Viet Name Defense and Security Report Q4 2013 PDF

Q4 2013
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VIETNAM
DEFENCE & SECURITY REPORT
INCLUDES 5-YEAR FORECASTS TO 2017
ISSN 1749-1762
Published by:Business Monitor International
Vietnam Defence & Security
Report Q4 2013
INCLUDES 5-YEAR FORECASTS TO 2017
Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: September 2013
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Vietnam Defence & Security Report Q4 2013
CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................... 9
Vietnam Security SWOT .............................................................................................................................. 9
Vietnam Defence & Security SWOT ............................................................................................................. 12
Political ................................................................................................................................................. 14
Economic ............................................................................................................................................... 15
Business Environment .............................................................................................................................. 16
Industry Forecast .............................................................................................................. 17

Defence Expenditure ............................................................................................................................... 17
Table: Vietnam Defence Expenditure 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table: Vietnam Defence Expenditure By Changing % Of GDP, 2010-2017 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Armed Forces ........................................................................................................................................ 18
Table: Vietnam Armed Forces, 2000-2009 ('000 personnel, unless otherwise stated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table: Vietnam Manpower Available For Military Service, 2010-2017 (aged 16-49 unless otherwise stated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Defence Trade ....................................................................................................................................... 20
Imports ................................................................................................................................................ 21
Table: Vietnam Defence Imports, 2010-2017 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table: Vietnam Defence Trade Balance, 2010-2017 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Exports ................................................................................................................................................ 23
Table: Vietnam Defence Exports, 2010-2017 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Macroeconomic Forecasts ............................................................................................... 24

Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Industry Risk Reward Ratings .......................................................................................... 28

Asia Security Risk Ratings ......................................................................................................................... 28
Table: Asia Pacific Regional Security Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Table: Asia Pacific State Vulnerability To Terrorism Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Vietnam Security Risk Ratings .................................................................................................................... 29
Market Overview ............................................................................................................... 30

Vietnam Defence Market Overview ............................................................................................................. 30
Weapons Of Mass Destruction .................................................................................................................. 34
Vietnam Security Overview ........................................................................................................................ 35
Domestic threats .................................................................................................................................... 35
Regional threats ..................................................................................................................................... 37
Tensions with China: outcomes ................................................................................................................. 38
Foreign Relations ................................................................................................................................... 48
Table: Recent Japanese Initiatives In The Asia-Pacific Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Regional Overview ............................................................................................................ 55
© Business Monitor International Page 4

Political Risk Analysis .............................................................................................................................. 55
Global Industry Overview .................................................................................................. 67

Global Political Outlook ........................................................................................................................... 67
Methodology ...................................................................................................................... 71
Industry Forecast Methodology ................................................................................................................ 71
Sector-Specific Methodology .................................................................................................................... 72
Sources ................................................................................................................................................ 73
Risk/Reward Rating Methodology ............................................................................................................. 73
Sector-Specific Methodology .................................................................................................................... 73
Table: Security Risk/Reward Ratings Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

BMI Industry View
BMI View: Alongside the Philippines, Vietnam has the most serious dispute with China concerning
territories in the South China Sea. However, while relations between Manila and Beijing have all but
broken down, Hanoi has done a better job of maintaining a good working relationship with the Chinese.
Managing ties with China is only part of Vietnam's approach to protecting its interests, however.
The Vietnamese defence budget has reached a record high of U$3.7bn for 2013 - still very low for a country
of Vietnam's size, but enough to enable some new systems to be procured. On that front, Hanoi is pursuing
a dual approach. The first part of the strategy has been to deepen a long-standing defence partnership with
Russia. A U$600mn order for 12 additional Sukhoi Su-30 fighter aircraft was placed in August, increasing
the size of the Vietnamese Su-30 fleet to 36. The navy is awaiting the delivery of its first two Kilo-class
submarines in November and the Russians are working with Vietnam on a range of other defence
programmes, including UAV development.
However, the Vietnamese are also beginning to diversify their supply of military equipment, in particular
encouraging ties with the US and Europe. In August, Dutch shipbuilder DSNS confirmed a EUR500mn
order from Vietnam for two SIGMA-class corvettes, while France, Israel, Italy and the UK have also been
in discussions with Hanoi about defence industry collaboration.
Improving relations with the US could ultimately prove the most significant, though. President Truong Tan
Sang visited the White House in July 2013 and signed a new comprehensive agreement with President
Barack Obama. While no details of materiel transfers have yet come to light, the US government is
understood to be contemplating the sale of second-hand P-3C Orion maritime patrol aircraft to Vietnam.
With both the US and Vietnam wary of China, their strategic interests have suddenly aligned, and
Washington is likely to be supportive of capability requests that relate to maritime patrols. Vietnam
announced important developments in this area in Q2-Q3, setting up a new Vietnam Coast Guard which
will begin operations in October, and consolidating its aerial patrol assets in a newly formed joint air force-
naval brigade tasked with maritime surveillance and search and rescue.
So while Hanoi is keen to remain on good terms with China, it is also intent on fielding a deterrent that will
be effective in protecting its interests against Chinese expansionism. Delivering the keynote speech at one
of Asia's most important foreign policy platforms, the Shangri-La Dialogue in Singapore, in May 2013,
Prime Minister Nguyen Tan Dung underlined the extent to which Vietnamese defence policy now revolves
around China when he remarked pointedly that "somewhere in the region, there have emerged preferences

for unilateral might, groundless claims and actions that run counter to international law". This was a barely
concealed reference to China, and Nguyen's choice of theme pointed to the unease that Hanoi still feels
about Chinese activities in the region.
There were positive signs in mid-2013 that fears of domestic instability arising from Vietnam's troubled
economy would not be realised, as a series of encouraging data suggested that the economy was rebounding
even as other in South East Asia were starting to struggle. An economic recovery would be welcome news
both in terms of domestic security, and also in terms of the MoD's ability to finance some of its more
ambitious procurement programmes.

SWOT
Vietnam Security SWOT
SWOT Analysis
Strengths ■
Abundant operational experience among senior military personnel.
■
Large standing force.
■
Role of military in politics ensures its place in society.
■
No lack of political support for military upgrades.
■
Revival of diplomatic ties with US could strengthen bilateral security relations.
■
Longstanding relationship with Russia will ensure a steady stream of new military
equipment from Russian suppliers.
■
Membership of ASEAN and common cause with other South East Asian countries
means that Vietnam has international support in its territorial disputes with China.
Weaknesses ■
Outstanding territorial claims, specifically with China, could lead to conflict.
■
Low defence budget and antiquated platforms restrict operational capacity.
■
Economic fragility could send the country's military modernisation programme into
reverse.
■
The political primacy of the army versus the navy and air force means that the army
remains far too large and diverts resources away from the other services.
■
Systemic corruption remains a problem.
■
Inefficient and uncompetitive state-run defence establishment.
■
Having not fought a major war for several decades, the once-feared Vietnamese
military has by now lost much of its combat experience.

SWOT Analysis - Continued
Opportunities ■
Forecast economic growth may lead to a larger military budget, although economic
fragility may counterbalance this growth.
■
Russia has offered wide-ranging assistance in Vietnam's military modernisation
programme.
■
Advanced new naval assets should enable Vietnam to safeguard its offshore interests.
■
Recent pattern of engagement with US could lead to increasing military cooperation if
the US uses Vietnam as an aid to balance the rise of China.
■
Access to second-hand US equipment, including P-3C Orion maritime patrol aircraft,
would give the Vietnamese a huge capability boost.
■
A new Code of Conduct governing activities in disputed areas of the South China Sea
being negotiated by ASEAN and China could significantly reduce the chances of a
Sino-Vietnamese maritime clash.
■
Defence diplomacy with a range of countries, including Australia, Israel and
Singapore, should bolster security by opening up new avenues for procurement and
also forging new strategic partnerships.
■
Indonesia, France, Italy, Sweden and the UK are the latest countries to have emerged
as potential defence industry partners.
■
The refurbishment of naval facilities at Cam Ranh Bay will turn Vietnam into a regular
port of call for foreign navies, including the US Navy.
■
The establishment of a new Vietnam Coast Guard will enable better monitoring of
coastal waters.
■
Vietnam and China are co-chairing the ASEAN Defence Ministers' Meeting Plus
Expert Working Group on humanitarian assistance and disaster relief, and the co-
operation should serve to build relationships between the two countries.
Threats ■
The Vietnamese economy is vulnerable to global shocks: a downturn could lead to
social instability, and also hinder defence modernisation.

■
A banking crisis is also a major threat to economic stability, which in turn could
jeopardise domestic stability.
■
Territorial disputes in the South China Sea could lead to conflict with China, whose
naval power greatly exceeds that of Vietnam.
■
Piracy and smuggling continue to pose a threat off the Vietnamese littoral.
■
The collapse of ASEAN unity brought about by an inability to adopt a unified position
on China means that the region's security framework is now vulnerable.

Vietnam Defence & Security SWOT
SWOT Analysis
Strengths ■
Agreements with India and Russia could provide template for industry development.
■
Procurement of four advanced modular corvettes from Netherlands, two of which will
be built in Vietnam, will give industry experience of cutting-edge ship-building tech.
■
The acquisition of three new Sveytlak-class patrol ships, one of which was built in
Vietnam, should similarly boost local industry know-how.
■
A growing defence budget provides industry with the opportunity for growth.
■
The recent launch of Vietnam's first domestically developed warship demonstrates
that the country's naval shipyards are making good technical progress.
Weaknesses ■
Lack of capital to invest in research and development (R&D) and new development.
■
Infrastructure needed to produce larger platforms.
■
Government has not tapped into ready demand for small arms in Vietnamese Army.
■
Vietnam may struggle to afford advanced technology from Western countries.
■
Human rights concerns remain a barrier to arms sales in the eyes of Western
countries.
Opportunities ■
Russia is helping Vietnam to upgrade its naval facilities at Cam Ranh Bay, boosting
defence capabilities but also local industry know-how.
■
A new initiative aimed at streamlining inefficient state-run enterprises by 2020 could
yield a more effective domestic defence industry.
■
The construction of advanced SIGMA-class corvettes, procured from the
Netherlands, should boost the knowhow of local shipbuilders.
■
Russian agreement to help Vietnam produce its own anti-ship missiles and UAVs will
equip Vietnamese industry with important new capabilities.

■
Sweden is also helping with UAV development, suggesting that Vietnamese industry
is starting to develop its own capabilities in this area.
■
Government orders for naval vessels are strengthening domestic industry.
■
India-Vietnam defence agreement could mean wider range of locally made goods.
■
Technology transfers are expected to be bargaining points.
■
Open to joint ventures (JVs).
■
Improving US ties could enable Hanoi to tap into the US's defence industry expertise
in the long term. In the short term, it could mean the lifting of the US arms embargo.
Threats ■
Changes in commodity prices or an economic downturn resulting from a severe
downturn in Europe could reduce funds available for defence industry development.
■
Technology transfers likely to be preceded by asymmetric arms trade relationship.
Vietnam will most likely import defence products to gain transfers of technology.
■
Industry purportedly riddled with corruption at the highest levels.

Political
SWOT Analysis
Strengths ■
The Communist Party of Vietnam remains committed to market-oriented reforms and
we do not expect major shifts in policy direction over the next five years. The one-
party system is generally conducive to short-term political stability.
■
Relations with the US have witnessed a marked improvement, and Washington sees
Hanoi as a potential geopolitical ally in South East Asia.
Weaknesses ■
Corruption among government officials poses a major threat to the legitimacy of the
ruling Communist Party.
■
There is increasing (albeit still limited) public dissatisfaction with the leadership's tight
control over political dissent.
Opportunities ■
The government recognises the threat corruption poses to its legitimacy, and has
acted to clamp down on graft among party officials.
■
Vietnam has allowed legislators to become more vocal in criticising government
policies. This is opening up opportunities for more checks and balances within the
one-party system.
Threats ■
Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the
one-party system, and street demonstrations to protest economic conditions could
develop into a full-on challenge of undemocractic rule.
■
Although strong domestic control will ensure little change to Vietnam's political scene
in the next few years, over the longer term, the one-party-state will probably be
unsustainable.
■
Relations with China have deteriorated over recent years due to Beijing's more
assertive stance over disputed islands in the South China Sea and domestic criticism
of a large Chinese investment into a bauxite mining project in the central highlands,
which could potentially cause wide-scale environmental damage.

Economic
SWOT Analysis
Strengths ■
Vietnam has been one of the fastest-growing economies in Asia in recent years, with
GDP growth averaging 7.1% annually between 2000 and 2012.
■
The economic boom has lifted many Vietnamese out of poverty, with the official
poverty rate in the country falling from 58% in 1993 to 14.0% in 2010.
Weaknesses ■
Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving
the economy vulnerable to global economic uncertainties in 2012. The fiscal deficit is
dominated by substantial spending on social subsidies that could be difficult to
withdraw.
■
The heavily-managed and weak currency reduces incentives to improve quality of
exports, and also keeps import costs high, contributing to inflationary pressures.
Opportunities ■
WTO membership has given Vietnam access to both foreign markets and capital,
while making Vietnamese enterprises stronger through increased competition.
■
The government will in spite of the current macroeconomic woes, continue to move
forward with market reforms, including privatisation of state-owned enterprises, and
liberalising the banking sector.
■
Urbanisation will continue to be a long-term growth driver. The UN forecasts the
urban population rising from 29% of the population to more than 50% by the early
2040s.
Threats ■
Inflation and deficit concerns have caused some investors to re-assess their hitherto
upbeat view of Vietnam. If the government focuses too much on stimulating growth
and fails to root out inflationary pressure, it risks prolonging macroeconomic
instability, which could lead to a potential crisis.
■
Prolonged macroeconomic instability could prompt the authorities to put reforms on
hold as they struggle to stabilise the economy.

Business Environment
SWOT Analysis
Strengths ■
Vietnam has a large, skilled and low-cost workforce, which has made the country
attractive to foreign investors.
■
Vietnam's location - its proximity to China and South East Asia, and its good sea links
- makes it a good base for foreign companies to export to the rest of Asia, and
beyond.
Weaknesses ■
Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to
cope with the country's economic growth and links with the outside world.
■
Vietnam remains one of the world's most corrupt countries. According to
Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123
out of 176 countries.
Opportunities ■
Vietnam is increasingly attracting investment from key Asian economies, such as
Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech
skills and know-how.
■
Vietnam is pressing ahead with the privatisation of state-owned enterprises and the
liberalisation of the banking sector. This should offer foreign investors new entry
points.
Threats ■
Ongoing trade disputes with the US, and the general threat of American
protectionism, which will remain a concern.
■
Labour unrest remains a lingering threat. A failure by the authorities to boost skills
levels could leave Vietnam a second-rate economy for an indefinite period.

