BMI Vietnam Defence and Security Report Q2 2014

Q2 2014
www.businessmonitor.com
VIETNAM
DEFENCE & SECURITY REPORT
INCLUDES 5-YEAR FORECASTS TO 2018
ISSN 1749-1762
Published by:Business Monitor International
Vietnam Defence & Security

Report Q2 2014
INCLUDES 5-YEAR FORECASTS TO 2018
Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International
Copy deadline: March 2014
Business Monitor International

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Vietnam Defence & Security Report Q2 2014
CONTENTS
BMI Industry View ............................................................................................................... 7
Key BMI Forecasts ................................................................................................................................... 8
Recent Developments ................................................................................................................................ 8
SWOT .................................................................................................................................... 9
Vietnam Security SWOT .............................................................................................................................. 9
Vietnam Defence SWOT ............................................................................................................................ 12
Political ................................................................................................................................................. 14
Economic ............................................................................................................................................... 15
Business Environment .............................................................................................................................. 16
Industry Forecast .............................................................................................................. 17

Defence Expenditure ............................................................................................................................... 17
Table: Vietnam's Defence Expenditure 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table: Vietnam's Defence Expenditure By Changing % Of GDP, 2010-2018 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Armed Forces ........................................................................................................................................ 19

Table: Vietnam's Armed Forces, 2000-2009 ('000 personnel, unless otherwise stated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table: Vietnam's Manpower Available For Military Service, 2011-2018 (aged 16-49 unless otherwise stated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Defence Trade ....................................................................................................................................... 20

Table: Vietnam's Defence Trade Balance, 2010-2018 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Imports ................................................................................................................................................ 21
Table: Vietnam's Defence Imports, 2010-2018 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Exports ................................................................................................................................................ 22
Table: Vietnam's Defence Exports, 2010-2018 (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Macroeconomic Forecasts ............................................................................................... 23

Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Industry Risk Reward Ratings .......................................................................................... 27

Asia Security Risk Ratings ......................................................................................................................... 27
Table: Asia Pacific Security Risk Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table: Asia Pacific State Vulnerability To Terrorism Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Vietnam Security Risk Ratings .................................................................................................................... 28
Market Overview ............................................................................................................... 29

Vietnam Defence Market Overview .............................................................................................................
Recent Developments ..............................................................................................................................
Armed Forces ........................................................................................................................................
Domestic Industries ................................................................................................................................
Imports ................................................................................................................................................
Vietnam Security Overview ........................................................................................................................
Domestic Threats ...................................................................................................................................
29
29
29
30
33
37
37
Page 4

Regional Threats .................................................................................................................................... 38
International Threats .............................................................................................................................. 40
Regional Overview ............................................................................................................ 41

Political Risk Analysis .............................................................................................................................. 41
Global Industry Overview .................................................................................................. 54

Global Political Outlook ........................................................................................................................... 54
Table: Election Timetable, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Methodology ...................................................................................................................... 63
Industry Forecast Methodology ................................................................................................................
Sector-Specific Methodology ....................................................................................................................
Sources ................................................................................................................................................
Risk/Reward Rating Methodology .............................................................................................................
Sector-Specific Methodology ....................................................................................................................
63
64
65
65
66
Table: Security Risk/Reward Ratings Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Page 5
BMI Industry View

BMI View: Given China's recent declaration of an Air Defence Identification Zone (ADIZ) in the East
China Sea and increased territorial assertiveness in the South China Sea, Vietnam is increasingly finding
itself squeezed between the US and China.
Vietnam is involved in territorial disputes with China in the South China Sea, most notably over the Spratly
and Parcel Islands. Although Beijing denies that is planning to declare an ADIZ in the South China Sea, a
recent announcement by foreign minister Wang Yi that China would 'defend every inch' of its territory has
no doubt left Hanoi worried.
Beijing's increasing assertiveness n has had a pronounced effect on Vietnam's defence policy over the past
decade. Indeed, between 2005 and 2012 Vietnam's defence spending doubled. As with most other
neighbouring countries, regional tensions have ensured that defence sales have remained buoyant despite
various economic challenges. Over the past few months, Vietnam has taken delivery of two six Kilo-class
diesel-electric submarines ordered from Russia, as well as a Ukraine-made 3D search radar ST68UM for the
S-300 missile system.
Given its increasing appetite for new defence equipment, as a result of rising tensions with China in the
South China Sea, Vietnam has become a key market for a range of countries. While Moscow has always
been Hanoi's primary defence partner, due to the latter's reliance on Soviet-era equipment, a number of
European defence companies are also expanding ties with the country. Airbus Helicopter, French naval
company DCNS and European missile-maker MBDA are all reportedly looking to win contracts in Hanoi.
Defence ties with the US have continued to strengthen since the ADIZ declaration in November 2013.
Following US Secretary of State John Kerry's visit to Vietnam in December 2013 a range of deals have
been announced between the two countries. This includes US$32.5mn in assistance for maritime law
enforcement in South East Asia, US$18mn of which is earmarked for Vietnam. In March 2014 Wendy
Sherman, the under-secretary of state for political affairs, followed Kerry's visit to Vietnam with a short
visit to Hanoi. During the under-secretary's meetings with Nguyan Chi Vinh, the Vietnamese deputy
minister of national defence, the two countries agreed to promote exchanges aimed at better coordination in
strategic consultations on defence and security, clearing bombs and mines, as well as enhancing maritime
security.
Page 7
With the US' strategy of rebalancing to Asia and China antagonising traditional allies, it will be interesting
to see how the Vietnam-China-US dynamic develops. Unlike other neighbouring countries, notably Japan
and South Korea, Vietnam has maintained a cautious reaction following Beijing's announcement of an
ADIZ in November. However, the warm reception proffered to Kerry during his recent, may imply a
reorientation of Vietnam's web of alliances.
A notable development has been Vietnam's increased integration with its ASEAN regional partners on
matters of defence and security. Indeed, in March 2014 ASEAN members agreed to undertake joint
maritime security exercises in the Malacca Straits in 2015. The announcement comes at a sensitive time,
with five member states embroiled in territorial disputes with China, and was intended to signal solidarity in
the face of Chinese aggression and assertiveness.
Key BMI Forecasts
Defence expenditure is forecast to rise from US$5.9bn in 2013 to US$6.8n, up 15.1% year-on-year
As a percentage of GDP growth, defence expenditure is set to remain stable at roughly 3.5% of GDP.
In 2014 real GDP is set to grow 5.97% from 2013. In 2015 real GDP is forecast to grow at 6.42%.
Recent Developments
Given regional tensions, Vietnam's defence spending remains buoyant, with a number of European
defence manufacturers involved in negotiations over the export of supplies.
ASEAN partners announced joint naval exercises in the Malacca Straits to start in 2015.
Beijing has reportedly carried out preparations for establishing an ADIZ in the South China Sea, although
with no immediate plans to implement it.
Page 8
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.
Development of new defence partnerships gives Vietnam options and flexibility.
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.
Chinese advances in East China Sea could be replicated in South China Sea, directly
impacting upon Vietnam's security
Low defence budget restrict operational capacity.
Antiquated, Soviet defence platforms are in need of upgrading
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.
Page 9
SWOT Analysis - Continued
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.
Opportunities
Forecast economic growth may lead to a larger military budget, although economic
fragility may counterbalance this growth.
Russia and India have 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, the UK, South Korea and India 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 cooperation should serve to build relationships between the two countries.
Page 10
The new constitution outlines plans to expand Vietnam's domestic defence industry,
which may make it more self-sufficient regarding defence and security.
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 and Chinese advances 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.
Page 11
Vietnam Defence SWOT

SWOT Analysis
Strengths
Agreements with India and Russia could provide blueprint for industry development.
Procurement of four advanced modular corvettes from the 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).
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.
Page 12
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 as
agreement focuses on boosting domestic defence production.
Technology transfers are expected to be bargaining points.
Open to joint ventures.
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.
Given Vietnam's increasing appetite for defence equipment a number of European

defence manufacturers are exploring potential deals with Hanoi.
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.
Page 13
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 oneparty 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 continue 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.
Page 14
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 20.7% in 2012.
Weaknesses
Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy
vulnerable to global economic uncertainties. 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 and the upcoming ASEAN AEC in 2015 should give Vietnam
greater 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.
Page 15
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.
Page 16
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.
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 that spending was U$3.36bn, around 2.4% of
GDP, although this is hard to verify. The declared 2013 spending was U$3.8bn and for 2014 this is
projected to increases to US$4.3bn. BMI forecasts defence expenditure in 2014 to reach over US$6bn,
before rising to US$7.7bn in 2015.
Table: Vietnam's Defence Expenditure 2011-2018
2011
VNDmn
2012
2013e
2014f
2015f
2016f
2017f
2018f
87,831,477 111,582,639 123,506,954 139,029,544 157,286,807 177,712,451 200,088,484 225,238,067
- % change
y-o-y
10.8
27.0
10.7
12.6
13.1
13.0
12.6
12.6
- % of GDP
3.2
3.4
3.4
3.5
3.5
3.5
3.6
3.6
- VND per
capita
976,839
1,228,941
1,347,157
1,502,243
1,684,254
1,886,724
2,107,044
2,353,669
US$mn
4,252.0
5,345.8
5,873.2
6,760.5
7,736.7
8,791.1
10,004.4
11,375.7
2.5
25.7
9.9
15.1
14.4
13.6
13.8
13.7
47.3
58.9
64.1
73.0
82.8
93.3
105.4
118.9
3,059.0
4,209.3
4,449.4
5,323.2
6,290.0
7,325.9
8,337.0
9,479.7
- % change
y-o-y
-2.1
37.6
5.7
19.6
18.2
16.5
13.8
13.7
- EUR per
capita
34.0
46.4
48.5
57.5
67.4
77.8
87.8
99.1
3,506.5
3,974.3
4,126.7
4,523.2
4,950.2
5,377.3
5,856.0
6,371.7
-15.4
13.3
3.8
9.6
9.4
8.6
8.9
8.8
- % change
y-o-y
- US$ per
capita
EURmn
US$mn,
constant
prices
- % change
y-o-y
Page 17
Vietnam's Defence Expenditure 2011-2018 - Continued
- constant
US$ per
capita
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
39.0
43.8
45.0
48.9
53.0
57.1
61.7
66.6
e/f = BMI estimate/forecast; per capita = per capita of population. Source: US Department of State's World Military
Expenditures and Arms Transfers report (WMEAT)
Budget restraints dictate that Vietnam must procure
Defence Expenditure outpaces

GDP growth
much of its most advanced military equipment

through alternative means, such as via credit
agreements, or by providing oil and gas instead of
Defence Expenditure % Increase Y-o-Y Versus

Real GDP Growth % Y-o-Y, 2010-2018
currency. For instance, in November 2013 India

extended a US$100mn line of credit for the purchase
30
of four offshore patrol vessels.

20
Our forecasts of defence spending are driven by two
10
variables. One is overall GDP. The other is the

2018f
2017f
2016f
2015f
2014f
2013
2012
2011
forecasting the latter, we give consideration to the
0
2010
percentage of GDP that is devoted to defence. In
size of defence spending as a percentage of GDP in

recent years and the likely future trends, given what
GDP: Real GDP growth, % y-o-y

EXPENDITURE: Defence expenditure, VND~ % y-o-y
we know about the budgetary priorities of the

government.
f = forecast. Asian Development Bank, General Statistics
Office, US Department of State's WMEAT, BMI
The chart compares the rate at which defence

expenditure is increasing compared to the annual
real GDP growth rate. It shows that the rate at which defence expenditure is increasing substantially
outstrips real GDP growth. This is no doubt a response to the deteriorating security situation in the East and
South China Sea. While real GDP is set to grow by 5.97% in 2014, defence expenditure is set to increase by
12.6%.
The table displays defence expenditure as a changing percentage of GDP. The core 2014 scenario, where
defence spending equates to 3.5% of GDP, will mean that defence spending amounts to US$6.8bn.
Page 18
Table: Vietnam's Defence Expenditure By Changing % Of GDP, 2010-2018 (US$mn)
2010
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
Core scenario
4,146.5
4,252.0
5,345.8
5,873.2
6,760.5
7,736.7
8,791.1 10,004.4 11,375.7
Spending +0.2pp of GDP
4,372.2
4,521.1
5,656.7
6,214.1
7,150.8
8,178.9
9,289.1 10,566.1 12,008.9
4,710.7
4,924.8
6,123.2
6,725.4
7,736.1
8,842.2 10,036.0 11,408.5 12,958.8
5,275.0
5,597.7
6,900.6
7,577.6
8,711.8
9,947.6 11,281.0 12,812.6 14,542.0
Spending -0.2pp of GDP
3,920.8
3,982.8
5,034.8
5,532.3
6,370.2
7,294.5
8,293.1
9,442.8 10,742.4
3,582.2
3,579.1
4,568.3
5,020.9
5,784.8
6,631.2
7,546.2
8,600.3
9,792.5
3,018.0
2,906.2
3,790.9
4,168.7
4,809.2
5,525.7
6,301.3
7,196.2
8,209.4
e/f= BMI estimate/forecast; pp = percentage points. Source: WMEAT calculation, BMI
Armed Forces
As of 2009 the total size of Vietnam's armed in personnel was 523,000 people. The army remains far and
away the largest service, comprising 413,000 people. This owes to a tradition of defending against land
invasions and also the power and influence the army exerts within the political sphere. The Navy and Air
Force have 39,000 and 31,000 personnel, respectively. Vietnam's military also comprises a paramilitary
force amounting to roughly 40,000 people, a 40,000-strong border defence corps and 5 million reservists.
A new Vietnam Coast Guard (VCG) and a reorganised marine police will be consolidated as they come
under the auspices of the Ministry of Defence from October. In July, the military also announced that it was
setting up a new joint Air Force-Naval brigade to perform maritime surveillance and search and rescue
missions. This unit is likely to absorb a number of the assets from the Vietnam Marine Police, due to be
folded due to the creation of the VCG.
Page 19
Table: Vietnam's 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
413.00
Navy
42.00
42.00
42.00
36.30
37.40
38.00
38.50
39.20
39.20
39.20
Air force
30.00
30.00
30.00
30.00
30.00
30.30
30.60
31.00
31.00
31.00
Paramilitary
force
40.00
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
523.20
0.67
0.66
0.65
0.65
0.64
0.63
0.62
0.62
0.61
0.60
- % of
population
Source: BMI, IISS
Table: Vietnam's Manpower Available For Military Service, 2011-2018 (aged 16-49 unless otherwise stated)
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
Males
25,368,398
25,518,671
25,625,454
25,702,858
25,762,143
25,805,917
25,834,177
25,852,490
Females
25,047,114
25,180,068
25,278,792
25,352,205
25,407,436
25,446,511
25,469,695
25,480,216
Total
50,415,512
50,698,740
50,904,246
51,055,062
51,169,579
51,252,428
51,303,872
51,332,706
- % of
population
56.1
55.8
55.5
55.2
54.8
54.4
54.0
53.6
- % change
on 10 years
previously
16.1
14.4
12.6
10.9
9.2
7.6
6.2
4.8
e/f = estimate/forecast. Source: BMI
Defence Trade
A former Soviet proxy, Vietnam has failed to develop its own domestic defence industry adequately. 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. 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. Recently, Vietnam has been looking to develop defence trade
ties with new partners, such as India, Canada and France.
Page 20
Table: Vietnam's Defence Trade Balance, 2010-2018 (US$mn)
Arms and ammunition

- % change y-o-y
2010
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
-10.9
-10.9
-10.9
-10.9
-10.9
-10.9
-10.9
-10.9
-10.9
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
e/f = BMI estimate/forecast. Source: BMI, UN Comtrade
Vietnam maintains a small domestic defence industry capable of supplying small arms, minor weaponry and
ammunition. For more technologically advanced production, it relies on reverse engineering and this
technique has been employed to keep its 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) conducted in the country aimed at creating new platforms. However, through a focused
procurement programme, the 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, 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
state-owned companies across the board, not just in defence, as it seeks to revitalise the flagging economy.
The country'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.
Given Vietnam's diminutive domestic defence industry, it is no surprise that it has a substantial trade deficit
regarding arms and ammunition trade. In 2014 this deficit is expected to amount to US$10.9mn, and is set
to maintain a similar level until at least the end of the current forecasting period, in 2018.
Imports
As is to be expected of a country at Vietnam's stage of development, defence imports have increased.
Between 2005 and 2012, Vietnamese defence imports actually doubled. Arms and ammunition constitutes
the main import area, with imports in 2014 expected to amount to roughly US$11.5mn.
Page 21
Defence funding for new equipment remains relatively limited compared to many neighbouring countries.
Nonetheless, as the economy continues to expand, BMI expects far more significant sums of money to be
allocated towards acquiring new equipment.
Table: Vietnam's Defence Imports, 2010-2018 (US$mn)
2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Arms and ammunition
11.5 11.5 11.5
11.5
11.5
11.5
11.5
11.5
11.5
Military weapon imports, excl. guns and swords
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
Revolvers and pistols
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Bombs, grenades, mines, missiles, ammunition
6.4
6.4
6.4
6.4
6.4
6.4
6.4
6.4
6.4
e/f = BMI estimate/forecast. Source: BMI, UN Comtrade
Owing to the predominance of Soviet-era defence platforms, Vietnam has traditionally acquired the bulk of
its military equipment from Russia, usually on credit. While Russia remains Vietnam's primary defence
partner, Hanoi has recently sought to establish new defence partnerships. Central to these partnerships are
technology transfers and domestic industry development. It is no surprise to see a large number of
procurement deals tied in with the development of Vietnam's defence industry.
The recent procurement of two SIGMA-class corvettes from the Netherlands is a good example of this kind
of deal. With the second of the two ships likely to be built in Vietnam, the domestic defence industry will
gain access to far more advanced technology and developed techniques than are currently available.
Exports
Vietnam's defence exports are negligible, amounting to only US$600,000 in 2013. Furthermore, exports are
confined to the area of arms and ammunitions.
Table: Vietnam's Defence Exports, 2010-2018 (US$mn)
Arms and ammunition
2010
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
e/f = BMI estimate/forecast. Source BMI, UN Comtrade
Page 22
Macroeconomic Forecasts
BMI View: Vietnam's latest real GDP reading, which showed that the economy expanded by 6.0% year-onyear (y-o-y) in Q413, has reaffirmed our conviction that the Vietnamese economy will begin 2014 on a
strong note. Not only are we witnessing more evidence of a sustained pick-up in production activity and
employment in the manufacturing sector, but we also expect foreign direct investment (FDI) inflows to
accelerate as the economic recovery gathers pace over the coming quarters. We forecast real GDP growth
to come in at 5.9% in 2014, versus Bloomberg consensus of 5.5%.
In line with our view that the Vietnamese economy would accelerate forcefully into the final months of the
year (see 'Economy Picking Up Pace', October 4 2013), latest data released by the General Statistics Office
(GSO) showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q413. This translates into fullyear growth of 5.4% for 2013, just slightly above our forecast of 5.3%. The latest GDP reading, combined
with the strong set of economic data we have seen in recent weeks (accelerating foreign direct investment
inflows, remittances, and merchandise trade exports), have reaffirmed our conviction that the Vietnamese
economy will begin 2014 on a strong note.
Page 23
Looking At A Strong Start For 2014

Vietnam - Real GDP Growth, % (LHS) & Contribution By GFCF & Private Consumption, pp (RHS)
Source: BMI, General Statistics Office. (e = estimates, f = BMI forecasts)
Signs Of Improvement
Despite the lack of progress with regards to banking sector reforms and efforts to ease lending conditions
(credit growth is estimated to have expanded by around 9% in 2013, well under the State Bank of Vietnam's
initial target of 12%), the economy appears to be holding up well. Not only are we witnessing more
evidence of a sustained pick-up in production activity and employment in the manufacturing sector (see
'Strong PMI Reading Reinforces Outlook On Growth', November 5 2013), but we also expect foreign direct
investment (FDI) inflows into the export sector to accelerate as the economic recovery gathers pace over the
coming quarters.
Private Sector Investment To Drive Recovery
According to figures published by GSO, FDI-related exports made up an estimated 67% of the country's
total exports for the first 11 months of the year. Thus, although increased FDI inflows could potentially
result in a temporary deterioration in the country's trade and current account dynamics due to a burst of
Page 24
capital goods imports in the near term, we believe that this is a long-term positive for the economy.
Furthermore, we view FDI inflows as a crucial source of economic growth over the coming quarters given
that the Vietnamese government is struggling to unlock domestic lending. We forecast real gross fixed
capital formation (GFCF) growth to come in at around 10% in 2014, contributing around 2.7 percentage
points (pp) to our real GDP growth forecast of 5.9%.
Expenditure Breakdown
Private Consumption: We expect private consumption to grow at a relatively resilient pace of 6.5% in
2014. 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 2014, partly
led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the
coming months as the effect of rate cuts in 2013 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 substantially from 4.1% in 2013 to 10.0% in 2014.
Public Spending: We expect total public spending to remain relatively resilient in 2014, 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 in 2014. 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 5.6% in 2014.
Page 25
Table: Vietnam - Economic Activity
2011
Nominal GDP,
VNDbn 3
Nominal GDP,
US$bn 3
2012
2013e
2014f
2015f
2016f
2017f
2018f
2,779,880.2 3,245,419.2 3,584,261.0 4,012,847.7 4,494,844.6 5,033,219.9 5,616,365.8 6,269,265.3

134.6
155.6
170.6
195.1
221.1
249
280.8
316.6
6.2
5.2
5.4
5.9
6.4
6.6
6.4
6.4
GDP per capita,

US$ 3
1,497
1,713
1,860
2,108
2,368
2,643
2,957
3,309
Population, mn 4
89.9
90.8
91.7e
92.5
93.4
94.2
95
95.7
Industrial
production, %yo-y, ave 1,5
10.9
7.0
5.9
7.7
8.4
8.6
8.6
8.5
Unemployment,
% of labour
force, eop 2,6
3.6
3.2
3.7e
3.5
3.5
3.6
3.5
3.5
Real GDP
growth, %y-o-y 3
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.
Page 26
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 shortterm 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, and each country
is assigned a score out of 100, with a low score indicating a high level of risk.
Table: Asia Pacific Security Risk Ratings
Interstate
risk
Terrorism
risk
Criminal
risk
Composite
domestic
risk
Regional
rank
Composite
security
rating
Ranking
Singapore
91
88
99
93
93
Australia
98
83
92
88
91
Japan
87
93
91
92
2=
90
Taiwan
71
95
79
87
5=
82
Malaysia
84
85
75
80
81
South Korea
65
86
88
87
5=
80
North Korea
46
98
87
92
2=
77
Thailand
86
69
73
71
76
8=
Vietnam
60
98
71
85
76
8=
China
79
85
59
72
10
74
10
Indonesia
88
68
53
61
11
70
11
Philippines
81
51
40
46
13
57
12
India
69
47
53
50
12
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
Page 27
Table: Asia Pacific State Vulnerability To Terrorism Index
Terrorism
Short-term political
Short-term economic
Composite
Regional rank
Singapore
88
94
90
90
1=
Taiwan
95
84
87
90
1=
South Korea
86
81
89
86
3=
Vietnam
98
79
69
86
3=
Japan
93
86
66
85
China
85
75
86
83
Malaysia
85
75
78
81
Australia
83
82
72
80
North Korea
98
66
30
73
Indonesia
68
66
68
68
10
Thailand
69
59
72
67
11
Philippines
51
71
74
62
12
India
47
61
62
54
13
Pakistan
26
56
48
39
14
Scores out of 100, with 100 the highest. The 'state vulnerability to terrorism index' is the principal rating. It comprises the
'terrorism', '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. It incorporates subjective analysis of 15 conceptually separate analytical elements, as well as 13
separate objective data points. Source: BMI
Vietnam Security Risk Ratings

Vietnam has an overall security risk rating of 76, which means that the country is 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 disputed territory in the South China Sea proving a particular concern.
Page 28
Market Overview
Vietnam Defence Market Overview
With Vietnam's recent economic growth and a replacement date of 2020 established for most major
platforms, it is looking to acquire new armoured personnel carriers (APCs), battle tanks, artillery, fighters,
helicopters, transports, surface assets and anti-missile systems. Given that Vietnam relies on Soviet era
defence platforms Russia remains a key defence ally, particularly when it comes to providing maintenance,
repair and training services.
However, an interesting development in 2014, which BMI expects to continue for the foreseeable future,
has been Vietnam's proactive stance towards building relationships with a number of new defence partners.
Most notable among these are perhaps India and the United States. Cooperation with these countries points
to a wider strategy to counter Chinese influence. In the second half of 2013, the Vietnamese Ministry of
Defence announced a major reorganisation of the military, with the formation of a new Vietnam Coast
Guard (VCG) set to replace the Vietnam marine police.
The US is providing substantial material assistance in this reorganisation. Procurement priorities in 2014
include the acquisition of anti-submarine warfare and maritime surveillance capabilities that can deter
against potential Chinese aggression in the South China Sea.
Recent Developments
Hanoi in negotiations with a number of European defence manufacturers over the procurement of a
variety of new defence platforms, including new warships and missiles systems.
Vietnam takes possession of two of six Kilo-class diesel-electric submarines ordered from Russia, A
symbol of increased defence cooperation between the countries.
Vietnam takes delivery of Ukraine-made 3D radar 36D6 for S-300 missile system.
Armed Forces
Organisation
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
Page 29
and the rural People's Militia. The military now serves, at least partially, as a means of employment for
many young men.
In August 2013, Hanoi announced that it forming a new VCG, which will be a reconstituted version of the
existing Vietnam Marine Police and be overseen by the Ministry of Defence. The new unit became active in
October. The United States recently provided a sum of US$18mn, a large proportion of which will go
towards acquiring five new patrol boats for the Vietnamese coast guard. 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 that the South China Sea's littoral states are placing on
maritime policing and control. Vietnam is involved in long-running territorial disputes with the Chinese
over the Spratly and Parcel islands, 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 ForceNaval 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.
Numbers
The army is overwhelmingly the largest arm of the services. 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. 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-ofcountry conflict and it relies on ageing Cold War platforms, which are increasingly difficult to service.
Domestic Industries
Developing domestic defence industries was made a priority in Vietnam's revised constitution, released at
the start of 2014. However, as things stand, Vietnam's domestic defence industry is limited.
In order to boost its dwindling defence industry, Vietnam is looking to collaborate with international
partners. It is hoped that such collaborations will lead to the transfer of technology and know-how necessary
for the development of a domestic defence industry.
Page 30
Part of the 'Comprehensive Strategic Partnership' agreed with Russia in August 2013 is the provision to set
up a range of joint ventures that will enable Vietnam to repair and maintain its own military platforms.
Furthermore, in October 2011, the Vietnamese government announced that it was acquiring four SIGMAclass 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.
Page 31
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.
In Q1 2014, US President Barack Obama approved a civilian nuclear pact with Vietnam, which could lead
to the sale of US reactors to Vietnam. As part of this agreement Vietnam agreed not to enrich or reprocess
uranium, key steps in the manufacture of nuclear weapons.
Although 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.
Page 32
Imports
International Relations
As a result of Chinese advances in East Asia and uncertainty surrounding its intentions in the South China
Sea, it is no surprise to see Vietnam fostering defence partnerships with countries such as the United States,
India and South Korea. Vietnam's ongoing rapprochement with the United States, most recently underlined
by John Kerry's visit to Hanoi in December 2013, has the potential to open up a range of new procurement
options for Vietnam.
For instance, the acquisition of P-3 Orion maritime patrol aircraft, from US defence company Lockheed
Martin is now a viable option. The procurement of such aircraft is deemed to be a vital part of beefing up
Vietnam's maritime security in the face of increasing Chinese aggression in the South China Sea. It is
reported that Washington is now 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, with the US Secretary of State, John Kerry, recently visiting Hanoi these sales
look likely to occur in due course. Indeed, during his trip, Kerry announced $32.5mn in US assistance for
maritime law enforcement. Approximately $18mn of this is earmarked for Vietnam, including the purchase
of five new patrol boats for the Vietnamese coast guard.
In November 2013, the Secretary General of the Vietnam Communist Party, Nguyen Phu Trong, visited
India in an attempt to bolster defence cooperation between the two countries. This can also be seen as part
of Vietnam's efforts to move away from Chinese influence in the region. Trong was successful at gaining
India's assistance in Vietnam's modernization of its armed forces. India offered a $100mn line of credit for
the purchase of four Offshore Patrol Vessels. In addition, preliminary agreements were made regarding the
sale of the BrahMos Cruise missile to Vietnam, the training of 500 Vietnamese sailors and the maintenance
of its Soviet era military platforms.
Given the predominance of Soviet era equipment in its military arsenal, Russia unsurprisingly remains a key
strategic defence ally of Vietnam. The signing of a 'Comprehensive Strategic Partnership' in 2012
Page 33
underlined the significance of this relationship to Vietnam. Following a short visit to Hanoi in December
2013, it was announced that an agreement on defence cooperation had been reached. However, details were
not forthcoming. It is thought that Russia's development of the Cam Ranh Bay submarine crew training
centre will be central to the collaboration between the two countries. 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.
Vietnam is also looking to deepen defence ties with a number of other countries. In November 2013,
Vietnam and South Korea agreed to 'expand defence dialogue' by enhancing cooperation in training,
military medicine and cyber-security.
In addition, Vietnam has endeavoured to deepen defence cooperation with European allies, such as France.
These enhanced ties are seen as an opportunity to move beyond questionable Russian/Soviet defence
platforms to what are often considered more reliable and sophisticated European equivalents In November
2013, Vietnam and France agreed to enhance defence cooperation, particularly in delegation exchanges,
training, defence industry development and maritime security.
In Q1 2014, it was reported that Hanoi was in negotiations with Airbus Helicopter, French naval company
DCNS and European missile maker MBDA. These companies view Vietnam as an exciting new market,
with plenty of potential for growth given the regional security situation, as well as Vietnam's economic
expansion.
The Vietnam Navy reportedly wants to buy Mica vertical launch surface-to-air missiles and Exocet MM40
Block III anti-ship weapons from MBDA to arm two Sigma corvettes from Dutch warship builder Damen.
Recent Imports
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. The first two of these six
submarines were delivered to Vietnam in Q1 2014, ahead of the original schedule which had the deliveries
due for 2016. 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.
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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.
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.
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.
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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 Canada-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. In November 2013 the United
States provided Vietnam with funding for five new patrol boats for the new Vietnamese coast guard.
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, with President Putin returning the favour in December 2013
to further defence industry collaboration.
Although no agreement has yet been reached, Vietnam has long been rumoured to be interested in acquiring
the BrahMos cruise missile from India. Of late, this procurement looks far more likely, with negotiations
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between both governments about the sale of the missiles reportedly ongoing since a Vietnamese delegation
visited India in November 2013.
In Q1 2014 Vietnam took delivery of Ukrainian 3D radar 36D6-M for the S-300 missiles system. This radar
is especially designed to be used with anti-aircraft missile complexes, such as the S-300 surface-to-air
defence missile system.
Vietnam Security Overview

Domestic Threats
The biggest threat to Vietnam's domestic stability stems 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.
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.
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 members of 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. 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.
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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.
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.
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Vietnam And China
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. Indeed, Vietnam was the last sovreignstate that China attacked in 1979, resulting in a brief
border war. Since then the two countries have been engaged in the occasional maritime skirmish.
However, this perception of threat is more a result of recent developments which saw Beijing declare an Air
Defence Identification Zone (ADIZ) over parts of the East China Sea in November 2013. According to
recent reports Beijing has also prepared a similar defence zone in the South China Sea, although has no
immediate plans to implement it.
While the ADIZ declared in the East China Sea does not directly affect Vietnam, any ADIZ in the South
China Sea would have far greater repercussion as Hanoi is currently embroiled in territorial disputes with
Beijing over the Spratly and Paracel Islands. Any unilateral actions by China in the South China Sea could
therefore have a serious impact on Vietnam's security.
One inevitable consequence of China's increased aggressiveness in the region is that Vietnam will
increasingly be pushed into alliance with the United States. Indeed US Secretary of State John Kerry made a
high profile visit to Vietnam in November 2013, consolidating this improvement in relations. As part of
this, the US announced that it would provide US$18mn to Vietnam to boost its maritime security. John
Kerry's visit was followed up by a visit by Wendy Sherman, under Secretary of State for Political Affairs,
Wendy Sherman inMarch 2014.
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, and its
willingness- as exemplified by the declaration of an ADIZ in the East China Sea- to actively assert these
claims. The Philippines, Malaysia, Brunei and Vietnam also lay claim to some islands and reefs in the oilrich 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.
As a result it is no surprise to See Vietnam strengthening its ties with ASEAN partners in an effort to deal
with China's assertiveness. Indeed, following meetings in Q114, the military chiefs of ASEAN member
states agreed to conduct joint Naval exercises in the Malacca Strait from 2015. This concerted action is no
doubt intended to send a strong message as Beijing ponders a new ADIZ in the South China Sea.
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International Threats
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,
since 2010 we have seen a marked improvement in ties between the countries. In July 2013 President
Obama announced a 'comprehensive partnership 'between the United States and Vietnam, something
reinforced by John Kerry's visit to Hanoi in December 2013.
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.
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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:
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Poor Governance And Political Instability
Most South East Asian states are vulnerable to political instability and suffer from relatively poor
governance. Thailand has been wracked by multiple periods of mass protests since 2005. 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.
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, and high levels of political corruption, we cannot preclude
renewed instability in the years ahead.
Indonesia has achieved a high degree of stability under President Susilo Bambang Yudhoyono (2004-)
following the chaos that accompanied the fall of long-time ruler Suharto in 1998. 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, as mandated, 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. