Will Vietnam’s political turmoil shake up foreign investment ?

The president’s abrupt resignation suggests uncertainty, but it should not sow doubt about Hanoi’s economy or engagement with the world.

Last month, a delegation of around 50 U.S. businesses—among them major players such as Boeing and Meta—traveled to Vietnam to explore investment opportunities. Their visit was overshadowed by the abrupt resignation of Vietnamese President Vo Van Thuong on March 20, two days after meetings began.

But Ted Osius, who led the delegation and served as the U.S. ambassador to Vietnam from 2014 to 2017, is no stranger to Hanoi’s political landscape, known for its relative consistency but sometimes colored by unpredictability.

In recent years, Vietnam has emerged as a preferred alternative to China and successfully wooed foreign investment. It has also walked a fine line between Beijing and Washington on the global stage, securing upgrades in bilateral ties with other global powers. But the sudden resignation of a second president in little over a year suggests some political uncertainty. An intensifying anti-corruption campaign has ensnared a slew of high-ranking officials, contributing to bureaucratic stagnation and unnerving foreign investors.

In his inaugural speech last March, Thuong highlighted the importance of revitalizing ideology for the party-state, citing the collapse of the Soviet Union as a cautionary tale. The emphasis on ideology was not unusual, but its prominence in the speech marked a departure from Thuong’s predecessors. The message appeared directed at a notable figure in the audience: Vietnamese Communist Party (VCP) chief Nguyen Phu Trong, a conservative ideologue.

Thuong soon came to be seen as a potential heir apparent to Trong, but almost exactly a year later, Thuong was gone—seemingly ousted in a move that caught many observers off guard. In a typically cryptic statement, the VCP cited Thuong’s violations of party regulations and failure to set an exemplary standard as a top leader. His actions “caused negative public opinion, besmirching the reputation of the party, the state, and him personally,” the statement said, stopping short of naming specific transgressions.

State media uniformly reported that the party accepted Thuong’s resignation, but questions abounded in Vietnam, where high-ranking leaders seldom step down voluntarily. Did Thuong resign of his own accord? Or was he, like his predecessor Nguyen Xuan Phuc, ousted after falling out of political favor amid fierce infighting?

Trong spearheaded a comprehensive reform of Vietnam’s anti-corruption initiatives in 2011 and accelerated the efforts after his reelection as party chief in 2016. This has led to significant changes in how the VCP combats graft. The campaign hit a crescendo in January 2023, when Phuc, two deputy prime ministers, and three ministers were purged for their involvement in scandals over the allocation of COVID-19 testing kits and the coordination of repatriations during the pandemic.

Some analysts say the anti-corruption campaign is also a tool for settling political scores, a characterization that the state has bristled at. Political infighting is common in Vietnam and often intensifies in the leadup to the VCP’s National Congress, which is held every five years to select the country’s new leadership. Although the next Congress is not scheduled until 2026, the power struggles began as early as two years ago, fueled in part by health concerns about Trong and uncertainty over the next leadership transition.

The recent actions against high-ranking figures underscore the nuances of the campaign. It is not baseless to assume that their adversaries capitalized on the anti-corruption drive to orchestrate their ousters. On the other hand, it is naive to see them only as casualties of political rivalry: Just before his resignation, Thuong was implicated in a bribery scandal stemming from his days as a local leader more than a decade ago. Regardless, his departure has clearly telegraphed the message that no one is safe, amplifying a sense of uncertainty among the political class.

Deepening uncertainty could risk policy paralysis. Both diplomats and investors have lamented that the anti-corruption campaign has contributed to the inertia plaguing Vietnam’s bureaucracy. The removal of Thuong is likely to exacerbate this stagnation: Officials, increasingly fearful of making missteps, may become more hesitant to act. Such caution has already led to delays in approving procurement contracts and disbursing public funds, with many analysts attributing these holdups to the overzealousness of the anti-corruption drive.

Foreign investors, often lured by Vietnam’s reputation as having a more stable political environment than its neighbors, could see the defenestration of two presidents in a short period of time as a red flag. After all, the predictability and operational dynamics of Vietnam’s governance are critical pillars for sound investment decisions.

However, Vietnam’s ability to draw strong foreign direct investment flows amid global economic shifts has positioned it as a competitive manufacturing and export hub, a trend that is expected to continue. The country’s focus on industrialization, along with an increasingly educated workforce and low labor costs, has made it an appealing alternative in the global supply chain as companies look for options beyond China. The Vietnamese government has announced an ambitious economic growth target of between 6 and 6.5 percent for this year.

As foreign investment continues to flow into Vietnam, especially in high-tech manufacturing, the country is poised to become the next so-called Asian tiger economy. Because multinational companies play a vital role in the country’s manufacturing sector, maintaining investor confidence is crucial for sustaining Vietnam’s economic growth, which in turn reinforces the regime’s legitimacy.

A day after Thuong’s ouster, Vietnam’s legislature appointed Vice President Vo Thi Anh Xuan as acting president while seeking to accelerate the installation of a successor, in what seems to be a move to project stability. Furthermore, in a political landscape where collective leadership rules, the ousting of even high-profile figures does not typically herald major shakeups in policy. The resilience of Vietnam’s political system is likely to remain intact.

As a result, Vietnam’s foreign policy will likely remain unchanged, particularly its bilateral ties with the United States. Osius, the former U.S. ambassador, sheds light on the intricacies of this relationship in his own memoir, recounting an episode around then-U.S. President Barack Obama’s visit to Vietnam in 2016. Despite Vietnamese officials dictating which civil society representatives Obama should meet, there was a consensus among the Vietnamese leadership on the importance of bolstering ties with Washington; a high-ranking official urged Osius not to cancel Obama’s visit due to the tensions around the civil society meetings.

This incident highlights the delicate balance between Vietnam’s internal political maneuvering and its external diplomatic objectives​, which it has maintained in the years since to success. The elevation of U.S.-Vietnam relations to a comprehensive strategic partnership during U.S. President Joe Biden’s visit last September marks a significant milestone—and one that has surprised many observers given that it was orchestrated by Trong, the party chief.

During Biden’s visit, Thuong celebrated the historic upgrade in Vietnam-U.S. relations and described it in the context of “unprecedented quantum leaps” in the countries’ bilateral ties over the decades. He highlighted Trong’s skill in navigating between Beijing and Washington.

Trong seemed an unlikely candidate to spearhead such a move. Just a year before the upgrade, he reaffirmed Vietnam’s commitment to socialism and close ties with China during an official visit to Beijing. Trong’s anti-corruption campaign, which bore some resemblance to that of President Xi Jinping in China, also led to the removal of some Vietnamese leaders considered to be Western-oriented, suggesting a preference for Beijing over Washington.

Given the lack of a clear leadership succession plan, there is no end in sight to political infighting before the next Congress in 2026, and uncertainty will likely continue to cloud Vietnam’s political landscape. But for both foreign investors and international partners, the key is to stay the course. Hanoi’s political processes, although turbulent, have a way of self-correcting over time. A long-term perspective is essential, as the country’s strategic importance and economic potential remain compelling.

The coming years present a litmus test for Vietnam’s leadership. Whoever holds power must balance the drive to root out corruption with the need for political stability and economic growth. The outcome of this balancing act will have implications not only for Vietnam’s domestic affairs but also for its role on the world stage amid global power rivalry.

By Dien Luong – ForeignPolicy.com – April 1st, 2024