Industry Forecast
Defence Expenditure
Vietnam is not transparent about its defence spending, and its stated defence budget often varies
substantially from year to year. For example, in 2011 the government said it was increasing the budget by
70%, leading most analysts to question the numbers. However, Vietnam is understood to be one of the
lowest defence spenders in South East Asia, with a smaller budget than most of its neighbours. In 2012, the
country's declared spending was U$3.36bn, around 2.4% of GDP - although this is hard to verify. The
declared 2013 spending is U$3.7bn.
Budget restraints dictate that Vietnam must procure much of its most advanced military equipment through
alternative means, such as through credit agreements, or by providing oil and gas instead of currency.
Our forecasts of defence spending are driven by two variables. One is overall GDP. The other is the
percentage of GDP that is devoted to defence. In forecasting the latter we give consideration to the size of
defence spending as a percentage of GDP in recent years and the likely future trends, given what we know
about the budgetary priorities of the government of the country in question.
Table: Vietnam Defence Expenditure 2010-2017
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
VNDmn 49,739,000 55,100,000 70,000,000 79,640,642 89,526,105 100,708,310 113,097,992 127,039,748

-% 21.4 10.8 27.0 13.8 12.4 12.5 12.3 12.3
change y-
o-y
- % of 2.5 2.2 2.4 2.4 2.4 2.4 2.4 2.4
GDP
- VND 566,191.0 620,551.4 780,115.8 878,487.5 977,756.1 1,089,415.0 1,212,294.6 1,349,891.9
per
capita
US$mn 2,599.5 2,667.9 3,355.4 3,810.6 4,353.3 4,953.7 5,626.8 6,352.0
-% 12.9 2.6 25.8 13.6 14.2 13.8 13.6 12.9
change y-
o-y
EURmn 1,959.7 1,919.3 2,642.0 2,865.1 3,427.8 4,027.4 4,689.0 5,293.3
-% 19.2 -2.1 37.7 8.4 19.6 17.5 16.4 12.9
change y-
o-y
- EUR 22.3 21.6 29.4 31.6 37.4 43.6 50.3 56.2
per
capita

Vietnam Defence Expenditure 2010-2017 - Continued
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
-% 11.5 -6.7 26.5 7.5 8.7 8.8 8.6 7.9

change y-
o-y
- 32.8 30.3 37.9 40.3 43.4 46.7 50.3 53.8
constant
US$ per
capita
e/f = BMI estimate/forecast; per capita = per capita of population. Source: SIPRI
Table: Vietnam Defence Expenditure By Changing % Of GDP, 2010-2017 (US$mn)
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Core scenario 2,600 2,668 3,355 3,811 4,353 4,954 5,627 6,352
Spending +0.2pp of GDP 2,795 2,948 3,677 4,128 4,716 5,366 6,096 6,881
Spending -0.2pp of GDP 2,381 2,456 3,112 3,493 3,991 4,541 5,158 5,823
Source: BMI, SIPRI calculation. Notes: e/f= BMI estimate/forecast; pp = percentage points.
Armed Forces
Second only to the Communist Party of Vietnam, the Vietnam People's Army is a dominant force in
Vietnam politically, economically and socially. Many past top CPV officials have made the transformation
from the services to politics with great success.
Comprised mainly of conscripts, the military is divided into four services: the army; navy/coast guard; air
and air defence force; and the border defence corps. Hanoi also maintains the People's Self Defence Force
and the rural People's Militia. The military now serves, at least partially, as a means of employment for
many young men.
The Center for Strategic & International Studies estimates the total military force to stand at 455,000
personnel, with some 412,000 in the army, 13,000 in the navy and 30,000 in the air force. The army is

overwhelmingly the largest arm of the services. A tradition of defending against invasion, a large number of
former army members in politics, and lower cost platforms have made it the focal point for national
defence. Nevertheless, it must be noted that the army's operational capacity is severely limited for out-of-
country conflict and it relies on ageing Cold War platforms, which are increasingly difficult to service.
There are also an estimated 40,000 paramilitary troops, some 5mn reserves and a 40,000-strong Border
Defence corps. The reservists include the People's Self-Defence Forces, which are urban security units, and
the rural People's Militia. Both of these organisations have access to artillery, small arms and light
weaponry. Foreign analysts agree that the Vietnamese military needs to significantly downsize as it
modernises; however, this remains a politically sensitive issue, and personnel reduction is likely to be a very
slow and protracted process that could hinder the country's overall force modernisation.
The Vietnamese armed forces are relatively well equipped but this is due to the historical importance placed
on the armed forces. Moreover, that equipment is ageing and becoming increasingly outmoded, leading to a
renewed emphasis on procurement that will see the induction of new advanced weapon systems over the
coming decade.
In August 2013, Hanoi announced that it forming a new Vietnam Coast Guard (VCG), which will be a
reconstituted version of the existing Vietnam Marine Police and be overseen by the Ministry of Defence.
The new unit will become active in October. China took a similar step earlier in 2013, consolidating a
number of maritime agencies into one combined coast guard, and Vietnam's decision to do likewise is a
reflection of the emphasis which the South China Sea's littoral states are placing on maritime policing and
control. Vietnam is involved in a long-running territorial dispute with the Chinese, and the government is
determined to protect its sovereignty.
In a related move, the Vietnamese military announced in July that it was standing up a new joint Air Force-
Naval Brigade to perform maritime surveillance and search and rescue missions. The new unit, called 954
Brigade, appears likely to inherit a number of assets from the Vietnam Marine Police, which is being folded
into the new VCG. This could include the three C212 maritime patrol aircraft recently acquired from
Airbus Military, and the six DHC-6 Twin Otter amphibious aircraft previously procured from Canada.
Vietnam is also reportedly interested in acquiring second-hand Lockheed Martin P-3C Orion maritime
surveillance aircraft.
The police fall under the Ministry of the Interior and are divided into the larger urban People's Security
Force and rural People's Public Security Service; an unknown number of secret police are also part of the

ministry's portfolio. In conjunction with the nation's militia groups, the police are tasked with preventing
dissent and criticism of the party, as opposed to focusing primarily on property and violent crime.
Table: Vietnam Armed Forces, 2000-2009 ('000 personnel, unless otherwise stated)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Army 412.00 412.00 412.00 420.00 420.00 418.00 416.00 413.00 413.00 -
Navy 42.00 42.00 42.00 36.30 37.40 38.00 38.50 39.20 39.20 -
Air force 30.00 30.00 30.00 30.00 30.00 30.30 30.60 31.00 31.00 -
Paramilitary
force 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 -
Total armed
forces 524.00 524.00 524.00 526.30 527.40 526.30 525.10 523.20 523.20 0.00
- % of
population 0.67 0.66 0.65 0.65 0.64 0.63 0.62 0.62 0.61 0.00
- % of
manpower
available for
military
services 1.26 1.23 1.20 1.19 1.17 1.14 1.12 1.10 1.08 0.00
Source: BMI, IISS
Table: Vietnam Manpower Available For Military Service, 2010-2017 (aged 16-49 unless otherwise stated)
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Males 24,874,753 25,124,878 25,311,700 25,441,145 25,536,096 25,612,153 25,694,673 25,746,357
Females 24,901,533 25,096,542 25,231,724 25,312,229 25,359,235 25,387,585 25,423,232 25,428,783
Total 49,776,286 50,221,419 50,543,424 50,753,374 50,895,331 50,999,738 51,117,905 51,175,140
- % of
population 56.7 56.6 56.3 56.0 55.6 55.2 54.8 54.4
- % change
on 10 years
previously 20.1 17.9 16.1 14.5 12.7 10.8 9.3 7.5
e/f = estimate/forecast. Source: BMI
Defence Trade
A former Soviet proxy, Vietnam has failed to develop its own domestic defence industry adequately. And in
recent years, Soviet reliance has evolved into Russian reliance, at least when it comes to advanced defence
equipment.

Hindering the local industry's development has been its long history of conflict, meagre resources, lack of
domestic know-how and military doctrine of guerrilla and defensive warfare strategies, which are still being
overcome. Most Vietnamese arms were purchased from the Soviets, except for a few newly acquired
platforms from North Korea, Russia and a small number from India and Canada.
Vietnam maintains a small domestic defence industry capable of supplying small arms, minor weaponry,
and ammunition. For more technologically advanced production, Vietnam relies on reverse engineering and
this technique has been employed to keep the nation's fleet of ageing Soviet aircraft in use prior to an
agreement with India. All defence production is facilitated by state enterprises, and there is little if any
research and development (R&D) done within the country aimed at creating new platforms. However,
through a focused procurement programme, the Vietnamese defence industry will benefit from exposure to
new technology.
Perhaps the largest inhibiting factor preventing the industry's development is capital. With Vietnam so far
behind regional leaders economically, it lacks the required industrial and scientific base necessary for any
credible defence industry. However, future purchases, expected to come in the next decade, may include
technology transfers, allowing Vietnam to jump ahead generations and to provide the foundation for a
domestic industry.
In February 2013, Hanoi announced a new initiative whereby it plans to reorganise state-run defence
companies with a view to making them competitive by 2020. The government is planning to restructure
SOEs across the board, not just in defence, as it seeks to revitalise the country's flagging economy.
However, the company's indebted defence firms are badly in need of an organisational overhaul, if they are
to enable Hanoi to start procuring more domestic equipment, rather than rely on foreign (mainly Russian)
imports.
Imports
In the past, Vietnam simply acquired modern military equipment, usually from Russia, and usually on
credit. While this kind of deal still occurs - and while Vietnam still sources the bulk of its military
equipment from Russia - Hanoi is beginning to adopt a more nuanced and forward-looking approach,
seeking international industry partners and demanding technology transfer as part of any procurement
package.
A notable example of this was the recent procurement of two SIGMA-class corvettes from the Netherlands.
The SIGMA, which stands for Ship Integrated Geometrical Modularity Approach, is constructed using a

unique block system. With the second of the two ships likely to be built in Vietnam, local industry has the
opportunity to absorb cutting-edge ship-building technology that it has never had access to before. The
SIGMAs may also come with advanced European weapon systems, depending on the configuration that
Hanoi has requested.
Vietnam has also encouraged tech-transfer opportunities with companies from India, Israel, Italy, the UK,
Russia and France. Most recently, Vietnam signed a defence production MoU with Bulgaria in August
2013. Singapore agreed to help Vietnam develop its defence industry in 2012 in what could prove to be a
highly significant agreement, while Vietnam laid the groundwork for the start of cooperation with Australia
in February when the two countries held their first-ever defence dialogue. Another significant intra-ASEAN
development occurred in May 2013, when Indonesia and Vietnam held talks about the sale of Indonesian
equipment - complete with technology transfer - to Hanoi.
We note that, in addition to the Netherlands corvette procurement, Vietnam ordered six Canadian-built
DHC-6 Twin Otter amphibian aircraft in 2010 - its first major order for defence equipment from a Western
source. It has also procured three C212 maritime patrol aircraft from Airbus Military, as well as operating
10 PZL M28 Skytrucks procured from Poland. These deals point to the fact that Vietnam is now an open
market for Western defence companies, with the exception of the US, which maintains its arms embargo
against Vietnam. This may be lifted in the near future, amid warming ties between Hanoi and Washington.
However, even if this happens, Vietnam is unlikely to start procuring significant amounts of US equipment,
partly because it is too expensive, and partly because it would not be interoperable with its mainly Russian
inventory. The acquisition of second-hand platforms, notably the Lockheed Martin P-C3 Orion, which
Vietnam is reportedly keen to buy, is the obvious way to proceed, although there is competition for used US
materiel from other countries in the region, such as Indonesia and the Philippines.
The main barrier to growing the amount of arms imports remains funding. With few resources directed
towards the massive military and just a small percentage of the total budget allocated to new purchases,
Vietnam remains temporarily handcuffed until the economy expands to such a point that significant money
is allocated to the defence budget. Vietnam's ageing platforms require replacements if the military is to have
any operational capacity within the next decade; they also need spare parts, which the US and other Western
players are unlikely to produce. Therefore, Russia will remain Vietnam's main arms trading partner for the
foreseeable future. Indeed, the two countries signed a strategic pact in 2012, and Defence Minister Phung
Qunag Thanh visited Moscow in August 2013 to further defence industry collaboration.

Table: Vietnam Defence Imports, 2010-2017 (US$mn)
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Arms and ammunition 7.7 8.1 8.5 8.9 9.4 9.9 10.4 10.9
- value % change y-o-y 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Revolvers and pistols 0.2 0.3 0.3 0.3 0.3 0.4 0.4 0.4
- value % change y-o-y 24.0 24.0 5.0 5.0 5.0 5.0 5.0 5.0
Bombs, grenades, mines,
missiles, ammunition 3.1 3.3 3.4 3.6 3.8 4.0 4.2 4.4
- value % change y-o-y 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
e/f = BMI estimate/forecast. Source: BMI, UN Comtrade
Table: Vietnam Defence Trade Balance, 2010-2017 (US$mn)
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Arms and ammunition -7.0 -7.4 -7.8 -8.3 -8.7 -9.2 -9.7 -10.2
- % change y-o-y 5.5 5.5 5.5 5.4 5.4 5.4 5.4 5.4
Exports
Vietnam's military sales are negligible. Over the last decade, it has sold some low-end items to
neighbouring Cambodia, but there has been no other significant activity.
Table: Vietnam Defence Exports, 2010-2017 (US$mn)
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Arms and ammunition 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7
- value % change y-o-y 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Macroeconomic Forecasts
Vietnam's economic recovery is beginning to lose its momentum, with the country recording a relatively
weak real GDP growth figure of 5.0% year-on-year (y-o-y) in Q213, up only slightly from 4.9% in Q113.
The latest GDP print also suggests to us that further efforts by the Vietnamese government to speed up the
restructuring of debt-laden banks and restart lending to small and medium-sized enterprises (SMEs) may be
necessary to support economic growth over the coming quarters. Moreover, given that we have recently
begun to see signs of a slowdown in economic activity across the region, 2013 looks increasingly precarious
for the Vietnamese economy.
Not A Good Year

Vietnam - Real GDP, VNDbn (LHS) & % chg y-o-y (RHS)
Source: BMI, General Statistics Office
Hint Of A Weak PMI Release
The latest GDP print also suggests that the HSBC Vietnam manufacturing purchasing mangers' index (PMI)
for June, which is scheduled for release later this week, is likely to come in relatively weak. As the
accompanying chart shows, Vietnam's PMI initially exhibited signs of a sustained expansion in

manufacturing sector growth in March, before recent data indicated that the sector has fallen back into
contraction territory (PMI came in at 48.8 in May, compared to 50.8 and 51.0 in March and April,
respectively). On the whole, we maintain a cautious outlook on the manufacturing sector in H213, as the
sector remains heavily dependent on external demand to drive growth.
As we have highlighted in recent articles, the long-awaited establishment of the Vietnam Asset
Management Company (VAMC) to clean up the build-up of bad debt across the banking sector should help
to ease credit conditions for businesses over the coming months (see 'All Eyes On New Debt Management
Company', June 28 2013). However, we argue that the pace of the recovery will be highly dependent on the
smooth and timely implementation of banking sector reforms by the government. Indeed, further delays in
implementing banking reforms and the lack of clarity over how the government will address the country's
deteriorating fiscal position as a result of rescuing the banking sector over the longer term, could risk
undermining investors' confidence in the economy.
Stalled Lending A Major Drag On Economy
Vietnam - Purchasing Managers' Index
Source: BMI, Markit/HSBC

Surge In FDI Inflows A Sign Of Confidence
On a more positive note, we continue to see evidence that foreign direct investment (FDI) inflows into the
country have remained resilient despite the lack of progress on banking reforms and the weak economic
data. According to figures published by the Ministry of Planning and Investment (MPI), FDI inflows into
Vietnam grew by 16.0% y-o-y to US$10.5bn in H113. FDI in new projects were worth US$5.8bn, an
increase of 3.7% over the same period. This is in line with our view that Vietnam's long-term prospect
remain bright and that the influx of FDI inflows will provide a significant boost to real gross fixed capital
formation (GFCF) growth over the coming quarters. We forecast GFCF growth to come in at 4.4% this
year, before accelerating towards 4.8% in 2014. Accordingly, we expect real GDP growth to come in at
5.3% in 2013 before accelerating towards 6.0% in 2014.
Expenditure Breakdown
Private Consumption: We expect private consumption to grow at a relatively resilient pace of 4.6% in
2013. However, we note that the risk of further bankruptcies among SMEs could potentially lead to
widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employment
could, in turn, prompt households to cut back on spending.
Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2013, partly
led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the
coming months as the effect of recent rate cuts by the SBV begins to kick in. We are also seeing evidence
that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to
accelerate slightly from 4.3% in 2012 to 4.4% in 2013.
Public Spending: We expect total public spending to remain relatively resilient in 2013, expanding at a
respectable pace of 6.5%. However, there is limited room for the government to increase spending further
owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks.
Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy,
although we expect external demand to pick up through H213. Vietnam's trade account has fallen back into
deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a
rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a
moderate pace of 5.5% in 2013.

Table: Vietnam - Economic Activity
2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Nominal
GDP,VNDbn 3 1,658,389 1,980,914 2,536,631 2,950,684 3,309,880 3,711,413 4,175,199 4,689,021 5,267,161
Nominal GDP,US
$bn 3 93.2 103.5 122.8 141.4 158.4 180.5 205.4 233.3 263.4
Real GDP growth,
% change y-o-y 3 5.3 6.8 6.0 5.0 5.3 6.0 6.9 7.0 7.0
GDP per
capita,US$ 3 1,056 1,163 1,366 1,558 1,727 1,950 2,199 2,477 2,773
Popul-ation,mn 4 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0
Industrialproductio
n index, % y-o-y,
ave 1,5 6.7 14.1 10.9 7.0 12.0 14.0 13.0 12.0 11.0
Unempl-oyment,
% of labour force,
eop 2,6 4.6 4.3 3.6 4.0 4.8 4.7 4.6 4.5 4.4
Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank,
General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.

