For the longest time, Vietnam was the “in” thing. Foreign investors gushed over its low-cost but hard-working labour force. Even more impressive was how hungry those young Vietnamese were, with their keenness to learn and upgrade themselves endearing them to foreign investors.
Though nominally committed to socialism, the ruling Communist Party of Vietnam (CPV) has pragmatically supported the private sector and foreign investment. The economy is one of the most open in the world in terms of the share of trade in the economy and the leadership has zealously pursued free trade agreements with most of its key trading partners. Private enterprise has flourished, with some of the bolder business leaders becoming dollar billionaires. Vietnam has also been a huge winner from the trend of production relocating out of China. Its proximity to China has helped but so too has all its other strengths.
Vietnam’s appeal is still strong but one of the key strengths that contributed to its attractiveness is coming under a cloud — there are growing concerns over political stability following recent unusual changes in its top leadership.
Our view is that there is indeed an unwelcome degree of political uncertainty that did not exist before. However, the key issue for investors is the predictability of economic policies — which we think will not be badly affected by the turnover in political leaders given the broad consensus that exists on that issue among the political leaders.
There are two areas, however, which could be affected. First, political uncertainty could hurt the economy, especially as local officials are hesitant to approve major projects or issue licences needed by investors to begin operations. This uncertainty could weaken the speed of recovery from last year’s slowdown in external demand and the downturn in the local real estate market. Second, the rival factions espouse different approaches to relations with China — victory for the reformist faction which is wary of China could thus affect the geo-political balance in this region.
A long-simmering political struggle is reaching a crescendo
Concerns about political instability were triggered by the abrupt resignation of Vietnamese President Vo Van Thuong on March 20, barely a year after he was elected to office. The official word was that Thuong resigned to take responsibility for violations which discredited the party and the state.
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His departure was surprising as he had been seen as a protégé of, and perhaps even a possible successor to, the CPV general secretary and leader of the CPV’s conservative faction, Nguyen Phu Trong. Last year’s ouster of Thuong’s predecessor, the reformist Nguyen Xuan Phuc, had been seen as a victory for Trong. Phuc had been forced to take responsibility for corruption that occurred in departments that he had overseen some years earlier — even though there was no allegation against him personally.
Note that in January, Politburo member Tran Tuan Anh was also forced to quit following an investigation into alleged violations at the trade ministry when he led it. Several provincial CPV leaders have also been purged in recent months on corruption charges.
Such volatility in Vietnam’s leadership is highly unusual and suggests that the decade-long tussle between conservatives and reformists in the CPV is heating up. One reason for this could be the 79-year-old Trong’s health. Questions were raised over his health in January when he failed to receive international visitors such as Indonesian President Joko Widodo and Laos’ Prime Minister Sonexay Siphandone. Although he re-appeared soon after, there is persistent speculation that he is now ailing, providing an opening for his rivals in the reformist faction to make a comeback.
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This infighting between conservatives and reformists has been underway at least since the days of Trong’s predecessor and adversary, the previous senior Vietnamese leader, Nguyen Tan Dung. The conservatives under Trong seek greater party discipline and are determined to stamp out corruption. They have also been disposed to maintain friendly ties with China despite the territorial disputes between the two countries. Conservatives are also said to be more inclined to crack down on political dissent.
The reformist wing associated with people like Dung and Phuc, on the other hand, has been more willing to take on China while being somewhat lackadaisical about cracking down on corruption and less harsh on political dissent.
Where key policies of interest to foreign investors are concerned, though, there has been a broad consensus among the different CPV factions in support of an open economy and attracting foreign investors. Both factions have supported the multiple free trade agreements that Vietnam has pursued. Being friendly to foreign investors has not been a major area of disagreement between the factions.
The infighting may last a while
Vietnam’s presidency is largely ceremonial but the post can be a stepping stone to higher office. With Thuong no longer in the running, there is likely to be a big fight over the succession to Trong at the 2026 Party Congress. The party constitution dictates that the new president must have served a full term as a Politburo member, meaning that the leading candidates are Prime Minister Pham Minh Chinh, National Assembly Chair Vuong Dinh Hue, Standing Member of the Communist Party of Vietnam Secretariat Truong Thi Mai, and Minister of Public Security To Lam.
However, it is also possible that the CPV may choose to get around its own rules and nominate an official who has yet to complete a full Politburo term. Vice President Vo Thi Anh Xuan is likely to act as president until a successor is named. Still, even after a new president is elected we expect infighting to continue all the way until the 2026 Party Congress.
Thuong’s removal will complicate the political succession process in the country. Thuong’s departure means that only four of the 14 remaining Politburo members fulfil the age criteria to serve another term, unless a special waiver is given. The early 2026 party congress could thus see an unusually large turnover of senior leaders. That will not only add to the uncertainty but because the stakes are so high, the infighting could turn more intense.
Vietnam’s fundamental policy orientation will not change but the economy could still suffer
The good news is that whichever camp wins the power struggle, the pro-growth policies that have powered Vietnam’s economic surge will continue. Note, for example, that even with conservatives such as Trong and Thuong in charge, Vietnam went ahead just recently with labour reforms that were demanded by its trading partners. Vietnam agreed to ratify the United Nations International Labor Organization’s Convention 87, which allows the free establishment of trade unions, something that the CPV has long resisted. The Vietnam General Confederation of Labor, an organ of the CPV, had until now been the only trade union allowed to operate in Vietnam.
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Nevertheless, there are some real costs arising from the ongoing infighting. Unclear as to who will win the power struggle, local party officials and provincial technocrats are dragging their feet on important decisions at the ground level. Many fear that they may be involved with tainted projects that could cripple their careers. Several are also strategising by waiting out to see which way the political wind blows. This means that urgent projects to resolve the country’s dismal power and logistical infrastructure have been put on indefinite hold.
Many foreign investors are also complaining that they are not being issued the permits they need to operate even after completing the construction of their production facilities. As a result, foreign investors are delaying actual investment commitments until there is more political clarity. This is probably why the ratio of realised to promised foreign direct investment declined in 2023 from the prior year. That, too, will slow the economy.
Possible geopolitical implications
While which faction wins the power struggle may not matter for the openness of the economy and its long-term attractiveness to foreign investors, it will matter greatly for relations with China. While Trong, like all Vietnamese leaders, is a strong nationalist who probably resents China’s claims over what Vietnam considers to be its territory, he has also been keen to ensure good relations between the two ruling communist parties.
Even as Vietnam has strengthened its defences in disputed areas and worked quietly to improve relations with the US and Japan, Trong has preferred a gentler approach to China, forsaking verbal sparring in favour of quiet diplomacy over their differences. This is in contrast to the defiant one taken by the Philippines in the past year.
This quiet approach to China may not last if the rival faction wins power. Relations with China were strained when the reformist leader Nguyen Tan Dung was the dominant leader. In 2014, tensions between China and Vietnam rose when a Chinese oil rig was moved into an area claimed by Vietnam. That led to a tense stand-off between China and Vietnam and anti-China passions were inflamed as a result, which the then leadership went along with. Large-scale anti-China protests erupted in Vietnam and Chinese establishments were trashed by protestors. Dung even threatened legal action against China and tensions only subsided after China pulled the oil rig out a month earlier than it had planned.
Conclusion
In short, the political uncertainty is unfortunate but the risk is not to pro-growth policies or promised structural reforms as there is a broad consensus within the CPV on the basic policy orientation. Vietnam also has a good track record of keeping to the promises it made in trade agreements.
Nevertheless, an extended period of uncertainty will inhibit decision-making at the central government level while lower-level bureaucrats will become even more hesitant to make decisions on licensing and approvals for economic projects. The resulting slowdown in economic growth could deter foreign investors who want to take advantage of Vietnam’s growing consumer spending, rather than just use Vietnam as a low-cost base for the production of goods for export.
Vietnam still has a lot going for it. Its demographic dividend in the form of educated young workers hungry to learn will still help Vietnam for another decade or so. It now has several clusters of manufacturing in the north and south of the country where globally competitive ecosystems are emerging. Foreign investors are now putting money not only in low-end production but also in research and development.
There are still many areas of untapped potential — tourism being one and higher value processed agricultural goods. Vietnam’s abundance of rare earth ores is now gaining the attention of foreign investors as well. Although Vietnamese production is still a fraction of what China produces, geopolitical tensions mean that many foreign countries would welcome the opportunity to buy from Vietnam rather than China. The government has approved plans to step up production by around 15 times over the next six years.
With so much at stake, there is a strong incentive for Vietnam to end this political uncertainty. This is only likely once the succession to the ailing CPV chief Trong is settled.
That, unfortunately, may take a while.
Manu Bhaskaran is CEO of Centennial Asia Advisors
