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Reforms at stake during Vietnam's 'make-or-break' meeting

The My Dinh National Convention Center in Hanoi, the main venue of the Vietnam Communist Party's 12th National Congress.
HOANG DINH NAM | AFP | Getty Images
The My Dinh National Convention Center in Hanoi, the main venue of the Vietnam Communist Party's 12th National Congress.

A power tussle between Vietnam's Prime Minister and the country's most influential leader is overshadowing a meeting of the ruling Communist Party, a rare occurrence for a party accustomed to tranquil internal politics.

Called the 12th Party Congress, the eight-day event that began on Wednesday will nominate candidates for the country's top political posts. Most at stake is the title of General Secretary of the Communist Party, considered the most powerful position, surpassing even the Prime Minister.

Current Prime Minister (PM) Nguyen Tan Dung is reported to be seeking the role of General Secretary as his term comes to an end, and that's created tensions with incumbent Nguyen Phu Trong given the two's opposing policy agendas.

"Dung is seen as being pro-reform and is expected to push ahead with an economic liberalization agenda, as well as continuing the process of building closer political and economic relations with the U.S," explained Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight.

Dung made headlines in 2014 when he demanded that Beijing stop deploying oil rigs into a disputed territory in the South China Sea, known as the Paracel Islands or Xisha islands in China. His assertive stance to China's aggressive expansion in the area festered tensions between the two nations after Vietnam saw deadly anti-Chinese riots earlier that year.

"Trong meanwhile is expected to take a more cautious approach to economic reforms, continuing to follow a state-led model of economic planning that will downplay economic reforms of state-owned enterprises and be more restrained in building Vietnam's ties with the U.S," said Biswas.

However, a leak from a recent closed-door meeting of party officials revealed that PM Dung no longer stands a chance at becoming General Secretary.

According to the leak, Dung will retire, Trong will stay on as Secretary General and deputy PM Nguyen Xuan Phuc will become Dung's successor, said Carl Thayer, emeritus professor of politics at The University of New South Wales. News outlets, such as the Wall Street Journal and the Nikkei Business Daily, have also published those findings, citing unnamed sources.

"If the leak is correct, this Congress is now an opportunity lost," remarked Thayer, who expects more of the status-quo if Trong remains in power.

"Until the current General Secretary retires and a replacement is found, Vietnam won't be in fourth gear and moving ahead with global integration."

What's at stake

Being a one-party country, it's rare for Vietnamese candidates to have such extreme differences, which makes this particular congress especially consequential for the economy and financial markets.

Despite growth hitting a five-year high of 6.6 percent in 2015 spurred by strong electrical and electronic exports—thanks in part to the central bank's aggressive currency depreciation— structural reforms are badly needed, economists warn.

"The new leader needs to seize the window of opportunity for Vietnam to become a major Asian hub for manufacturing exports. While this transformation is already underway, the next leader needs to underpin this process by continuing to liberalize the economy and improve competitiveness," Biswas said.

Multinationals such as Samsung and Intel have already been ramping up their presence in the country and the recent Trans-Pacific Partnership is expected to provide a further fillip to growth, but analysts say more needs to be done to improve the ease of doing business.

From an investor's point of view, broad removal of foreign ownership limits for stocks is the number-one priority but that really depends on who's in power, said Kevin Snowball, CEO of Ho Chi Minh-based PXP Vietnam Asset Management.

Last year, the government declared the current 49 percent ownership cap for overseas investors would be lifted for certain industries, but provided few other details except for the fact that banks would maintain a 30 percent limit. Then in December, officials said 17 areas—including real estate, transportation, construction, and health care—would be open to foreign investors if they met certain ownership ratios, which remain undefined. No other information was provided.

"Foreigners are on average between 10-15 percent of daily turnover on the Ho Chi Minh Stock Exchange so by implication, domestic investors are more than 80 percent...The market can only mature if it broadens its investor base, instead of being dominated by retail investors" said Snowball, who has lived in Vietnam since 2002.

In terms of listed stocks, he believes Vietnam remains the most accessible among its neighbors, particularly Myanmar's new bourse.

"Vietnam is essentially China fifteen years ago... There are still major problems with transparency and corruption and hopefully that's something on the top of the agenda for the next leader."

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