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Home » Vietnam’s corruption crackdown is paralysing officials and worrying investors

Vietnam’s corruption crackdown is paralysing officials and worrying investors

by Kane Guzman
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Vietnam’s new president, Vo Van Thuong, has vowed to continue the country’s fight against corruption, but at what cost?

Following March’s leadership election in Vietnam, foreign investors will be assessing whether the appointment of a new president will see the easing of a long-running anti-corruption campaign that has accelerated in the past year, inadvertently putting a severe strain on the economy.

The crackdown, dubbed ‘blazing furnace’, has ensnared hundreds of businessmen and officials, often paralysing decision-making and, in doing so, slowing some economic activity. Administrators have been reluctant to approve projects and procurement that may subsequently be investigated for irregularities, leaving them vulnerable to dismissal or prosecution.

The delays could act as an economic break on an export-reliant country looking to persuade more Western manufacturing companies to switch some or all of their Chinese production to Vietnam amid rising tensions between Washington and Beijing and China’s uncertain recovery from its zero-Covid policy.

Vietnam’s anti-corruption message is mired in confusion

Vietnam’s new president, Vo Van Thuong, was appointed after his predecessor stepped down in January in what was seen as an intensification of the anti-graft drive – which also saw the resignation of two deputy prime ministers.

The crackdown, in place since 2016, is aimed at restoring trust in the ruling Communist party and addressing the integrity concerns of foreign investors, but it does appear to have been used at least in part by the leadership to remove opponents and rivals. That the campaign claimed three senior leaders just before the national assembly voted on a new head of state is widely seen as evidence of its politicisation.

Whatever the motivation behind it, ‘blazing furnace’ has led to many officials sitting on their hands, apparently fearing that any mistake they make may be pounced upon by either those seeking to get them out of the way or overzealous investigators wanting to boost numbers of arrests.

There is good reason for such concern. Vietnam is a tightly controlled, authoritarian state, where arbitrary arrest, detention and prosecution occur. Indeed, Nikkei Asia points out that what qualifies as fraud or corruption in Vietnam largely depends on the discretion of its authorities – and the seeming randomness of the purges has clearly had economic consequences.    

In February, Bloomberg reported that once-routine approvals for real estate developments and infrastructure spending are increasingly being held up. The agency reported that one official responsible for infrastructure approvals said that he would prefer to be scolded by superiors for inactivity rather than risk imprisonment for any perceived mistakes. The Asia Society magazine in November 2022 commented that experts believe the campaign has thrown a wrench in the functioning of government, characterised, it said, by an ongoing failure to disburse public funding.

Also in November, Reuters reported that officials are so fearful of being accused of corruption they are reluctant to greenlight procurement and investment, causing a shortage of essential goods and dampening investor confidence. Projects involving medium-sized investors were said to be repeatedly delayed because of missing signatures from officials, and delays in approving long-awaited energy projects were reportedly contributing to power shortages.

‘Blazing furnace’ takes sharp focus

While the anti-corruption campaign has been broad in scope, in the past year it has had its sights firmly on the financial and real estate sectors, with a number of prominent property developers arrested and the dismissal of the general director of the Ho Chi Minh Stock Exchange and the chairman of the State Securities Commission.

After his appointment as president, the second-highest position in the country, Thuong said he would “resolutely” continue the fight against corruption. He is seen as an ally of, and possible successor to, the ageing general-secretary of the Communist party, Nguyen Phu Trong, the architect of ‘blazing furnace’. However, with the election of Thuong, there is a possibility that the intensity of the crackdown may ease as there is less need to employ it as a means of removing rivals.

For now, at least, the paralysis does not appear to be deterring foreign investors. In the first ten months of 2022, foreign direct investment in the country rose by 82%, the second-highest growth rate in Asia-Pacific, according to Investment Monitor figures. In its fourth-quarter survey for 2022, the European Chamber of Commerce in Vietnam revealed that 41% of respondents said they were moving their operations from China to Vietnam, 13% up on the previous quarter.

The downside of Vietnam’s corruption crackdown

However, Vietnamese leaders know that if they want to capitalise on the supply chain diversification in the region they will need to address the unintended consequences of the anti-corruption campaign. How they will manage that is unclear. Thus far, Prime Minister Pham Minh Chinh has sought to reassure foreign investors that Vietnam will protect their interests and vowed to disburse at least 95% of public funds allocated for 2023.

Some foreign investors looking to engage with Vietnam might choose to stand on the sidelines for a few months to see how ‘blazing furnace’ pans out in the wake of Thuong’s election. Those who have committed to entry or are already established in the country should ensure they have a deep understanding of the broader political environment and, more specifically, the political connections of counterparties and partners to assess whether they might be caught up in the dragnet.

While few foreign investors have been implicated in the campaign so far, as the Vietnamese leadership does not want them to view it as a hostile actor, international companies need to review how they operate in Vietnam to ensure there is no perception of wrongdoing in any of their business dealings, particularly if they are headquartered in the US or UK with their strict anti-bribery laws.  

While caution remains the order of the day for foreign investors, the Vietnamese leadership likely appreciates that it cannot allow its anti-graft campaign to undermine their confidence in the business environment. The country appears to be recovering well from the Covid-19 pandemic, with the prospect of cementing itself as a leading supply chain hub in Asia, especially if more Western companies relocate from China. Foreign investors still seem upbeat about Vietnam, but many will no doubt be hoping the authorities turn down the heat on ‘blazing furnace’. 

Source: Investment Monitor

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