i.e. the general secretary, prime minister, president, and chair of the national assembly).

A less stable scenario would be a changeover at the very top. Trong, at 76 years old (long past the traditional retirement age of 65 for politburo members and having a history of ailing health), could step down as general secretary and install his preferred successor Vuong. But this would likely precipitate a fragile peace with Vuong’s rival Phuc, and trigger more party infighting given resistance from Phuc’s pro-reform supporters.

The outcome of the power tussle is unlikely to change the general orientation of Vietnam’s pro-market and pro-investment policies, though leaving a pro-liberalization candidate like Phuc in-charge of the economically-focused PM role may hasten the pace of more pro-market policies like privatization of state-owned enterprises.

Pandemic handling and recovery

Vietnam has stood out in the region with its relatively successful containment of the pandemic. The government managed to keep the cumulative number of infections at one of the world’s lowest rates through strict quarantine rules and quick contact-tracing measures. With the pandemic situation still evolving, continued containment of the virus will be important for minimizing disruption to businesses, especially the booming export-sector, and also maintaining confidence among foreign investors.

Pending the successful rollout of its vaccination program, domestic tourism numbers should start to rise in Vietnam, and this may also extend to inbound international tourism, subject to unpredictable travel arrangements. Services makes up about a third of Vietnam’s GDP, and inbound tourism is a key driver.

Low-cost production base

Vietnam will continue to remain attractive given its low wages and rents, a trend that began in the last decade as low-end manufacturing moved out of China due to rising costs there. In recent years, Vietnam has also boosted its attractiveness through trade liberalization, i.e. the signing of trade deals with major markets like the recently concluded RCEP and UK-Vietnam FTA, and by riding on the “China plus one” trend of firms relocating out of China and into alternative production bases like Vietnam to diversify supply chains.

Looking ahead, Vietnam’s ability to absorb investor demand in fast-growing export sectors, especially in the electronics sector (Vietnam’s largest export category), will hinge on several factors. First, Vietnam is experiencing a shortage of skilled local IT talent and needs to deepen its labor market quickly. Second, it also needs to increase the pool of local suppliers and reduce reliance on imports of parts from China. Third, infrastructure improvements need to be planned, funded, and implemented speedily, such as a new airport in Ho Chi Minh city. This will have to be complemented by a modern logistics sector, which again needs to solve local capacity issues rather than be dominated by foreign logistics players.

The views expressed in this article are those of the authors alone and do not necessarily reflect those of Geopoliticalmonitor.com or any institutions with which the authors are associated.

The post How Does Vietnam Maintain Its Growth Momentum in 2021? appeared first on Geopolitical Monitor.

Shared interests 

Vietnam and Australia have a greater need for each other under the Indo-Pacific strategic environment that exists today. Vietnam seeks to diversify its foreign relations with other actors in the region, especially major ones, according to Vietnam’s four major foreign policy principles. Regarded as one of the major actors in the Indo-Pacific region due to its close relations with key regional powers and its economic and military power, Australia is not only a reliable partner for Vietnam but also for other ASEAN countries. Being a chair of ASEAN this year, if Vietnam was to foster its military ties with Australia, it could leverage its regional and international prestige as a responsible and efficient leader of ASEAN. At the same time, Vietnam would be a bridge for further cooperation between ASEAN and Australia, especially in the defense and security  sphere, which is vital for Vietnam’s ambition to become a full-fledged middle power. 

As for Australia, in recent years it has considered ASEAN as pivotal in the Indo-Pacific, geographically, diplomatically and strategically, and Canberra supports ASEAN-centrality in the Indo-Pacific’s most important regional architecture, as noted by Australian Foreign Minister Julie Bishop. Australia thus seeks further cooperation with ASEAN countries to nurture and defend a stable and rules-based order in the Indo-Pacific. Hence, it would be necessary for Australia to strengthen its relations with Vietnam, especially in the realm of military and defense. As mentioned previously, Vietnam is ASEAN’s chair this year, and it is also proven to be a strong leader of the bloc with its economic, political and diplomatic achievements so far. As such, fostering defense ties with Vietnam is in the interest of Australia, enabling it to deepen its strategic relations with ASEAN. 

It is also noteworthy that the forging Vietnam-Australia military cooperation dovetails with both sides’ interests in the South China Sea. Both Vietnam and Australia have significant interests in these waters. For Vietnam, it has territorial claims in the South China Sea, and the country sees South China Sea disputes as a threatening factor for regional stability, peace, and prosperity. For Australia, despite not being directly involved, it shares the same concerns as Vietnam over growing Chinese power in the South China Sea. Because of its geographical location, Australia’s economy depends on the safety of maritime routes, and the South China Sea is one of the most vital among them. More importantly, China’s increasing assertiveness in the region threatens the stability that Vietnam and Australia seek to maintain in the South China Sea, so Vietnam and Australia have the same incentives to contain China’s military actions. In these regards, deepening bilateral defense ties matters for both countries. 

A favorable landscape 

The current regional landscape would be conducive to both countries to cement their bilateral defense ties, making the fostering of their military relations more vital. Although the COVID-19 pandemic has seriously hit the two countries, it may, in some aspects, present an opportunity for Vietnam and Australia to enhance their military relations. Vietnam and Australia have both responded to the pandemic well, evidenced by their relatively low number of cases and deaths compared to other countries in the region. Notably, Indonesia, long deemed the most important strategic ally of Australia in ASEAN, is suffering greatly from the pandemic with the largest number of deaths in Southeast Asia. This implies that Australia cannot put all its eggs in one basket and must diversify its regional partners. Vietnam, given its leadership of ASEAN, its shared interests with Australia and its geostrategic location at the heart of the Indo-Pacific, is perhaps the best alternative for Australia. 

In addition, the regional strategic environment is now gradually more favarable for the two countries to foster their defense cooperation. Apparently China is one of the most important factors hindering further military cooperation between Vietnam and Australia. Despite sharing the same concerns about China as a destabilizing force in the South China Sea, neither Vietnam nor Australia wants to risk relations with China by promoting their defense cooperation, due to their economic dependence on China. However, the fact that China is facing a plethora of internal and external challenges may make it less able to exert significant influence over Vietnam and Australia as it did before. Regardless of controlling COVID-19 well, China is economically suffering from the pandemic, with a sharp decline of GDP growth, and it has been blamed for its “secrecy, deceptions and cover-up” for the global spread of COVID-19. Besides, China’s ramping up military presence in the South China Sea  has raised a great threat for Indo-Pacific countries, and several ones have joined the ‘battle of diplomatic notes’ against China, most notably the United States. 

Given the difficulties that Beijing is facing, Vietnam and Australia have been changing their policy toward China, paving the way for them to gradually strengthen the bilateral defense ties in the future. For Australia, it has explicitly rejected China’s maritime claims in the South China Sea, meaning it has arguably abandoned its neutrality on South China Sea disputes. In July, Australian warships also conducted naval exercises with the US and Japan in the Philippines Sea, where China claims territory. This can be seen as a reaffirmation of Australia’s stance on the South China Sea disputes and its commitment to address common security issues. In the case of Vietnam, it has been the front-liner in ASEAN against China in the disputes, and in its latest Defense White Paper 2019, Hanoi declares that it “will consider developing necessary, appropriate defense and military relations with other countries.” This can be viewed as an implicit message for major powers that Vietnam might to a certain extent go further in military relations with other countries if China’s actions in the South China Sea cross its redline. 

Policy recommendations  

First and foremost is that both sides should be more proactive in extending military relations. Up until now, there have been no major military trade deals or substantive capacity-building activities between Vietnam and Australia, which is a remarkable limitation in the Vietnam-Australia strategic partnership. Defense and security cooperation is among three priority areas agreed by both countries  for the period of 2020-2023. In this respect, a genuine Vietnam-Australia strategic partnership is the one with closer defense ties. Therefore, Vietnam and Australia should work toward more significant military activities, such as joint maritime security capacity-building, technology transfer or working together to complete deals on providing Australian modern defense equipment to Vietnam. 

Next, Vietnam and Australia should accelerate bilateral defense cooperation, but in a gradual pace so as not to stir China’s anxiety. It is crucial for the two countries to bear in mind that China is only facing a temporary setback and may return to strength,  thereafter putting pressure on Vietnam and Australia’s closer military ties. Because of this, Vietnam and Australia should step further in their military relations in a cautious way so that they could both achieve their defense interests and avoid agitating China. 

Additionally, the two countries could utilize existing security mechanisms in the region as a supplemental channel to cultivate Vietnam-Australia bilateral military ties. Both countries are members of multilateral regional security institutions, such as the ASEAN Regional Forum, ASEAN Defense Ministerial Meeting Plus, Council of Security and Cooperation in the Asia Pacific, to name a few. Multilateral security mechanisms can address regional issues more effectively than bilateral ones to a certain degree, thanks to their inclusiveness in terms of members and scope of issues. By cooperating in these mechanisms, Vietnam and Australia would have a better understanding of regional security issues, enabling both sides to drive defense ties in a trajectory that is beneficial for them and for the whole region. 

The bottom line is, with what Australia and Vietnam are looking for and have done so far, it matters for these two countries to deepen the bilateral military cooperation. The forging of defense relations suits the thinking of both sides in terms of geostrategic, at least in the near future, so the prospect of a flourishing Vietnam-Australia defense ties is realistic – provided both sides pursue this prudent policy. 

The views expressed in this article are those of the authors alone and do not necessarily reflect those of Geopoliticalmonitor.com or any institutions with which the authors are associated.

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