Industry Risk Reward Ratings

Asia Security Risk Ratings
BMI's Security Ratings service, which integrates closely with our Country Risk service, offers a
comprehensive comparative analysis of security risk in three key areas - interstate conflict, terrorism and
physical safety for expatriate workers - across major states in each region. The ratings are combined to form
a composite security rating to provide an overall guide to long-term trends and risks. We integrate our short-
term political and economic ratings with the terrorism rating, to indicate a state's vulnerability to a sustained
terrorist campaign or major terrorist attack. In all instances, the rated period is two years, with each country
assigned a score out of 100, with a low score indicating a high level of risk.
Table: Asia Pacific Regional Security Ratings
Composite
Interstate Terrorism Criminal Composite Regional security
risk risk risk domestic risk rank rating Ranking
Singapore 91 88 99 93 1 93 1
Australia 98 83 92 88 2 91 2
Japan 87 93 91 92 3 90 3
Taiwan 71 95 79 87 4 82 4
South Korea 65 86 88 87 5 80 5
Malaysia 81 84 71 78 6 79 6
North Korea 46 98 87 92 7 77 7
Vietnam 60 98 71 85 8 76 8
China 79 85 59 72 9 74 9
Thailand 86 69 73 71 10 76 10
Indonesia 88 68 53 61 11 70 11
Philippines 81 51 40 46 12 57 12
India 68 47 53 50 13 56 13
Pakistan 46 26 34 30 14 35 14
Scores out of 100, with 100 the highest. The 'Composite security risk' is the principal rating. It comprises 'Interstate' risk -
the risk of becoming a primary party to an interstate conflict that threatens significant damage to homeland; 'Terrorism'
risk - the risk of terrorist groups (domestic or international) being able to launch a major attack/sustained campaign; and
'Criminal' risk the risk of (politically motivated) violence against expatriate workers. Each of the three risks is given equal
weighting. The 'Composite domestic risk' rating comprises 'Terrorism' and 'Criminal' risk, each of which is given equal
weighting. Each rating (State, Terrorism, Criminal) is assessed subjectively by our analysts within a clearly defined
methodology, incorporating a minimum of six conceptually distinct elements. Source: BMI

Table: Asia Pacific State Vulnerability To Terrorism Index
Terrorism Short-term political Short-term economic Composite Regional rank

Singapore 88 94 89 90 1
Australia 83 81 70 79 2
Japan 93 80 65 83 3
Taiwan 95 84 85 90 4
South Korea 86 81 86 85 5
Malaysia 84 73 75 79 6
North Korea 98 69 30 74 7
Vietnam 98 76 62 84 8
China 85 75 86 83 9
Thailand 69 68 74 70 10
Indonesia 68 66 71 68 11
Philippines 51 66 64 58 12
India 47 65 62 55 13
Pakistan 26 56 46 38 14
Scores out of 100, with 100 the highest. The 'State vulnerability to terrorism index' is the principal rating. It comprises the
'Terrorism' rating and BMI's Country Risk 'Short-term political' and 'Short-term economic' ratings, which are given equal
weighting. The 'State vulnerability to terrorism' rating quantifies the exposure of a state to a successful major terrorist
attack/campaign, evaluating first how likely one is (Terrorism) before considering the vulnerability of the political and
economic environment to a sudden shock. As such, it incorporates subjective analysis of 15 conceptually separate
analytical elements, as well as 13 separate objective data points; na = not available. Source: BMI
Vietnam Security Risk Ratings
Vietnam has an overall security risk rating of 76, which means that the country is generally regarded as
being reasonably safe and stable. This rating has improved steady over time.
The country's domestic security risk rating (85) is good, and the threat of terrorism (98) is seen as being
essentially non-existent. However, Vietnam scores less highly when it comes to interstate threats (60), with
the threat of conflict with China over South China Sea issues a particular concern.

Market Overview
Vietnam Defence Market Overview
With Vietnam's recent economic growth and a replacement date of 2020 for most major platforms, Vietnam
needs to replace: armoured personnel carriers (APCs), battle tanks, artillery, fighters, helicopters, transports,
surface assets and anti-missile systems.
There are also external drivers behind Hanoi's military investments. In particular, maritime disputes present
increased opportunities for clashes at sea - specifically with China - with military planners most likely to
concentrate on adding naval assets, especially for the under-resourced coastguard. The South China Sea
dispute has thus driven the acquisition of anti-submarine warfare and maritime surveillance capabilities up
Vietnam's list of procurement priorities. The obvious candidates to fulfil this role are the P-3 Orion
maritime patrol aircraft, which is built by Lockheed Martin, and its main rival, the C295, built by
European firm Airbus Military. Vietnam's rapprochement with the US means that the acquisition of
second-hand P-3s is now a realistic option, and it has been reported that Washington is weighing up the sale
of six unarmed P-3s to Hanoi.
Vietnam is hoping to gain access to other types of American system as well, as the two countries' bilateral
relationship rapidly improves. President Truong Tan Sang met President Obama in Washington in July 2013
shortly after a several top Vietnamese military commanders also visited Washington, amid what was widely
interpreted as a concerted push by both sides to boost defence collaboration. Ultimately, Truong's visit
yielded a new 'comprehensive partnership' agreement and not any specifics on equipment sales. However,
these now look likely to happen in sue course.
Major developments over the past few years include the signing of a major arms deal by then-President
Nguyen Tan Dung in December 2009, which will see Russia supply Vietnam with six Kilo-class Project
636 submarines, together with their associated weapons and equipment. In July 2011, Rosoboronexport
confirmed that Vietnam had signed a contract to buy six of the boats. Senior Vietnamese officials have
since confirmed that the submarines will then be delivered over a period of several years. The 2,300-ton
boats are optimised for shallow water operations.
The Vietnamese submarine programme reached a major milestone in late August 2012, when the Russian
media reported that the first Kilo-class submarine for Vietnam had been launched at a shipyard in St
Petersburg. The first two boats are on course to be delivered in November 2013, ahead of the original
schedule. All six subs are currently due to be delivered by 2016.

Moscow will also provide assistance with the construction of a submarine base and deliver eight Sukhoi
Su-30MK2V combat aircraft as part of the package. Russian sources estimate the total value of the 2009
agreement at US$2.6bn.
It was additionally announced in August 2013 that Vietnam is to buy a further 12 Su-30 fighters from
Russia in a deal worth up to U$600mn. The aircraft will be delivered over the next two years, and will bring
the size of the Vietnamese Su-30 fleet to 36 aircraft, or enough for three squadrons, in addition to 11
Su-27s. Introducing the new fighters will enable the air force to retire its ageing MiG-21 and Su-22 fighters,
and subsequently also the Su-27s.
In May 2012, it was reported that Vietnam was considering purchasing 18 Sukhoi Su-30K fighters, which
are currently in storage at a maintenance facility. The aircraft have a controversial history: they were
procured by India over a decade ago, but were rejected and returned to Moscow in 2003 on the grounds that
they had faulty engines. The announcement of the purchase of 12 new Su-30s most likely means that
Vietnam also rejected these aircraft.
Separately, Moscow and Hanoi also announced in August that they were setting up a joint venture to carry
out maintenance and repairs on the wide range of Russian systems that Vietnam has acquired.
A highly significant non-Russian naval procurement was confirmed in August 2013, when Dutch
shipbuilder Damen Schelde Naval Shipbuilding (DSNS) confirmed that they had reached a EUR500mn
agreement to supply Vietnam with two SIGMA-class corvettes. In 2011, Vietnamese reports had suggested
that four ships had been ordered; however, the order has now been trimmed to two ships, at least for the
time being. DSNS owns several shipyards in Vietnam, and it is likely that at least one of the corvettes will
be constructed locally. This will add significant new capabilities to Vietnam's shipbuilding sector, since the
SIGMA is constructed using an advanced modular approach.
In a further purchase that complements the Gepard programme, Vietnam also announced in October 2011
that it was acquiring four SIGMA-class corvettes from the Netherlands. The deal represents Vietnam's first
major procurement from Europe, and the assembly of two of the ships in Vietnam will deliver important
technical know-how to the local ship-building industry. When the eight new corvettes are all in service they
will greatly enhance Vietnam's ability to patrol its territorial waters.
To complement its foreign maritime procurements, Vietnam's domestic defence industry has made some
important strides in recent years, not least in the shipbuilding sector. In January 2011, Hong Ha, a local
shipbuilder, launched the country's first ever domestically produced warship. The ship was reported to be

based on the Russian Molniya-class patrol boat design, and is expected to be the first of 12 that Vietnam
produces domestically under licence. The patrol boats are armed with artillery and anti-ship missiles, and
will boost Vietnam's ability to protect its offshore interests.
The Vietnamese government evidently has growing confidence in the local shipbuilding sector, as it
followed up these successes with further orders in October 2012 for another patrol craft and a missile
corvette. However, local industry still lacks the capability to produce larger, more sophisticated platforms -
though a lack of funds in any case currently militates against such procurements.
Vietnam's determination to boost its maritime capabilities was also evident in its May 2010 order for six
Canadian-built DHC-6 Twin Otter amphibian aircraft, three of these being the Guardian 400 maritime-
patrol variant. The Twin Otters are scheduled for delivery between by 2014. Vietnam's efforts to develop
these assets (particularly a well-equipped submarine flotilla) are calculated to deter China from projecting
force into the South China Sea.
Hanoi further boosted its maritime patrol capability in August 2012 when it took delivery of three Airbus
Military C-212-400 light transport aircraft, those these are to be fitted out to fulfil a maritime patrol
requirement. The aircraft will be operated by the new Vietnam Coast Guard (formerly the Vietnam Marine
Police), in an indication that Vietnam may emulate China's approach to maritime disputes by using civilian
law enforcement agencies to police contested areas to reduce the possibility of escalation.
In June 2011, Hanoi indicated that it was keen to acquire the world's fastest anti-ship missile, the Indo-
Russian BrahMos. The missile is four times as fast as a US-made Tomahawk missile. BrahMos
procurement requires joint approval from India and Russia but improving relations between the three parties
suggest this will pose no problem. The Vietnamese government has given permission for Indian navy ships
to anchor at Nha Trang, which has been off-limits to foreign navies since 2003.
In March 2012, Moscow also revealed that it had signed an agreement to jointly develop anti-ship missiles
and unmanned aerial vehicles (UAV) with the Vietnamese defence industry. The anti-ship missile
programme is expected to enable Vietnam to produce its own version of the Kh-35 Uran missile - a system
that Vietnamese missile boats already field. The UAV tie-up will see Russia's Irkut team with the Vietnam
Aerospace Association (VASA) to develop a new mini-UAV, which the Vietnamese military will use for
surveillance purposes. Moscow and Hanoi held further talks in October aimed at promoting defence
industry collaboration, with the Vietnamese side apparently keen to leverage its strong defence relationship
with Russia to modernise its indigenous capabilities.

Swedish company Unmanned Systems Group (UMS) is also collaborating with VASA on UAV
development. It is helping the Vietnamese agency to produce a version of the MagicEye 1 tactical UAV,
which is used for local area surveillance.
Vietnam is considering the procurement of the Russian-built Yak-130 jet trainer aircraft, Russian industry
sources revealed in November 2012. The selection of this particular trainer would tally with Vietnam's
focus on acquiring Sukhoi fighters for its air force.
Lockheed Martin, meanwhile, announced the award of a contract in September 2011 by Vietnam Posts
and Telecommunications Group (VNPT) to help it build the new VINASAT-2 satellite. The satellite is
based on the A2100 spacecraft platform manufactured by Lockheed Martin Commercial Space Systems,
and was successfully put into orbit in 2012.
Procurements in late 2011 were directed mainly at further boosting Vietnam's naval capacity. In December
2011, Hanoi signed contracts with Russia's defence export agency Rosoboronexport for two additional
Gepard-class corvettes (two others having recently been delivered). This follows the acceptance of the last
two of four Svetlyak-class patrol boats in October 2011.
In February 2012, Israeli Aerospace Industries (IAI) confirmed that it had secured a US$150mn deal to
supply an undisclosed Asian customer with new radar systems. A number of military analysts reached the
conclusion that Vietnam was the probable recipient of these systems. Israeli firm Rafael revealed in early
2012 that it too is targeting Vietnam, as well as Indonesia, as a market for its UAV systems.
Vietnam is also hoping to cultivate new sources of military technology. As well as the US, the UK has
emerged as a potential avenue of new equipment. Having signed a defence MoU in late 2011, the UK
revealed in March 2012 that it was working on an action plan with Hanoi that covers a range of areas,
including defence. The ultimate intention is to open up Vietnam as a future market for British defence
materiel. However, as with the procurement US technology, Vietnam may struggle to find the resources to
procure anything more than small quantities of European equipment. Indeed, it may ultimately decide that it
can get better value for money by sticking with Russia as its main military supplier.
Separately, Vietnam signed defence collaborations with France and Italy in Q1 2013. Both countries sent
delegations to Hanoi in January and are understood to have made proposals for deeper defence co-
operation, as well as possible equipment procurements.

Australia has also reached out to Vietnam, hosting defence minister Phuong in Canberra in March 2013.
During talks, defence minister Stephen Smith agreed to use Australian troops to train Vietnamese forces
ahead of UN peacekeeping deployments. Australia is also set to accept 80 Vietnamese officers onto its
various military training courses in 2013 and 2014.
Weapons Of Mass Destruction
Vietnam does not have an operational nuclear reactor or known nuclear weapons. However, Hanoi hopes to
develop a civilian nuclear programme in the future, building on a 2002 Russian agreement that promised US
$100mn to upgrade a Soviet-designed research reactor in Da-lat. Hanoi hopes to have a functioning reactor
for power generation by 2015. Though Vietnam is a signatory to the Nuclear Non-Proliferation Treaty
(NPT), pursuit of a nuclear weapons programme is expected. The historic conflict with China will be used
to justify research into the programme or other strategic short- or medium-range weapons.
If a nuclear warhead could be produced, Vietnam possesses an unknown quantity of North Korean,
modified Scud missiles bought in 1999 (likely to be Scud-C missiles), as well as an ageing cache of SS-1
and Scud B ballistic missiles capable of delivering a nuclear payload. If it were looking to expand on its
current missile stocks, Vietnam would likely look again to North Korea or Russia, or possibly India. At
present, Vietnam is the only country in South East Asia to possess its own ballistic missile weapons system
provided by the former Soviet Union.
However, this situation will change in the near future, with neighbouring states, such as Indonesia,
announcing their intention to begin their own ballistic missile weapons programmes.
To date, there is no evidence indicating that Vietnam has biological weapons, and further, the country is a
signatory to the Bacteriological Convention (1980). Although Laos and Cambodia have accused Vietnam of
using chemical weapons, it appears unlikely that the country has any stockpiles, as it continues to lack the
industrial base to produce them domestically. However, given requisite financial resources, there is suitable
evidence to suggest that the CPV has the political will and ambition to pursue biological and chemical
weapons development.

Vietnam Security Overview
Domestic threats
The National Assembly, the legislative organ of governance, is elected every five years and soon after elects
the president, who, in turn, appoints the prime minister. The president is the head of state, commander of the
military and the chair of the National Defence and Security Council. He also has the power to 'recommend'
the chief justice, who is then confirmed by the National Assembly. The prime minister is responsible for the
day-to-day running of the government and for rubber-stamping the appointment of four deputy prime
ministers and the cabinet, picked by the Communist Party of Vietnam (CPV)'s 150-member Central
Committee.
In the Central Committee, the secretary general is widely understood to hold considerable political sway.
However, the Committee does include the president, prime minister and cabinet. Although the Committee is
the supreme decision-making organ, the Politburo, composed of 15 members, guides legislation and policy
formation. The Secretariat, an even smaller group, is similar to the Inner Politburo, consisting of five
members who provide day-to-day advice. However, in actual operational terms, the CPV is run by the
president, prime minister and secretary general.
The 499-member National Assembly is elected every five years by some 40mn voters but all candidates
must be approved by the CPV and only a handful of independents bother to run. In theory, the assembly is
the only organ that possesses legislative authority and it meets twice annually. Lower down, local
governance is fulfilled by the People's Councils.
In July 2011, the National Assembly elected Truong Tan San as president for a five-year term. He is
understood to be a rival of Nguyen Tan Dung, who became prime minister in 2006 and retains that post
today. The president officially outranks the prime minister in the party hierarchy, although in many respects
the role of prime minister is the more important, as it carries with it far more executive powers. Reports
suggest that there remains a serious rift in the senior Vietnamese leadership. While this has possible
implications for national stability, the CPV has for the most part kept these arguments as internal party
issues. Despite this, disunity clearly poses a threat to the party's political monopoly, especially with calls for
democratic reforms mounting outside the party ranks.
In 2012, Nguyen narrowly held onto his job after publicly apologising to the National Assembly for failures
in economic management which led to the collapse of state-owned shipbuilder Vinashin, to concerns about

the financial health of other state-owned enterprises, and more generally to a tailing off in national
economic growth.
In May 2011, the Vietnamese government ordered a military crackdown on Hmong demonstrations in the
north-west province of Dien Bien. Around 5,000-7,000 protesters - mainly consisting of members from the
ethnic Hmong population - took part in the demonstrations, demanding for democratic reforms and religious
freedom. Although we acknowledge public unrest remains a threat to political stability in Vietnam, we see
limited evidence to suggest a large-scale political uprising could occur in the short to medium term. Indeed,
similar incidents of public unrest among the ethnic community in Vietnam's Central Highlands in 2001 and
2004 were quickly suppressed by the government. There was no repeat of the Hmong protests for the rest of
2011 or in 2012, following the government crackdown. Given that such incidents do not reflect a
widespread movement for political change, we believe these protests are unlikely to attract the interest of
the broader population. As such, we believe risk of contagion remains remote and anti-establishment
sentiment will remain limited to a minority group.
By 2012, the biggest threat to Vietnam's stability stemmed from the economy, which appeared to be in
crisis. Though Vietnam has enjoyed a rapid rate of growth in recent years, bubbles had developed in the
economy in areas such as real estate development. The government also used large stimulus packages to
boost the economy during the global financial crisis, but corruption and inefficiency led to much of that
money being wasted. The result is that a large number of bank loans are going bad, and multimillion dollar
developments are being left half-finished, the money to complete them having run out. Vietnam is also
heavily dependent on foreign investment; this has poured in over the past decade, but it has now slowed as
investors are put off by the uncertain economic outlook.
With economic growth always a source of tension in a society that is ostensibly communist while at the
same time capitalist in many practical respects, there could be severe social consequences if - as appears
likely - many Vietnamese enterprises fail. Indeed, over 55,000 Vietnamese SMEs were reported to have
gone bust in 2012 with the country's banks unable to lend; this has helped push up unemployment and
added to social unrest. The government's approach to any instability will dictate how the situation ultimately
plays out: if it resorts to harsh, repressive measures - as it has in the past - then that could potentially
backfire, and provoke even more unrest. So far the government has reacted only by clamping down on
protesters. This will work in the short to medium term, but suggests a complete lack of innovative thinking
about how to move the country forward politically and economically.

However, by August 2013 it looked like the Vietnamese economy was over the worst. Despite a wider
slowdown in South East Asia, Vietnam reported strong manufacturing data and increases in foreign direct
investment, suggesting that confidence in its economic prospects were returning. This is undoubtedly
welcome news in terms of the government's hopes of maintaining stability.
Regional threats
Piracy And Maritime Security
Maritime security has become increasingly important to Vietnam in recent years. Indeed, the issue is
gaining more policy attention from neighbouring South East Asian states. Piracy in South East Asia was
still a major issue in 2011 and early 2012. The Malacca Strait, once heavily pirated, has been subjected to
huge efforts by Indonesia, Malaysia and Singapore, which have been largely successful, but the South
China Sea is still under-patrolled. The modus operandi of pirates does not appear to have changed, with
many attackers focusing on small-scale attacks on slow-moving vessels. Kidnap-for-ransom attacks appear
to be less prevalent, as are hijackings. The types of boats that were attacked in the last decade have in
general not changed, with bulk carriers remaining the most likely target.
In the past, the ports of Vung Tau and Haipong have reported ship attacks while in port. It should be noted
that Vietnam lacks an effective naval deterrent to piracy as the coastguard and the navy both lack funds and
equipment. The navy is now beginning to induct new, modern patrol vessels, while the government is
considering the acquisition of maritime patrol aircraft and unmanned surveillance platforms. However, a
comprehensive range of capabilities to enable Vietnam to police its littoral effectively remains some years
away.
Vietnam has been involved in regional efforts to combat piracy, including the 2006 announcement of the
Regional Cooperation Agreement on Anti-Piracy (ReCAAP). This marked a regional first for East Asian
governments in engaging through a standing body that will enable the joint combating of piracy and armed
robbery. The institution will also allow for full-time staff to focus on maritime security issues. The ASEAN
member states were signatories, as well as Japan, South Korea, Bangladesh, India and China. So far, 11 of
the states have ratified the agreement and five have yet to ratify it; this latter group including Indonesia and
Malaysia, which are key littoral states.
Piracy has been significantly reduced in Vietnam's nearby seas, though it has not been eradicated. In
November 2012, Vietnamese maritime authorities stopped a Malaysian chemical tanker that had been
hijacked and was en route to Borneo from the Malaysian peninsula. Around a dozen hijackers were arrested.

Border Security
Along its border, Vietnam and Cambodia continue to enjoy cordial ties, and the Sino-Vietnam border is
largely becoming a conduit for trade, as cheap Chinese goods flow legally and illegally into the country,
satisfying the demand of Vietnam's growing consumer base. China and Vietnam reached a permanent
settlement on border demarcation in 2009.
Elsewhere, Laos presents almost no threat to Vietnam. The only possible destabilising factor is the number
of small insurgent groups, which oppose the CPV. Their presence in a neighbouring country could create a
problem, especially if supported by a neighbouring government. However, past acts of repatriation make
this scenario unlikely.
Overall, Vietnam will continue to keep its forces squarely concentrated on domestic concerns, with a small
focus on maritime security fuelled by increased incidents of illegal fishing and piracy. International threats
appear unlikely if the security environment in the region remains stable, as predicted.
Tensions with China: outcomes
Vietnam perceives China to be its main security threat. This is partly due to historical enmity: China ruled
Vietnam many centuries ago, and the memory of Chinese imperialism still lingers in Vietnam's popular
consciousness. More recently, Vietnam was the last sovereign state that China attacked, in 1979, resulting in
a brief border war. Since then the two countries have also engaged in occasional maritime skirmishes.
However, tension between Vietnam and China has risen in recent years as Hanoi has grown increasingly
wary of China's rise as it emerges as a world power. Sovereignty issues in the South China Sea have also
flared up sporadically, as the two countries have overlapping claims to the Paracel Islands and parts of the
Spratly Islands chain.
This state of affairs has had three important strategic consequences from Vietnam's point of view:
■ Renewed focus on military modernisation. To provide a credible deterrent to Chinese naval forces,
Vietnam signed a series of major arms deals with Russia in recent years which have included six Kilo-
class submarines and 36 Sukhoi Su-30MKK fighter-bombers. One deal in 2009 amounted to around US
$2.6bn, the biggest since Moscow pulled its remaining military interests out of Vietnam at the end of the
Cold War about 20 years ago. Moscow signalled that the two countries' close defence relationship would
continue in March 2012, when it announced that it had signed an agreement to jointly develop anti-ship
missiles and unmanned aerial vehicles (UAV) with the Vietnamese defence industry. The anti-ship
missile programme is expected to enable Vietnam to produce its own version of the Kh-35 Uran missile -
a system that Vietnamese missile boats already field. The UAV tie-up will see Russia's Irkut team with
the Vietnam Aerospace Association to develop a new mini-UAV, which the Vietnamese military will use

for surveillance purposes. Since Russia does not stand to make much money from these two initiatives
directly, the agreement should be viewed as a strategic favour to Hanoi that could translate into more
substantive equipment orders in the future. Vietnam is also exploring defence industry tie-ups with a
number of European countries, including Italy and Sweden (these initiatives are discussed in more detail
below).
■ Rapprochement with the United States. Increasingly, Hanoi and Washington have found that their
interests coincide. A series of steps towards closer cooperation culminated in the visit of former US
Secretary of Defence Leon Panetta to Vietnam in June 2012. Panetta was the most senior US official to
have visited the country since the Vietnam War, and the decision to make it one of three destinations on
his Asian tour - the others being Singapore and India - demonstrated that Washington is keen to cultivate
Vietnam as a new partner as it tilts towards the Asia-Pacific region. The visit came as Panetta fleshed out
the US's plan of placing greater strategic emphasis on Asia. This will include stationing 60% of the US
Navy in the Pacific, as opposed to 50% today, he revealed. Greater access to Vietnam's Cam Ranh Bay
naval facility - which is currently being refurbished - is one of the US's main objectives in its attempts to
engage Hanoi. The improving relationship was cemented when President Phuong Tan Sang visited the
White House in July 2013 and signed a new comprehensive partnership agreement with President
Obama.
■ Disharmony within ASEAN. While a unified ASEAN would have been able to deal firmly and
collectively with China, the group's 10 members have become polarised on the question of how to handle
Beijing. The pro-China camp is led by Cambodia, the ASEAN Chair in 2012, with Myanmar and
Thailand also often adopting a China-friendly stance. The Philippines and Vietnam stand together as the
most anti-China countries. The other five members have tended to take a more neutral position. China's
success in splintering ASEAN is serious not only for the association's future, but also for the ability of
Vietnam and the Philippines to deal with what they regard as Chinese aggression regarding territorial
disputes in the South China Sea. Intra-ASEAN relations were further damaged at the East Asia Summit in
November, when Cambodia, which was chairing the meeting, said in its concluding remarks that the
ASEAN countries had reached a consensus about not internationalising their territorial disputes.
However, the Philippines immediately objected to this statement, insisting that no such consensus had
been reached. It was an embarrassing incident for ASEAN which highlighted that the member states have
very different approaches to these important regional questions. The four ASEAN members with a direct
stake in the South China Sea - Brunei, Malaysia, the Philippines and Vietnam - had been due to meet in
Manila in late 2012 to try to formulate a collective approach to the disputes, but the meeting was
postponed indefinitely, most likely because some of the participants felt uncomfortable about forming a
new group outside the confines of ASEAN. The Philippines subsequently referred its dispute with China
to the UNCLOS tribunal, though Vietnam has made no indication that it intends to follow suit. A former
Vietnamese official, Le Luong Minh, who previously serves as deputy minister of foreign affairs, has
now become ASEAN secretary-general, though it remains to be seen whether this will work in Vietnam's
favour.
China and the South China Sea dispute
There has been friction between China and Vietnam, as there has between China and its other neighbours,
over Beijing's insistence on its indisputable sovereignty over most parts of the South China Sea. The
Philippines, Malaysia, Brunei and Vietnam also lay claim to some islands and reefs in the oil-rich area.
Vietnam adopts a similarly inflexible approach to sovereignty issues, and claims the Paracel Islands even
though they are not particularly close to the Vietnamese coastline.

In 2012 and on into 2013, the most active South China Sea disputes involved China and the Philippines,
most specifically over a contested set of reefs known as Scarborough Shoal. However, Hanoi was generally
supportive of Manila during the April/May 2012 confrontation. In particular, Vietnam expressed support for
a Philippine plan to institute a 'zone of peace' in the South China Sea, despite a lack of backing from most
other ASEAN members. At the same time, Vietnam has qualified this support by repeatedly making clear
that it desires good relations with Beijing.
By July 2012, it was clear to both Hanoi and Manila that a meaningful solution to South China Sea issues
would not come via ASEAN. In particular, the most recent ASEAN Foreign Ministers Meeting was
disastrous both for ASEAN unity and for the prospects of lasting stability in the South China Sea.
Cambodia, the ASEAN chair until the end of 2012 when Brunei took over, is virtually a Chinese client state
on geopolitical issues by virtue of the generous economic aid that Beijing has provided, and it has
effectively blocked constructive dialogue on the South China Sea. Cambodia has done so to safeguard the
interests of China, which prefers to deal with individual countries rather than a more powerful, single-
minded ASEAN bloc. Cambodia again appeared to protect China's interests at the East Asia Summit held in
Phnom Penh in November, when Prime Minister Hun Sen declared in his closing remarks that ASEAN had
reached a consensus about not internationalising territorial disputes - a position that China endorses.
However, this prompted an instant and angry response from Philippine President Benigno Aquino, who said
that no such consensus existed.
Aquino at this point appeared to recognise the value of pursuing negotiations with the ASEAN countries
which claim territories in the South China Sea territories, and called a Manila conference in mid-December
with Brunei, Malaysia and Vietnam. The sense is that some ASEAN members with no direct stake in the
disputes have not helped - and in some cases actively hindered - their fellow ASEAN members to safeguard
their interests. However, the meeting never took place. Officially, the participants said that this was due to
scheduling problems, but it was reported that some of the interested parties felt uncomfortable about going
outside the ASEAN framework.
ASEAN and China agreed new guidelines on a Declaration of Conduct in the South China Sea in July 2011,
after which ASEAN began the process of drafting of a new Code of Conduct. The idea was to consult
internally before opening discussions about the draft document with China. However, this process has also
fallen foul of internal ASEAN divisions and outside Chinese pressure. Reports suggest that the draft COC is
far too weak to deal meaningfully with the challenges of the South China Sea. China initially refused to
commit to a date for talks, saying merely that it would discuss the COC with ASEAN 'when the time is
ripe'. However, it finally agreed to move forwards with talks at the ASEAN summit held in Brunei in July

2013. Even so, there is little chance that the new code will be robust enough to reduce regional tensions.
The Philippines' decision to take its dispute with China to the UNCLOS tribunal further complicates
matters. While China asserts that it supports dialogue and the peaceful resolution of disputes, it has rejected
the Philippines' effort to resolve the dispute peacefully via UNCLOS, even though China, like the
Philippines, has ratified the treaty. From Vietnam's perspective, this is a signal that China is in fact not
minded to resolve the South China Sea disputes, even through peaceful channels.
Diplomatic tensions between Vietnam and China also sharpened in Q3 2012, as both sides made
provocative moves. In July, Vietnam passed a new Maritime Law, in which it restated its sovereignty over
the Paracel and Spratly islands. This drew a far-reaching response from China, which announced within a
matter of days that it was upgrading the political status of Sansha, a settlement on Yongxing (Woody)
Island, the largest of the disputed Paracel Islands. Sansha is now a prefecture-level city, and the
administrative centre for the Paracel, Spratly and Macclesfield Bank groups of islands. China also said it
was establishing an army garrison on the island, which already plays host to a naval garrison.
In Q4 2012, China further extended its claimed jurisdiction over the South China Sea, when the Hainan
People's Congress approved new regulations for the management of maritime territories. Under the new
rules, China now reserves the right to board and detain any ships in its territorial waters. Other countries in
the region expressed concern about this development.
In June 2012, it also emerged that the China National Offshore Oil Corp (CNOOC), with Beijing's
backing, was offering a new batch of oil-exploration blocks that sit within what is generally considered to
be Vietnam's 200-mile exclusive economic zone. China, like Vietnam, has ratified the United Nations
Convention on the Law of the Sea (UNCLOS) which gives states the right to an EEZ that extends 200 miles
from their territory. However, China claims this area of ocean by virtue of its claim to South China Sea
islands. As well as impinging on Vietnamese sovereignty, Chinese exploration of these areas would also
harm the country's commercial interests. PetroVietnam was particularly vocal in its opposition to
CNOOC's proposals, describing them as illegal.
In early December 2012, PetroVietnam complained that two Chinese boats had cut cables that were being
laid by one of its survey ships. A similar incident in mid-2011 triggered a major diplomatic incident
between Beijing and Hanoi. The Vietnamese government responded by saying that it would intensify its
patrols of the area, and India - which has commercial interests with PetroVietnam - also threatened to
intervene, saying that it would dispatch naval ships to the South China Sea to protect its interests if
necessary.

Hanoi then announced in January that it had set up a new Fisheries Bureau within the Ministry of
Agriculture, and that this Bureau would control a new maritime surveillance fleet charged with patrolling
Vietnam's South China Sea territories. This appeared to come in response to China's own efforts to
reorganise its oversight of its territorial claims. These have included the upgrading of Sansha to a provincial
level city officially overseeing a large maritime area, as well as newly announced plans to unify China's
various maritime law enforcement agencies into one coast guard under the State Oceanic Administration.
There are pros and cons to these moves from a security standpoint. Both China and Vietnam look set to
intensify their patrols of their maritime territories, and this increases the chance that they could come into
conflict. On the other hand, these patrols will probably be better organised and follow much clearer
command structures, which should reduce the risk of unintended and potentially provocative actions.
Delivering the keynote address at the Shangri-La Dialogue in Singapore in May 2013, PM Nguyen stopped
short of criticizing China by name, but lamented the lack of 'strategic trust' in the handling of regional
disputes. He also said that 'somewhere in the region, there have emerged preferences for unilateral might,
groundless claims and actions that run counter to international law', in remarks which most observers
interpreted as referring to China. Nguyen also endorsed the US presence in the region, while urging both
China and the US to live up to their responsibilities as major powers.
Nguyen's comments echoed those made by Deputy Foreign Minister Pham Quang Vinh in December 2012,
when he warned China against using trade as a weapon in its maritime disputes. He pointed to the
boycotting of Japanese goods in a recent spat, and observed that oil and gas exploration remained a very
controversial issue. He said that Vietnam was open to jointly developing resources with China, but said that
unilateral exploration by CNOOC in waters claimed by Vietnam was a red line for Hanoi. Reports in early
December that Chinese fishing boats had cut cables being laid by a PetroVietnam survey ship also revived
concerns about the potential for resource conflict in the South China Sea.
Despite this tense backdrop, the two sides have continued to discuss their problems. In June 2013, the
Seventh China-Vietnam Defence and Security Consultation was held in Beijing, with both sides being
represented by a high-level military delegation. They discussed the territorial dispute and stressed the
importance of the bilateral relationship. An important step forward also came in March 2013 when the
Chinese and Vietnamese authorities conducted their first joint border patrol. This was a significant
indication that the two governments continue to communicate, and that they are willing to attempt new joint
initiatives even against a backdrop of tensions in their bilateral relationship.

It is also important to note that, while China's relations with the Philippines have all but broken down over
the ITCLOS issue, its relations with Vietnam remain much more positive, despite the underlying tensions.
PM Nguyen met Premier Li Keeqiang at a regional expo in southern China in September, and he invited Li
to visit Vietnam in the near future.
Relations were set on a more stable path in December 2011, when Vice President Xi Jinping, who has since
succeeded Hu Jintao as Communist Party general secretary and as president, visited Vietnam. After meeting
with President Truong Tan Sang and Prime Minister Nguyen Tan Dung, Xi finalised agreements whereby
Vietnam will receive US$300mn in Chinese credit. With the Vietnamese economy under pressure, and little
assistance having been forthcoming from other sources, China's gesture of financial support will have
earned it considerable good will.
The US is also a factor in the South China Sea disputes. China wants to keep the US out of the South China
Sea, and this consideration restrains Beijing from acting too aggressively in its territorial disputes because it
does not want to give countries like the Philippines an excuse to call for an increased US presence. Former
Secretary of State Hillary Clinton embarked on an Asian tour in September 2012 in which she put pressure
on China to maintain regional stability. Clinton is seen in a negative light in China on these issues following
comments she made during the ASEAN Regional Forum in Vietnam in July 2010, when she stated that
Washington had a national interest in playing an active role in mediating territorial disputes in the South
China Sea. Clinton referred to the sovereignty issue as a 'leading diplomatic priority', prompting an angry
response from China's state-controlled media. Chinese foreign minister Yang Jiechi described Clinton's
comments as 'virtually an attack on China', which would only exacerbate matters.
Similarly, China views the US strategy of rebalancing to Asia as an attempt to counter its rise. It has
repeatedly asked the US to clarify its aims, and is wary of the role that countries in the region - chiefly
Australia, the Philippines, Singapore and Vietnam - stand to play in the US plan. President Barack Obama's
decision to visit Southeast Asia straight after his re-election in November set the foreign policy tone for his
second term, underlining his commitment to the Asia pivot. However, little new of substance came out of
the trip, which took in Thailand, Myanmar and Cambodia.
The South China Sea is important to its claimants and other major powers for several reasons:
Critical Trade Route
The South China Sea connects the trade-dependent economies of Japan, South Korea, Taiwan, the
Philippines and China itself with the Indian Ocean and beyond this, key export markets.

Maritime Strategy
Owing to its economic significance, the South China Sea has taken on a strategic importance. Japanese
defence planners have feared for some years that the Chinese navy could come to dominate the sea, thus
raising the possibility that it could interdict Japanese shipping in the event of a regional crisis, such as a new
clash in Korea or a Chinese attack on Taiwan. While we view such interdiction fears as exaggerated,
strategic planners must nevertheless take all eventualities into consideration. Indeed, China has been
building up the People's Liberation Army Navy (PLAN) for many years now, and has built a large
underground submarine base on Hainan Island, which will increase its ability to project power in the South
China Sea. Furthermore, given that China is seeking to expand its naval influence into the Indian Ocean, it
must first become a strong maritime power in the South China Sea.
Energy And Fishing Resources
A further consideration regarding the South China Sea dispute is that its islands are believed to contain
substantial oil and gas reserves. These are unproven, yet perception is more important that reality.
Geopolitical tensions have already had an impact on foreign investment, with BP having halted plans to
explore for oil off the coast of Vietnam in 2007 because China had threatened to take punitive measures
against it. As described above, CNOOC's plans to explore oil blocks near the Vietnamese coast has further
damaged relations.
In addition, the South China Sea's substantial fisheries have fuelled tensions. Vietnamese fishing vessels are
regularly intercepted by Chinese patrol ships in disputed waters, and their crews detained by China. A tenth
of the entire global catch comes from the South China Sea, and millions of people depend on the region for
food. At the same time, fish stocks are crashing in many areas of the South China Sea, meaning that
fishermen are having to follow the fish into areas which might be regarded as the territorial waters of other
countries. With thousands of livelihoods at stake, there are now many angry and frustrated fishermen at
work in the South China Sea - and this factor makes conflict increasingly probable.
In March 2012, Vietnam risked reigniting its 2011 spat with China, when the foreign ministry repeated its
claims that China had infringed upon Vietnamese sovereignty and assaulted Vietnamese fisherman during
last year's dispute. It said China should pay compensation to the victims. However, Beijing dismissed the
claims, insisting that it had merely acted to eject the Vietnamese fisherman from China's territorial waters.
There has also been friction with China stemming from Hanoi's decision to conduct offshore exploration
with Indian assistance. China regards India as a strategic rival, and opposes the country's involvement in the

South China Sea. In May, one Indian company, ONGC Videsh, announced that it was pulling out of the
South China Sea drilling block granted to it by Hanoi as exploration had proved unsuccessful. However,
there was speculation that the decision had come as a result of Chinese pressure. Nonetheless, Hanoi
remains adamant that it has the right to partner with any country of its choosing when it comes to exploring
energy reserves inside its exclusive economic zone. The Vietnamese and Indian governments responded to
Beijing's warning by issuing a joint statement expressing their support for the peaceful resolution of
territorial disputes in accordance with the United Nations Convention on the Law of the Sea.
Vietnam is also slowly emerging as a key player in the South East Asian security landscape. Vietnam's
membership of ASEAN and the ASEAN Regional Forum, has provided it with access to a key multilateral
institution in the Asia Pacific. However, Vietnam's strong military ties with Russia set it apart from the
other ASEAN member states. In the future, Vietnam may prove to be a key player for ASEAN, should the
institution want to develop stronger ties with Russia.
The ASEAN Regional Forum has expanded its remit beyond the ARF traditional security portfolio via a
new institution known as the ASEAN Defence Ministers' Meeting (ADMM). The group's remit is to focus
on developing mechanisms to foster enhanced levels of interaction and confidence building measures. The
formal mechanism is a first for the organisation, and was initially proposed by Thailand. The new security
focus is unlikely to impinge on member states' sovereignty and, therefore, Vietnam should be able to
contribute to the process with little fear of any impact on its internal security. Vietnam has also become
more active in ASEAN, particularly in areas of transnational security threats such as terrorism. ADMM held
its seventh meeting in Brunei in August 2013.
A Vietnamese politician also took over the reins of ASEAN as secretary general at the start of 2013. Le
Luong Minh, who previously served as deputy foreign minister and also as UN ambassador, will serve from
2013 until 2017. Though the secretary general is not expected to represent the interests of his home nation,
the appointment of a Vietnamese secretary general could provide some impetus to efforts to move forwards
on resolving territorial issues.
United States
BMI expects further efforts by Hanoi to deepen ties with Washington over the coming years, as Vietnam
leans towards the pro-US camp that already includes some of its ASEAN peers such as Indonesia and
Thailand. China's growing influence in the region and its expanding military presence in the South China
Sea will continue to play a key role in aligning the political interests of Hanoi and Washington. Indeed, we

saw a marked improvement in Vietnam-US relations in 2010 as the two countries made a series of symbolic
moves in boosting bilateral ties.
A highly significant step forwards in the bilateral relationship came with the visit of former US Secretary of
Defence Leon Panetta to Vietnam in June 2012. Panetta was the most senior US official to have visited the
country since the Vietnam War, and the decision to make it one of three destinations on his Asian tour - the
others being Singapore and India - demonstrated that Washington is keen to cultivate Vietnam as a new
partner as it tilts towards the Asia-Pacific region. The visit came as Panetta fleshed out the US' plan of
placing greater strategic emphasis on Asia. This will include stationing 60% of the US Navy in the Pacific,
as opposed to 50% today, he revealed.
In BMI's view, Vietnam will continue to seek strategic independence while also pursuing good relations
with both China and the United States. Hanoi's desire to maintain a cordial relationship with Beijing will
certainly act as a constraint on the broadening of US ties. However, regional concern about China's rise, as
well as Vietnam's deepening strategic ties with other US allies in region, such as Japan and Singapore, mean
that Hanoi and Washington increasingly regard closer bilateral ties as a mutually beneficial objective.
Panetta visited the Cam Ranh Bay naval base during his Vietnam trip. As the main US air base during the
Vietnam War, it was highly symbolic as a choice of venue given that the US and Vietnam appear now to
have truly drawn a line underneath the conflict of the 1960s and 1970s. However, Washington is also
interested in Cam Ranh Bay for its future strategic value; it would like the facility to be made available to
US Navy ships (only US merchant shipping is currently permitted to use it).
Panetta described the base, which is one of South East Asia's prime deep-water ports, as a 'key component'
in the US' vision of its future partnership with the Vietnamese. However, the US will have to weigh up
whether it is prepared to give Vietnam what it wants in return for access to the base. At a press conference
with Panetta, Vietnamese Defence Minister Phung Quang Thanh said that the US should lift its arms
embargo on Hanoi, and then partner with Vietnam as a weapon supplier as it attempts to modernise its
armed forces. Panetta responded by hinting that the US would be prepared to consider such a step. 'One of
the keys to [the US] strategy is to stress the Asia-Pacific region, but more importantly to stress the
importance of developing the capabilities of our Asian partners, such as Vietnam,' he said. The US will also
factor into its decision that fact that the Philippines recently reopened Subic Bay - another prime deepwater
port - to the US Navy. This makes access to Cam Ranh Bay less critical for the US Navy, though it remains
highly desirable.

For the US to start providing arms to Vietnam would signify a remarkable turnaround in the bilateral
relationship. Arms deals would have been unthinkable only a few years ago. However, with Vietnam now
identified as a key partner in the US 'pivot' to Asia, Washington appears ready to accept that providing
Hanoi with military assistance is price worth paying for greater access to Cam Ranh Bay and other
Vietnamese facilities. With its growing military budget, Hanoi may also in time become a market of some
importance for US defence companies.
Panetta's visit was followed by another meeting imbued with significance, when new defence secretary
Chuck Hagel met PM Nguyen at the Shangri-La Dialogue in Singapore in May/June 2013. The two men
had served as soldiers on opposing sides during the Vietnam War, and so their meeting was highly symbolic
of the recent improvement in US-Vietnam relations.
This diplomacy culminated in President Truong's visit to the White House in July 2013 and the signing of a
new comprehensive agreement between Hanoi and Washington. The deal is likely to prefigure the transfer
of military equipment to Vietnam.
Human rights concerns may impede this final step in the rapprochement, however. The sentencing of two
students to six years in jail in May 2013 on charges of sedition - they had handed out anti-corruption leaflets
- serves as a reminder than Vietnam remains one of Asia's most authoritarian states.
Russia
Although a number of Western countries, including the US, are showing an increasing interest in selling
arms to Vietnam, Russia has taken steps to protect its large share of the Vietnamese defence market.
Moscow announced record arms sales in 2012, and, after India, Vietnam was one of its most important
customers. Moscow is not about to relinquish this dominant market position.
This status was underlined when Prime Minister Nguyen Tan Dung met President Vladimir Putin at the
Russian resort of Sochi in May 2013. The two sides pledged to significantly increase bilateral trade and to
deepen co-operation in a number of areas. Defence minister Phung Quang Thanh then visited Moscow in
August, placing an order for 12 additional Sukhoi fighters, and laying the groundwork for a range of new
defence collaborations, including the establishment of a maintenance JV to help Vietnam service its large
inventory of Russian systems.
To provide a credible deterrent to Chinese naval forces, Vietnam had earlier signed a series of major arms
deals with Russia in 2009 that included six Kilo-class submarines and 12 Sukhoi Su-30MKK fighter-

bombers. The deals amounted to around US$2.6bn, the biggest since Moscow pulled its remaining military
interests out of Vietnam at the end of the Cold War about 20 years ago. Overall, in addition to the
submarines, Vietnam has now ordered 36 Su-30s from Russia, as well as Gepard-class frigates and
Svetlayk-class fast attack craft. In fact, all of Hanoi's major equipment orders have been placed with
Russian companies.
Moscow signalled that the two countries' close defence relationship would continue in March 2012, when it
announced that it had signed an agreement to jointly develop anti-ship missiles and unmanned aerial
vehicles (UAV) with the Vietnamese defence industry. The anti-ship missile programme is expected to
enable Vietnam to produce its own version of the Kh-35 Uran missile - a system that Vietnamese missile
boats already field. The UAV tie-up will see Russia's Irkut team with the Vietnam Aerospace Association to
develop a new mini-UAV, which the Vietnamese military will use for surveillance purposes. Since Russia
does not stand to make much money from these two initiatives directly, the agreement should be viewed as
a strategic favour to Hanoi that could translate into more substantive equipment orders in the future.
Russia's new defence minister General Sergey Shoigu followed this up with a visit to Vietnam in March
2013. In talks with his Vietnamese counterpart General Phung Quang Thanh, Shoigu pledged to help Hanoi
to establish its submarine capability. As well as supply the six Kilo submarines, Russia will assist with the
construction of the necessary facilities, and also train the navy's new submariners.
So, while several countries look set to challenge Russia's near-monopoly on the Vietnamese defence
market, Moscow is well placed to remain the country's top materiel supplier.
Foreign Relations
Japan's Renewed Focus On South East Asia: Implications
BMI View: Japanese Prime Minister Shinzo Abe is actively seeking to boost his country's influence in South
East Asia to counterbalance China, with the US broadly supporting Japan as part of its 'pivot' towards
Asia. South East Asian economies should benefit from increased Chinese and Japanese economic incentives
as a result.
Japanese Prime Minister Shinzo Abe is actively seeking to revive his country's influence in the Asia-Pacific
region, and he is motivated primarily by a desire to counterbalance China's rising power. For many decades
after World War II, Japan was the most powerful country in Asia. However, China's economic rise over the

last decade and Japan's economic weakness since the early 1990s, have led to China assuming the mantle of
regional leadership.
South East Asia's Importance To Japan
Japan has for many decades regarded South East Asia as economically crucial, as evidenced by the fact that
it pursued its Imperial expansion in the region in the 1940s. In the post-World War II era, South East Asia
became a key battleground between the US on the one hand and the USSR and China on the other, with the
US fighting a decade-long war in Vietnam to prevent the spread of Communism in the region. Japan
eschewed military commitments in South East Asia due to the constraints imposed upon its armed forces
under its post-war constitution, but its rapid economic growth allowed it to serve as a regional anchor. As
Japan's economy matured in the 1980s, the country invested heavily in countries such as Indonesia,
Malaysia, and Thailand, among others. However, as Japan's economy stalled in the 'lost decade' of the
1990s, it was less able to serve as a locomotive for the region - a role that was assumed by China. During
the 1997-1998 Asian financial crisis, it was the US - not Japan - that led the economic rescue efforts, via the
IMF. In addition, the US overruled Japan's proposal to create an Asian Monetary Fund. During the 2000s,
as China's economy boomed, the People's Republic overtook Japan in terms of size as a trade partner of
many South East Asian states. Beijing also became an active lender to the region for infrastructure projects.
By comparison, Japan has been cutting its Official Development Assistance (ODA) for many years, due to
its severe fiscal problems.
Nevertheless, Japanese economic engagement of South East Asia has been strong. Japanese companies are
heavily invested in Thailand's auto manufacturing, and Japan receives considerable commodity imports
from Indonesia. Meanwhile, Japanese companies are said to be keen to establish a greater presence in
Vietnam as an alternative to China.
Japan's New Opportunity In South East Asia
Despite China's increasing trade and investment in South East Asia, Beijing has been unable to develop an
undisputed sphere of influence in the region. Regional states are unwilling to find themselves politically
subordinate to the People's Republic. Reports in the international media suggest that there is increasing
consternation about China's rise, especially in Vietnam and the Philippines, which have territorial disputes
with China in the South China Sea. Meanwhile, Myanmar, which has long been a quasi-satellite state of
China due to its isolation from the West, has sought to 'break free' of Beijing by seeking a rapprochement
with the US and Europe. For its part, the US has been pursuing a 'pivot' towards Asia, with the unstated
intention of counterbalancing China. Given that Japan is a close ally of the US, and given that Japan is still

a formidable economy, Tokyo has an opportunity to reassert its influence in South East Asia. The table
below lists some recent initiatives by Japan in the Asia-Pacific region.
Table: Recent Japanese Initiatives In The Asia-Pacific Region
Countries Programme Date And Status When Reported

ASEAN Satellite Network - aimed at enabling
Japan and ASEAN members that operate Japan-
ASEAN made satellites to share data Proposed May 2 2013
Currency swap agreements with Indonesia and
Philippines and talks to renew lapsed contracts
with Malaysia, Singapore and Thailand May 6 2013
Cross-border collateral scheme - to increase ease

at which Japanese firms can obtain local currency
funding for their operations with JGBs as collateral Proposed May 6 2013
Japan invested in local currency bonds issued by

Indonesia, Malaysia, the Philippines, Singapore
and Thailand (via dollar-denominated Pan Asia
Bond Index Fund) May 6 2013
Japan participated in a military training exercise in

northern Thailand which was attended by the
United States and six Asian countries - Japan,
Indonesia, South Korea, Singapore, Malaysia, and
Thailand. Dubbed Cobra Gold 2013, the exercise February 11 2013 to
covered combat training, as well as disaster relief February 21 2013
Cyber-defence network - system will enable the

quick and seamless communication between
officials in each country and possibly enable joint
countermeasures if one country is attacked.
Among the 10 nations already interested in
participating are Thailand and Indonesia Proposed October 8 2012
Japan and Sri Lanka agreed to strengthen bilateral

cooperation in Indian Ocean maritime security and
coast guard patrols, including greater exchanges
between their defence authorities to fight piracy.
Japan provided US$800mn to help Sri Lanka
Sri Lanka expand its main port in Colombo March 15 2013
Japan and Vietnam plan to hold maritime security
Vietnam talks in Hanoi. To be held in May January 18 2013
Japan will provide patrol boats as part of
Vietnam's efforts to improve its maritime security
capabilities.
Japan won an order for the construction of a
nuclear power plant (in 2010) that Vietnam hopes
will be completed in 2020.

Recent Japanese Initiatives In The Asia-Pacific Region - Continued

Japan has provided non-refundable aid for more
than 25 technical projects to develop Vietnam's
agriculture and rural areas, and four major
irrigation projects valued at US$450mn May 4 2013
Fishing accord signed allowing Taiwanese fishing
boats to fish in waters near the Senkaku/Diaoyu
Taiwan islands April 11 2013
Japan provided JPY220.4bn in loans for four
projects, including the Delhi-Mumbai Industrial
India Corridor project March 28 2013
Construction of an industrial complex is already
under way in Thilawa near Yangon as part of a
joint venture with Japan's Marubeni Corp. and two
other Japanese trading companies (due to start
Myanmar operation in 2013). Q1 2013
Japan will help Myanmar develop a system to
increase intellectual property protection and fully
establish its legal systems. The government sent
lawyers and Justice Ministry officials to Myanmar
Japan forgave about JPY300bn of Myanmar's
debt and resumed fully-fledged development aid April 21 13
Previously, Japan wrote off almost US$6bn in
Myanmar's debt and provided a new loan of about
US$600mn
Japan offered Mongolia loans of JPY4.2bn to help
Mongolia with renovation cost of thermal power plants April 2 2013
Japan agreed to start vice foreign minister-level
talks to discuss diplomatic and security issues and
hold a policy dialogue with the US
Japan provided the Philippines with 10 multi-role
response vessels to beef up the Philippines'
surveillance capacity as well as a high-tech
Philippines communication system for maritime safety March 9 2013
Japan donated approximately US$2mn through
the United Nations World Food Programme (WFP)
for victims of Typhoon Pablo last December. December 2012
Japan extended a PHP23.63bn loan for
infrastructure development (upgrading Lines 1 and
2 of the Manila Light Rail Transit and to build the
Bohol International Airport). Japan also extended a
PHP383mn grant to build a mini-hydropower plant
in Ifugao. Q1 2013
The two nations signed a bilateral cooperation
agreement to create an emergency (disaster)
warning system. Japanese manufacturers NTT
Data Corp. and Hitachi Ltd. will bear the
development and manufacturing tasks of the
Indonesia project to help create the system. April 29 2013
The Japan International Corporation Agency (JICA)
offered Indonesia new technology to help develop
underground reservoirs as a solution to its
incessant flood control issue. It is being funded by
JICA. Proposed November 8 2012

Recent Japanese Initiatives In The Asia-Pacific Region - Continued

Japan has agreed to contribute US$13bn to jointly
funded infrastructure projects in Jakarta worth
roughly US$43bn. The development plans include
the construction of roads, railways, airports, and
power plants in the Indonesian capital and its
surrounding areas by the year 2020. Out of 45
projects approved by the two countries'
governments, 18 are seen as priority
developments that will begin before the close of
2013. October 8 2012
Source: BMI, international media.
Japan's Means Of Influence In South East Asia
Trade relationships: Although China overtook Japan in 2010 to become the world's second-largest
economy, Japan still has considerable economic weight in Asia, and is among the biggest trade partners for
most countries in South East Asia. For example, Japan is the biggest export destination and import source
for the Philippines; the top export destination for Indonesia and its third-biggest source of imports; the third-
ranked trade partner of Malaysia; the second or third major export destination of Thailand and its top source
of imports; and one of the top three trade partners of Vietnam. Japan is also Myanmar's fourth-ranked
export destination. Therefore, any sustained revival of the Japanese economy would be a boon to the region.
Foreign direct investment (FDI): Japan is a major foreign investor in South East Asia, with figures from
the Japan External Trade Organisation (JETRO) showing that total outward foreign direct investment to
Asian countries between 1995 and 2012 amounted to US$266.4bn, or 28% of the total that Japan invested
abroad over the same period. Although China was by far the biggest recipient of Japanese FDI, with US
$90.3bn, the ASEAN Four (Thailand, Indonesia, Malaysia, and the Philippines) received US$72.9bn. The
respective figures for these countries were US$31.4bn, US$19.6bn, US$11.3bn, and US$10.6bn. A
sustained revival of the Japanese economy would support further FDI in South East Asia, especially with
Japan keen to diversify its investment away from China, due to geopolitical tensions.
Development assistance: Japan's Official Development Assistance (ODA) peaked at JPY1,169bn in

FY1997, and by FY2009, it had slid to JPY672.2bn, which was the lowest since 1986. The decline reflected
Japan's increasingly severe financial situation. Nevertheless, organisations such as the Japan Bank for
International Cooperation (JBIC) and Japan International Cooperation Agency (JICA), through which
Japanese ODA is channelled, play an important role in promoting development in emerging economies.

Japan also provides assistance to emerging Asian economies through its powerful role in the Asian
Development Bank (ADB), and a Japanese national has held the lender's presidency ever since it was
founded in 1966.
Financial assistance: Japan's proposal to create an Asian Monetary Fund after the 1997-1998 Asian
financial crisis was blocked by the US, but Japan maintains bilateral currency swap agreements with several
Asian countries and is a participant in the Chiang Mai Initiative (CMI) currency swap arrangement, which
includes the 10 members of ASEAN plus China and South Korea.
Security cooperation: Owing to the constraints placed on the Japanese armed forces after World War II,
Japan has played a minimal role in South East Asia's security. However, recent Japanese prime ministers,
including Shinzo Abe, are in favour of Tokyo playing a bigger part in the region, and Abe is hoping to
amend Japan's constitution for this reason. In December 2012, Abe stated that he wants Japan to participate
in the Five Power Defence Arrangement between the UK, Malaysia, Singapore, Australia and New Zealand.
Abe has also spoken of creating a 'security diamond' between Japan, India, Australia, and the US state of
Hawaii, linking the Indian and Pacific oceans. He sees both initiatives as aimed at counterbalancing Chinese
power in the Asia-Pacific region. Although we see little chance of a NATO-style formal military alliance
emerging to 'contain' China, because this would be seen as an overly provocative move, we believe that the
coming years will see increasing military cooperation between Japan, Vietnam, the Philippines, and India -
all of which are concerned about China's rise.
Constraints On Japanese Influence
Japan's ability to exert influence in South East Asia will depend on its future economic performance. If
Prime Minister Abe's 'Abenomics' sets Japan onto a path of sustainable recovery, then the country's
economy will be viewed favourably in the region, and we could witness greater Japanese FDI in South East
Asia.
However, there are considerable constraints to Japan playing a more active role in South East Asia. The first
is economic. Due to its massive fiscal deficit and colossal debt burden, Japan simply lacks the economic
resources that China has at its disposal.
Secondly, Japan's 'revolving door' political leadership makes it difficult for its prime minister to play a high-
profile role in regional affairs. Abe's six predecessors, including Abe in his first stint as premier
(2006-2007), barely lasted a year in office. It is unclear if Abe can break the recent tradition of misfortune.

That said, Japan's foreign policy bureaucracy will continue engagement with South East Asia, regardless of
who is prime minister.
Thirdly, Japan's fiscal challenges and domestic constraints preclude a major expansion of its armed forces,
and this will limit its ability to play a substantial role in regional security. The Japanese public is also very
cautious about any role that could embroil it in regional conflicts.
South East Asia To Benefit From Sino-Japanese Competition
Nevertheless, as Abe seeks to increase Japan's regional clout, we expect South East Asian countries to
benefit economically from the 'bidding war' between China and Japan. Quite simply, Beijing and Tokyo
will be keen to win political support through aid and investment, and South East Asian states will thus be in
a good position to maximise their rewards.

Regional Overview
Political Risk Analysis
South East Asia will face a number of challenges to its security in the 2010s, largely in the form of Islamist
militancy, piracy, weak borders and rising competition between China and the US for influence in the
region. One of the biggest individual unknowns in the region is the future of Myanmar. If the regime there
were to collapse suddenly, regional insecurity would be greatly increased.
South East Asia In A Global Context
South East Asia will remain one of the world's most important regions for the following reasons:
Population Size: It is one of the most heavily populated parts of the world, with an estimated 597mn people
in 2010, according to the UN. The population is still rising rapidly, with the UN forecasting an 11.5%
increase to 666mn in 2020, and to 723mn in 2030.
Rapidly Expanding Economies: South East Asia's economies are generally expanding rapidly and the
region is a key destination for foreign investment, business and tourism. It is also rich in commodities and
natural resources.
Islamist Militancy: Islamist militants have been active in South East Asia for some time. The region has
258mn Muslims (16% of the global total), according to a January 2011 report by the Pew Forum, providing
a significant pool of potential recruits.
International Piracy: The Malacca Strait and waters around Indonesia are major zones of pirate activity.
The Strait is one of the world's main maritime 'chokepoints', and there are fears that terrorists could block
the channel.
Sino-US Competition For Influence: The US dominated South East Asia during the Cold War but in
recent years Chinese influence (especially commercial) has been increasing. This raises the likelihood of a
concerted struggle for influence between Beijing and Washington.
Challenges And Threats To Stability And Security
South East Asia faces multiple challenges to its security over the coming decade and beyond. These include:

Poor Governance And Political Instability
Most South East Asian states are vulnerable to political instability and suffer from relatively poor
governance. Thailand had until 2011 been wracked by periods of protests (mostly in Bangkok) and saw five
changes of leadership since 2006. This instability reflects a deep-rooted power struggle between traditional
Bangkok-based royalist elites represented by the Democrat Party, and new elites and the predominantly
agricultural north eastern provinces, represented by exiled former premier Thaksin Shinawatra and his
younger sister, Yingluck, who was elected prime minister in July 2011. Although the political scene has
since calmed down, we believe the risk of instability will linger for some years, especially if Yingluck's
party seeks to amend the constitution.
The Philippines has also been prone to political instability, with two 'People Power' popular uprisings
against corrupt presidents (in 1986 and 2001), and several repeated attempts during the 2000s. During the
past decade the Philippines has occasionally been hit by rumours of an imminent military coup, although
most of these were speculative and actual mutinies were foiled or failed to attract the support of the top
brass. Given deep inequalities in the Philippines, high levels of political corruption, and on again-off again
attempts by elements of the establishment to push for constitutional change ('cha-cha'), we see scope for
renewed instability in the years ahead.
Indonesia has achieved a high degree of stability under President Susilo Bambang Yudhoyono (2004-)
following the chaos of the immediate post-Suharto years. That period resulted in three changes of president
in six years (1998-2004) and the near disintegration of the state, as separatist movements took advantage of
central government weakness to break free. It remains to be seen whether the stability achieved under
Yudhoyono represents a maturing of Indonesia's political culture or is an aberration that will end once he
steps down in 2014.
Cambodia, Laos and Vietnam are all de jure or de facto one-party states experiencing rapid economic
growth and social change. We do not preclude rising public unrest, especially if governments fail to
translate rapid economic growth into higher living standards. Indeed, the popular uprisings which shook the
Middle East and North Africa in 2011 show the speed at which pent-up public dissatisfaction with
authoritarian regimes can reach boiling point.
Rapid Population Growth And Urbanisation
Although birth rates have declined, populations are increasing fairly rapidly in most South East Asian
countries, with total fertility rates (TFR, the average number of children a woman is expected to have in her

lifetime) above the population replacement level of 2.1. The Philippines is forecast by the UN to have the
highest TFR in the region (3.1) in 2010-2015, while Thailand will have the lowest TFR of 1.5, which is
already below replacement level, having fallen from 3.9 in 1980.
High birth rates mean governments and private sectors must create sufficient jobs to absorb the expanding
labour force. However, in many cases, job creation is proving difficult, and this is leaving a vast segment of
unemployed or underemployed young people who have only limited prospects for social and economic
advancement. In the Philippines an estimated 10% of its workforce has moved abroad in search of work.
Several South East Asian states are also expected to experience substantial urbanisation over coming
decades. Cambodia, Laos, Myanmar, Thailand and Vietnam are still predominantly rural, with only one-
third of their populations living in cities. As more people migrate to the cities, this will place ever greater
strains on urban infrastructure and social services. This could increase scope for political instability or force
rural migrants to work in the underground economy. These conditions in turn provide opportunities for
organised crime to flourish.
Organised Crime
Organised crime is common in many parts of South East Asia (although hardly uniquely so), owing to weak
institutions, high levels of poverty and corruption and a degree of lawlessness in some countries. In
addition, increasing globalisation has allowed criminal groups hitherto mainly restricted to one country to
develop operations overseas. As with many underdeveloped regions of the world, organised criminal groups
trade in drugs, people (prostitutes, but also children and illegal migrants), weapons and counterfeit goods.
Nonetheless, most foreign visitors to South East Asia are unlikely to be physically targeted by criminal
gangs, although they are at risk of petty crime and trickery. Most criminal syndicates are arguably more
likely to pose a threat to domestic rather than foreign businesses.
Islamist Militancy
South East Asia's Muslim populations have long practiced a moderate form of Islam, and the vast majority
still does. However, since the 1990s the region has come under greater scrutiny for its ties with radical
Islam. For example, in 1995, al-Qaeda operatives used South East Asia as a staging ground for a failed plot
(Operation Bojinka) to destroy a dozen transpacific airliners flying towards the US, a scheme that was later
carried out on a smaller scale on September 11 2001. The '9/11' terror attacks prompted national and global
intelligence agencies to intensify their efforts to crack down on South East Asian terror cells.

There are several reasons why the region, and Indonesia in particular, will remain vulnerable to terrorism or
a source of terrorism in the near future:
•There is the region's sheer geographical size and population. Indonesia and the Philippines are large
archipelagos with thousands of small and sparsely populated islands where the government's presence may
be limited. This provides terrorists with places where they can hide and train.
•Despite fairly robust economic growth, tens of millions of people in Indonesia and the southern Philippines
remain in deep poverty. Their lack of opportunities for social advancement could make them vulnerable to
recruitment by radical groups.
•There are powerful religious organisations in Indonesia, which although not terrorist in nature, espouse
'radical' messages to their supporters. The Indonesian authorities have at various times been reluctant to
crack down on these groups for fear of creating a backlash.
•There is a significant foreign presence in South East Asia that provides potential targets for terrorists.
These include foreign businesses, tourists and travellers, aid workers and Christian missionaries. Singapore,
too, could potentially be targeted, because it is the region's leading financial centre and a pro-Western state.
Main Islamist Militant Groups In South East Asia
Jemaah Islamiyah
Jemaah Islamiyah (JI) is one of the most prominent Islamist militant groups in South East Asia, having
received notoriety in the international media for orchestrating the October 2002 Bali bombing. This was the
worst single act of terrorism on Indonesian soil, killing 202 people, including 152 foreign citizens (88 were
Australian). JI was founded in the early 1990s with the aim of forming an Islamist superstate consisting of
Indonesia, Malaysia, the southern Philippines, Singapore and Brunei. Of these countries, it has been most
active in Indonesia, carrying out bomb attacks on the Marriott Hotel in Jakarta in 2003, the Australian
embassy in 2004, Bali (albeit on a much smaller scale) in 2005, and on the Marriott and Ritz-Carlton hotels
in Jakarta in 2009.
By the start of the 2010s most of JI's top operatives had been killed or captured, with Noordin Mohammad
Top, the Malaysian-born mastermind of the 2009 Jakarta attacks, dying in a gun battle with Indonesia's anti-
terror police in Central Java in September that year. Nonetheless, the Islamist terror threat persists. In May
2010 the Indonesian police announced that they had foiled a plot by Aceh-based militants to carry out a

Mumbai-style hotel siege and attack President Susilo Bambang Yudhoyono, government officials, and
foreign guests at Indonesia's national day ceremonies on August 17. The militants were also reportedly
planning to target the US president, Barack Obama, who eventually visited the country in November 2010.
In August 2010 the Indonesian authorities detained the radical cleric Abu Bakar Bashir, whom they
consider to be the driving force behind JI. Indonesia's Detachment 88 linked Bashir to a militant training
camp in the westernmost province of Aceh, the only region of Indonesia to incorporate shari'a law. In
February 2011 Bashir went on trial charged with plotting acts of terror and in mid-June he was sentenced to
15 years in prison. This was reduced to nine years in October 2011. In July Indonesia's national counter-
terrorism chief stated that Islamist militants were now using parcel bombs and targeting minority groups to
push their radical agenda. In mid-April 2011 a suicide bomber detonated himself in a mosque inside a
police compound 200km south east of Jakarta, injuring around 30 people.
In March 2012, Indonesian police shot dead five suspected Islamist militants in a raid in Bali. The men were
believed to be plotting new attacks, including one against a beachfront bar popular with tourists. This
demonstrated the persistency of the terror threat, and security officials believe that militants are keen to
raise their profile with new attacks. In October 2012, the authorities foiled another plot aimed at attacking
the US and Australian embassies in Jakarta, the American consulate in Surabaya, and the offices of mining
company Freeport-McMoRan. The plotters were believed to represent a new group, the Sunni Movement
for Indonesian Society ('Hasmi').
In January 2013, police carried out further raids on Islamist militants in Poso, Central Sulawesi, which has
reportedly emerged as a new front in the fight against terror groups, and the island of Sumbawa. The
militants were apparently planning to attack tourist spots in these areas. In February 2013, Indonesian
lawmakers passed legislation enabling the government to cut off terrorist financing by freezing bank
accounts and seizing assets of accused terrorists. Previously, Indonesia had been among a small group of
countries lacking a comprehensive law regarding the financing of suspected terrorists. Overall, Indonesian
security forces are increasingly concerned about the proliferation of very small militant groups or terror
cells, which are harder to detect than larger, established groups such as JI.
Abu Sayyaf
Abu Sayyaf is a small but deadly Islamist group in the Philippines that was formed in the 1990s by
Abdurajak Abubakar Janjalani after he returned from the Middle East and Afghanistan. After Janjalani's
death in 1998, his brother Khadaffy led the group until his own death in 2007. Khadaffy's successor,
Albader Parad, was killed in February 2010. All three died in battles with Philippine government forces.

Abu Sayyaf has been fighting for an independent Islamist state and has attacked or kidnapped foreign
tourists, aid workers and Christian missionaries, as well as conducted bomb attacks. Its main strongholds
have been the islands of Jolo and Basilan.
In 2004 Abu Sayyaf bombed a ferry in Manila Bay, resulting in 116 deaths, making it the Philippines' worst
terror attack. The group developed close ties with al-Qaeda thanks to the support of Mohammed Khalifa, a
brother-in-law of Osama bin Laden, and Jemaah Islamiyah (see above). Abu Sayyaf's links with al-Qaeda
prompted the US to deploy several hundred troops to the southern Philippines in 2002 in support of
Philippine military operations against the group.
While the Philippine government has scored successes in its campaign against Abu Sayyaf, reducing the
number of militants to around 350 from a peak of 5,000 in early 2000, the authorities see the group as very
dangerous, and fear that it is rebuilding its ties with militant groups in the Middle East. As of 2013, the
militants were holding several foreign nationals as hostages, all of whom were captured in the south of the
Philippines.
Moro Islamic Liberation Front
The Moro Islamic Liberation Front (MILF) broke off from the Moro National Liberation Front (MNLF) in
1981 to wage an intensified war for an independent Moro (Muslim) state in the southern Philippine island of
Mindanao. The MNLF had been fighting for a Moro state since the 1960s, but gradually adopted a moderate
path, which prompted its hardliners to form MILF. In 1989 the Philippine government created the
Autonomous Region in Muslim Mindanao (ARMM), consisting of several Muslim provinces, in a bid to
placate local Muslim populations. However, MILF considered the move insufficient and continued its
armed struggle. Nonetheless, from 1997 MILF conducted on-and-off negotiations with the Philippine
government to end the conflict, which has killed more than 120,000 people.
On October 7, 2012, the Philippine government finally reached a landmark peace agreement with MILF that
paves the way for the establishment of a new autonomous Muslim territory, to be called Bangsamoro, which
will replace the ARMM before President Benigno Aquino III's term ends in mid-2016. The exact
demarcation of Bangsamoro will be determined by referendum, but it is intended to have greater political
power than the ARMM and more control over the resources located within it. (Under a deal signed in July
2013, MILF will receive 75% of gold, copper, and other resource wealth mined from the territory.)
Bangsamoro's government will have more power over taxes, spending, and internal security, but foreign,
defence, and monetary policy will remain in the hands of Manila.

However, the struggle in the Philippine south is not necessarily over. Early 2011 saw the emergence of a
MILF splinter group known as the Bangsamoro Islamic Freedom Fighters (BIFF), with around 100
members. The group was led by Ustadz Ameril Umbra Kato, a hardline commander who was behind an
outbreak of violence in August 2008. MILF formally expelled Kato in March 2011, prohibiting him from
using the group's name in any communications. Shortly after the announcement of the October 2012 peace
breakthrough, a BIFF spokesman rejected the deal. Going forward, BIFF may stage new attacks, which
could complicate the peace process. The group was implicated in a plot to bomb the Shariff Aguak town
hall in Mindanao in January 2013. Also potentially problematic is the existence of private armies controlled
by powerful clans in the region who could see their influence eroded under a peace deal.
Insurgents In Thailand's South
Since January 2004 Thailand's three predominantly Muslim southernmost provinces, Pattani, Yala and
Narathiwat, have been wracked by an insurgency that is estimated to have resulted in 5,200 deaths, mostly
civilians, by August 2012. The local population has long bemoaned its marginal economic and social status
in predominantly Buddhist Thailand, and believes it has more in common with its Malaysian neighbours.
The current insurgency has consisted of small-scale attacks on military and police facilities, but successive
Thai governments have all failed to bring the conflict to heel, despite a variety of economic incentives and
military measures. Despite the durability of the insurgency, the militants have shown little sign of wanting
to expand it to key tourist areas or the capital, Bangkok. Although there have been concerns that the
militants could attract the operational involvement of radical groups such as al-Qaeda or Jemaah Islamiyah,
this has not happened. Nonetheless, we believe Thailand remains an attractive target to South East Asian
Islamist militant groups, because of the large presence of Westerners in the country.
Meanwhile, fears of a possible terrorist attack against American or Israeli interests increased in January
2012 after Thai police arrested a Lebanese man with a Swedish passport for possession of large quantities of
chemicals, which could be used to make explosives. The man was allegedly linked to Iran-backed Shi'ite
Islamist group Hizbullah, prompting speculation that Tehran was preparing to strike American and Israeli
interests beyond the Middle East in the event of a US-Israeli attack on Iranian nuclear facilities.
Piracy In The Malacca Strait
Piracy is a major risk in the Malacca Strait and the waters around Indonesia, and there have long been
concerns that terrorists could bomb a tanker in the Strait, blocking it to international trade. Around 40% of
world trade passes through the Malacca Strait. Malacca is the main channel between East and South Asia,
the Middle East, Europe and Africa. It is especially important for China and Japan, since 80% of Chinese oil

imports and 90% of Japanese inbound crude shipments pass through it. Defence planners in Beijing and
Tokyo have long feared that terror attacks, piracy, or interdiction by hostile navies could choke off their
trade and oil supplies. Singapore is the world's top container shipping port and refuelling hub, and any
temporary shutdown of the port would be a tremendous economic blow to the city-state.
Militant groups have a proven capability to attack large ships. In 2000 Islamist militants used a small boat to
carry out a suicide bombing against the USS Cole in the port of Aden, Yemen, and in 2002 they attacked
the French oil tanker Limburg in the Gulf of Aden. More recently Somali pirates have shown an ability to
seize large vessels, including an oil supertanker in 2008. While joint maritime patrols by Indonesia,
Malaysia and Singapore have helped curb piracy, the overall threat to shipping in the Malacca Strait is real.
Fortunately, there are alternative routes to Malacca should it become blocked. The first is the Sunda Strait,
which separates Indonesia's largest islands of Sumatra and Java. However, this route is considered difficult
to navigate (especially for large vessels), because of shallow patches, strong tides, oil platforms and tiny
uninhabited islands. There is also the route through the Lombok and Makassar Straits, which is wider,
deeper, and less congested. However, this route is 1,600 nautical miles longer, requiring a further three-and-
a-half days' travelling time, which adds to shipping costs.
Overall, the rising volume of Asian trade, especially with emerging markets in the Middle East and Africa,
means the Malacca Strait is likely to become more important and more congested, increasing the risk of a
terror attack or piracy. China is building pipelines across Myanmar to bypass the Strait, and Malaysia is
planning a trans-peninsular pipeline, but these schemes will not compensate for any disruption in Malacca.
The South China Sea/Spratly Islands
The South China Sea is a potential flashpoint in South East Asia. Most notably, ownership of the Spratly
and Paracel Islands, which consist of thousands of small islands in the sea, is disputed between Brunei,
China, Malaysia, the Philippines, Taiwan and Vietnam. Not all of these countries claim all the islands;
rather, they each claim part of the archipelago, and have deployed small numbers of military forces there.
The islands are believed to contain oil and gas deposits and vast fish stocks, which increase their perceived
value to the claimant country.
For many years the countries with claims to the Spratly and Paracel Islands have been concerned about
China's increasing assertiveness in the South China Sea. China is progressing with long-term plans to
develop a blue-water (ocean-going) navy and has already developed a large new underground naval base in
Hainan Island, in the southernmost part of the People's Republic, which can be used to project power in the

South China Sea. Given that virtually all maritime trade between East Asia and Europe/the Middle East
must pass through the South China Sea, there are concerns among some defence planners in Japan, Taiwan,
and Vietnam that the Chinese People's Liberation Army Navy (PLAN) could interdict their vessels in the
area in the event of a geopolitical crisis. We believe such action is highly unlikely, given that this could be
construed as an act of war and could prompt US intervention.
Other Regional Threats
Thai-Cambodian Border Dispute
The Thai-Cambodian border is a potential flashpoint owing to the presence of the disputed Preah Vihear
temple. In 1962 an international court ruling awarded the temple to Cambodia, but many in Thailand do not
accept this status. Recent years have seen both countries use the dispute to stoke nationalist fervour and
both have deployed troops to the region, resulting in small but deadly skirmishes. The latest of these took
place in late April/early May 2011, resulting in at least 18 deaths. Despite these occasional hostilities,
neither side wishes to see full-scale armed confrontation. In July 2012, Thailand and Cambodia withdrew
their troops from the disputed area, in accordance with an order from the International Court of Justice, and
replaced them with police personnel.
New People's Army
Besides Islamist militants, the Philippine government has fought a Maoist insurgency led by the Communist
Party of the Philippines and its armed wing, the New People's Army (NPA), for more than 40 years. The
NPA has been a threat to government forces, as well as civilian communities in various parts of the country.
Both the US and the EU designate the militant group a terrorist organisation. Despite the offer in 2007 of an
amnesty by then-president Gloria Macapagal Arroyo that promised to forgive certain crimes committed 'in
pursuit of political beliefs', the NPA has continued to wage hostilities against the central government.
However, the NPA's strength has been weakened substantially, with Philippine military officials estimating
that the group may only have 4,000 fighters, compared with 26,000 at the peak of its power in the 1980s. In
early June 2010 guerrilla leaders stated that they were ready to resume talks with the Philippine government
under the new president, Benigno Aquino III. Formal talks, hosted by Norway, resumed in mid-February
2011 after a six-year hiatus. One of the key sticking points was the demand by rebels that more of their
comrades be released from detention. Meanwhile, the rebels continued to attack foreign and domestic mines
in the southern Philippines in 2011, citing their pollution and the displacement of indigenous people. The
government countered that the guerrillas use these social concerns as an excuse to extort money from mine

operators. In April 2013, peace talks collapsed, raising doubts about Aquino's goal of reaching a final
settlement by 2016.
The Future Of Myanmar
The future of Myanmar remains a major risk factor for South East Asian security. Myanmar is important for
the following reasons:
•It lies at the intersection of China and India, and has been the subject of competition for influence between
Beijing and New Delhi, with the former generally holding the upper hand.
•China sees Myanmar as a crucial transport corridor connecting its landlocked inner western provinces to
the Indian Ocean, and thus world markets. China is building new pipelines from Myanmar's gas fields and
ports to its industrial centres, so that less oil to China needs to be shipped via the Malacca Strait.
•Chinese access to Myanmar's ports could eventually allow the Chinese navy to increase its ability to
project power in the Indian Ocean, which is shaping up to be a major arena of 'Great Power' competition.
•A Myanmar closely allied to the US would allow Washington to increase its influence in South East Asia.
Like India, the US worries about rising Chinese influence. Indian dominance over Myanmar could
counteract some of China's geopolitical clout in the region.
•Myanmar is vulnerable to separatist pressures and any full-scale collapse of the country could lead to
massive refugee flows into China, India, Thailand and Bangladesh, none of which are necessarily well
placed to cope with them.
•Myanmar is a major centre of illegal trafficking of gems, timber, drugs, and labour (including prostitutes).
•The country emerged as a potential ally of North Korea in the late 2000s and there were reports that
Pyongyang was assisting Naypyidaw in developing a nuclear programme.
Following the first elections in more than 20 years in November 2010, Myanmar remains dominated by the
military, albeit in the civilian guise of the Union Solidarity and Development Party. However, new
President Thein Sein reached out to the US and other Western countries in 2011, eventually resulting in
President Barack Obama making a landmark visit to the country in November 2012. The EU and US
meanwhile moved to ease long-standing sanctions, with the former lifting all sanctions in April 2013.

Against this backdrop, hopes are high that Myanmar can be reintegrated into the global economy. Yet
despite these positive initiatives, BMI sees a risk of political instability and even chaos if the regime
eventually collapses or is replaced by a weaker and untested government. Already, 2012 and 2013 have
seen considerable violence between Buddhists and the Muslim Rohingya minority, resulting in more than
100,000 Rohingyas being displaced. Myanmar is a highly diverse country, and the experiences of Indonesia
and Yugoslavia in the 1990s showed that when a long period of authoritarian rule collapsed, ethnic
separatism and civil war (or quasi-civil war in Indonesia's case) followed, leading to atrocities, refugee
flows and the spread of organised crime, all of which proved detrimental to economic development.
The vast armed forces keep separatist regions in check, but if the military fractured, these regions might be
expected to take advantage of the power vacuum and go their own ways. The putative new central
government would thus face a dilemma over whether to allow breakaway states to become independent, or
fight to prevent their secession. Meanwhile, there would be the possibility of behind-the-scenes intervention
or even major troop deployments by China, India, Thailand and potentially even the US.
Sino-US Rivalry In South East Asia
Sino-US competition in South East Asia is likely to feature more prominently over coming years.
Traditionally, the US has been the preeminent 'Great Power' in the region. During the Cold War,
Washington developed close relationships (especially in the military sphere) with Thailand, the Philippines
and Indonesia, as a means of containing Chinese- and Soviet-backed communism in the region. However, in
the post-Cold War era South East Asia's geopolitical importance waned, and the US military withdrew its
substantial presence in the Philippines in 1992.
For much of the 1990s and the 2000s the US was too concerned about events in Iraq, Bosnia, Kosovo,
North Korea and Afghanistan to give much attention to South East Asia. Nonetheless, the 9/11 terror attacks
forced the US to turn its full attention to militant Islam, and while the prime foci of Washington's 'war on
terror' have been Afghanistan and Iraq, the White House feared that al-Qaeda and its offshoots could find
save havens in the southern Philippines and parts of Indonesia. In 2003 the Bush administration named
Thailand and the Philippines as US Major Non-NATO Allies (MNNA), a status that brings close defence
cooperation with Washington. The US also became more involved in assisting the Philippines in its war
against Abu Sayyaf militants. Even so, there has been a perception that the US' ongoing commitments in
Afghanistan and previous deployment in Iraq have resulted in Washington neglecting South East Asia at a
time when China has quietly been gaining influence through increased trade, investment, tourism and other
cultural exchanges.

Consequently, the US has been seeking to revive its influence in the Asia-Pacific region, and in late 2011
announced that it would deploy more military resources there. To Washington's advantage, it is unlikely
that South East Asian states would willingly acquiesce to Chinese hegemony. Beijing's attempts to assert its
sovereignty in the South China Sea since 2010 have led to a regional backlash. Most notably, Vietnam has a
long history of strained relations with China. Vietnam was the last sovereign state that China attacked (in
1979) and Hanoi remains wary of Beijing's rise, despite the fact that they are both one-party Communist
states pursuing similar economic reforms. The US is cognisant of Vietnam's apprehension and has been
working since the late 1990s to boost bilateral relations, apparently with the unstated intention of
developing Hanoi as a potential counterweight to Beijing. Although the US fought a bitter war with
Vietnam in the 1960s and 1970s, around half of all Vietnamese were born after the US defeat in 1975 and
thus do not have direct experience of the conflict. Vietnam therefore does not suffer from high degrees of
anti-Americanism that would preclude an alliance with the US. That said, there is reluctance by Hanoi to
become too dependent on Washington for security. In the early 2000s there was speculation that the US
would seek to establish a military presence at Cam Ranh Bay in southern Vietnam, following the
withdrawal of the Russian navy in 2002 after a 23-year stay, but this did not happen. Vietnam appears to be
sticking with its 'three nos' policy of no foreign bases, no formal military alliances, and no use of its
territory to attack another country. Meanwhile, the US's outreach to Myanmar, discussed in the previous
section, is part of its broader strategy to regain influence in South East Asia.
Sino-Japanese Rivalry In South East Asia
As China's influence in South East Asia has risen, Japan has started trying to reassert its own clout in the
region, with Tokyo seeking to counterbalance Beijing in the Asia-Pacific realm. Japan is still a major
foreign investor in South East Asia and a key trade partner of most countries in the region. Japan is thus
seeking to position itself as an alternative economic anchor to China - although its ability to do so is
constrained by its almost chronic economic weakness. Following the return to power of Japan's
conservative Liberal Democratic Party (LDP) in the December 2012 election, Tokyo is moving rapidly to
shore up its relations with South East Asian states. Japan's prime minister, Shinzo Abe, visited the region in
January 2013, and his commitment to boosting Japan's military profile could position Tokyo into closer
defence cooperation with regional states. Significantly, the Philippines in December 2012 backed Japan's
plan to become a fully fledged military power. Nonetheless, Japan's severe budget deficit and colossal debt
burden could limit is ability to become a powerful counterweight to China.

Global Industry Overview

Global Political Outlook
BMI View: Our key theme for the latest Global Political Outlook is policy risks in emerging markets, amid
mass protests in Turkey, Brazil, and Egypt. The main 'hotspots', such as Iran, Syria, and North Korea,
appear to be contained at manageable levels, at least for now.
As we enter the second half of 2013, the 'obvious' global political risks, such as Iran, Syria, North Korea,
and the Sino-Japanese maritime dispute, still appear to be contained. The bigger risks, at least for now, stem
from policy missteps in emerging markets (EM), as evidenced by outbursts of social unrest in Turkey,
Brazil, and Egypt in the early summer of 2013. Meanwhile, Japan's Upper House election, held on July 21,
will determine the fate of 'Abenomics' and whether the world's third-largest economy can experience a
sustained revival or relapse into stagnation and even an eventual fiscal crisis. As the year progresses, we
expect attention to turn to key elections in European countries, with September being an especially busy
month due to voting in Norway, Germany, and Austria. Beyond this, many EMs, such as Egypt, Argentina,
Chile, Bangladesh, Colombia, Indonesia, India, South Africa, and Brazil, will hold elections between late
2013 and late 2014.
EM Policy Risks In Focus
The current turmoil in emerging markets is a result of both external and internal risks that we have been
flagging for some time now. These include a slowdown in China as well as the normalisation of monetary
policy in the US. Moreover, many EMs have also seen a deterioration in their macroeconomic and political
risk profiles as a slowdown in growth has exacerbated social tensions.
On the one hand, politicians that choose to offset the slowdown in growth by expanding fiscal policy could
see a sustained deterioration in their country's fiscal profile. On the other hand, governments that try to
tighten fiscal policy may face a political backlash, which could cause a surge in political risk. Central banks
will also face a very tough set of policy decisions as they struggle to find manage rising inflationary
pressures and slowing growth in the midst of rising global bond yields.
Furthermore, we have also seen an uptick in political risk in the mining sector in several countries such as
Peru (indigenous movements), South Africa (protests over wage and working conditions) and Mongolia
(renegotiation of existing contracts) to name but a few, which, combined with falling profitability, has
resulted in several major miners scaling down investment plans. Combined, these risks could have a

significant negative impact on the economic outlook for these countries as investors lose confidence and
pull capital out.
Global Hotspots: Iran, Syria, Koreas, Sino-Japanese Dispute
Iran war risks on pause: The landslide victory of the relatively moderate candidate, Hassan Rouhani, in the
June 14 Iranian presidential election is arguably the most positive realistic outcome that could have been
expected, and reduces the risk of war in the near term. Rohani won almost 51% of the vote, far ahead of
second-placed candidate and Tehran mayor, Mohammad Baqer Qalibaf, on 16.6%.
As we have noted previously, although the presidency is subordinate to the Supreme Leader, Ayatollah Ali
Khamenei, the president still sets the overall tone of national and international discourse. The last time Iran
was led by a moderate figure, Mohammad Khatami, in 1997-2005, the country saw a somewhat more liberal
climate at home and a noticeable thaw in its relations with the West. By contrast, outgoing president
Mahmoud Ahmadinejad's social conservatism and fierce rhetoric against Israel and the West reinforced
Iran's image as a pariah state.
The unambiguous election result is positive for near-term stability, because, unlike the 2009 election, this
vote is not thought to have been manipulated in favour of the ultraconservatives. The 2009 election was
followed by mass unrest, as Ahmadinejad's opponents contested his re-election. The election of Rouhani
should also reduce the likelihood of an Israeli or US attack on Iran, at least for several months, if not longer,
as Tehran and Western powers attempt to establish some sort of modus vivendi and renew their dialogue on
the nuclear dispute. Israel may well find its position more awkward, for it will be far less easy to demonise
Iran while it is being led by a moderate figure.
Nevertheless, we also caution against expecting too much from Rouhani. The economy will continue to
suffer under sanctions, and, unless he can get these eased, it will remain a source of voter frustration. In
addition, Rouhani will lack the power and authority to deliver a breakthrough in the nuclear dispute. Thus,
an eventual Israeli attack on Iran cannot be precluded.
Syria proxy war to continue indefinitely: Syria's civil war looks set to intensify, following a decision in June
by Western powers to arm the country's rebels. The decision came amid military gains by President Bashar
al-Assad's forces, and accusations by Western states that he had used chemical weapons, thus crossing a 'red
line' issued by US President Barack Obama in 2012. With Iran and Russia standing firm in their political
and military support for Assad, Syria's civil war is now quite openly a proxy conflict between the Middle
East's major powers. The conflict also reflects the wider Sunni-Shi'a divide in the region, with Sunni

countries Turkey, Saudi Arabia, and Qatar backing Syria's largely Sunni rebels, and Shi'a Iran, Hizbullah,
and Iraq supporting the Assad regime, which adheres to the Alawite Shi'a sect. Overall, we believe that the
war could continue for some time, and we note significant parallels with the war in Bosnia in the 1990s (see
May 23, 'Syria's Parallels With Bosnia Offer Clues As To Endgame').
The Western states have no good options in Syria, and there is a risk that new weapons intended for 'secular'
rebels will fall into the hands of radical Islamist fighters. For now, direct Western intervention appears off
the cards, but eventual possibilities include limited US airstrikes against strategic targets in Syria, a partial
or country-wide no-fly zone, a full-scale air campaign to overthrow the Assad regime, and a deployment of
ground troops to secure Syria's chemical weapons. The problem with 'limited airstrikes' is that they may not
prove effective, and could later require a full-scale air campaign lest the US appear weak. For the time
being, the Obama administration will probably hold off on direct intervention, due to the casualty risks
stemming from Syria's air defences and concerns about the reaction of Russia and China. However, there
may come a point when pressure for American intervention becomes irresistible.
As regards wild cards, we caution that even if Assad flees Damascus or is overthrown, the war would not
end. Assad's Alawite supporters would be expected to fight on, while the Sunni majority opposition could
end up fighting among itself, with Syria's minority communities caught in the crossfire. Thus, Syria could
see several more years of conflict, with the risk of substantial spill-over of violence into Iraq, Jordan,
Lebanon, and Turkey.
Korean Peninsula: North Korea in May 2013 reached out diplomatically to Japan, China, South Korea, and
even the US following a period of particularly extreme rhetoric from Pyongyang during March and April,
when the US and the South held their annual joint-military exercises. Although the North refrained from
carrying out further missile or nuclear tests, or a new armed provocation, such actions remain a possibility
over the coming months, especially with Pyongyang marking the sixtieth anniversary of its perceived
victory in the Korean War on July 27, 2013. If the North does initiate a skirmish with the South, then there
is a risk that Seoul could respond forcefully, thus leading to a significant battle at sea or on land.
Meanwhile, we are keeping a close eye on internal stability in North Korea, especially the powerful military
establishment. The country's leader Kim Jong Un appointed a new defence minister, Jang Jong Nam, in
early May, which was the third time that the holder of this position has been changed since April 2012. Kim
also appointed a new chief of general staff, Kim Kyok Sik, for the second time since July 2012. Many other
senior command posts have also changed hands over the past year. Such a high turnover of top military
leaders is unprecedented in North Korea, and the ongoing reshuffle of the top brass could be indicative of a

power struggle in Pyongyang, with Kim seeking to consolidate his control of the armed forces. The Kim
regime is also coming under greater external pressure, with China's 'big four' state banks recently
suspending transactions with North Korea. This is believed to reflect Beijing's displeasure with Pyongyang's
provocative behaviour.
Asia's maritime disputes: Sino-Japanese relations will generally remain strained, as Beijing and Tokyo
quarrel over the ownership of the Japanese-administered Senkaku Islands, which are called Diaoyu in
Chinese. China's state media upped the ante against Japan in early May by questioning Japanese sovereignty
of the Ryukyu Islands, which include Okinawa, which hosts the majority of American military forces
stationed in Japan (see May 13, 2013 'China's Okinawa 'Claim' To Increase Regional Tensions'). Japan's
Prime Minister, Shinzo Abe, has vowed to use military force against Chinese attempts to land on the
Senkaku Islands, and he is likely to maintain his tough rhetoric even after the country's Upper House
elections on July 21, in which his coalition won a majority. Meanwhile, China's new leader, Xi Jinping, also
needs to demonstrate his nationalist credentials, especially amid reports that Beijing's military establishment
is rising in influence. As we have warned previously, while we do not believe that Abe or Xi wants war,
there is a risk of an aerial or naval skirmish as a result of an accident or miscalculation. China's disputes
with Vietnam and the Philippines in the South China Sea will also merit attention.

Methodology
Industry Forecast Methodology
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being
examined.
Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow
us to forecast a variable using more than the variable's own history as explanatory information. For
example, when forecasting oil prices, we can include information about oil consumption, supply and
capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality
is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for
analysis and forecasting.
BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of
objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-
linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for
example poor weather conditions impeding agricultural output, dummy variables are used to determine the
level of impact.
Effective forecasting depends on appropriately selected regression models. BMI selects the best model
according to various different criteria and tests, including but not exclusive to:
■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account
■ Testing the directional movement and magnitude of coefficients
■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value)
■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity

BMI uses the selected best model to perform forecasting.
It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry
forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot
structural breaks, anomalous data, turning points and seasonal features where a purely mechanical
forecasting process would not.
Sector-Specific Methodology
There are a number of principal criteria that drive our forecasts for each defence variable:
■ Defence Budget And Expenditure
Figures for the defence budget (but not expenditure) are based, where possible, on primary government/
ministry sources and official data. Where these are unavailable, defence budget/expenditure forecasts are
based on a range of variables including:
■ Stated expenditure and procurement plans;
■ Likely increases to expenditure owing to security threats;
■ Political factors (likely government changes, influence of the military);
■ Readiness of the military; and,
■ Commitments of the armed forces.
• Defence expenditure per capita, % of GDP and % of fiscal budget
These are calculated using BMI's own macroeconomic and demographic forecasts for population, GDP and
government expenditure.
■ Arms imports/exports
This is forecasted based on the following criteria:
■ Arms ordered and not yet delivered;
■ Stated procurement plans;
■ Military needs (based on the security situation and the readiness of the military); and,
■ Occasionally realpolitik (orders from major allies, foreign military sales from the US, etc).

Sources
Sources used in defence reports include local defence ministries, officially released company results and
figures, established think-tanks and institutes - such as the Stockholm International Peace Research Institute
(SIPRI), the International Institute for Strategic Studies (IISS) and the Royal United Services Institute
(RUSI) - and international and national news agencies.
Risk/Reward Rating Methodology
BMI's Risk/Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of
doing business and the country-specific opportunities and limitations for potential investors in a given
market.
The RRR system divides into three distinct areas:
■ Security Risks
■ Domestic Security Risks
■ Short-term terrorism vulnerability
These in turn have a number of sub-categories, each of which is scored out of 100 as a percentage
likelihood of a risk occurring, with 1 being the most likely and 100 being the least likely.
We take a weighted average, combining the various security risks, which are used to create our regional
ranking system for the risks involved in being present in a particular country.
Importantly, as most of the countries and territories evaluated are considered by BMI to be 'emerging
markets', our rating is revised on a quarterly basis. This ensures that the rating draws on the latest
information and data across our broad range of sources, and the expertise of our analysts.
Sector-Specific Methodology
In constructing these ratings, the following indicators have been used. Almost all indicators are objectively
based.

Table: Security Risk/Reward Ratings Indicators
Indicator
Interstate
- Strategic International Environment
- Military Capability
Terrorism
- Terrorist threat
- Counter-terrorism ability
Criminal
- Capability of security forces
- Capability of criminal groups/armed gangs
- Expatriate exposure
Security Risk Rating
Domestic Security Risk Rating
State Vulnerability Index
- Terrorism
- STPR
- STER
Source: BMI
Weighting
Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal
weight. Consequently, the following weighting has been adopted:
Table: Weighting Of Indicators
Indicator Weighting (%)

Interstate 33.3
- Strategic International Environment 50
- Military Capability 50
Terrorism 33.3
- Terrorist threat 60
- Counter-terrorism ability 40

Weighting Of Indicators - Continued
Indicator Weighting (%)

Criminal 33.3
- Capability of security forces 40
- Capability of criminal groups/armed gangs 40
- Expatriate exposure 20
Security Risk Rating
Domestic Security Risk Rating
State Vulnerability Index
- Terrorism 50
- STPR 25
- STER 25
Source: BMI

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Q4 2013

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2013

Business Monitor International © 2013 Business Monitor International

BMI Industry View ............................................................................................................... 7

Industry Forecast .............................................................................................................. 17

Macroeconomic Forecasts ............................................................................................... 24

Industry Risk Reward Ratings .......................................................................................... 28

Market Overview ............................................................................................................... 30

Regional Overview ............................................................................................................ 55

© Business Monitor International Page 4

Political Risk Analysis .............................................................................................................................. 55

Global Industry Overview .................................................................................................. 67

© Business Monitor International Page 5

BMI Industry View

© Business Monitor International Page 7

© Business Monitor International Page 8

© Business Monitor International Page 9

SWOT Analysis - Continued

© Business Monitor International Page 10

SWOT Analysis - Continued

© Business Monitor International Page 11

Vietnam Defence & Security SWOT

© Business Monitor International Page 12

SWOT Analysis - Continued

© Business Monitor International Page 13

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Table: Vietnam Defence Expenditure 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

VNDmn 49,739,000 55,100,000 70,000,000 79,640,642 89,526,105 100,708,310 113,097,992 127,039,748

© Business Monitor International Page 17

Vietnam Defence Expenditure 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

-% 11.5 -6.7 26.5 7.5 8.7 8.8 8.6 7.9

Table: Vietnam Defence Expenditure By Changing % Of GDP, 2010-2017 (US$mn)

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

© Business Monitor International Page 18

© Business Monitor International Page 19

Source: BMI, IISS

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

e/f = estimate/forecast. Source: BMI

© Business Monitor International Page 20

© Business Monitor International Page 21

© Business Monitor International Page 22

Table: Vietnam Defence Imports, 2010-2017 (US$mn)

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

e/f = BMI estimate/forecast. Source: BMI, UN Comtrade

Table: Vietnam Defence Trade Balance, 2010-2017 (US$mn)

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

e/f = BMI estimate/forecast. Source: BMI, UN Comtrade

Table: Vietnam Defence Exports, 2010-2017 (US$mn)

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

e/f = BMI estimate/forecast. Source: BMI, UN Comtrade

© Business Monitor International Page 23

Not A Good Year

Source: BMI, General Statistics Office

Hint Of A Weak PMI Release

© Business Monitor International Page 24

Stalled Lending A Major Drag On Economy

Vietnam - Purchasing Managers' Index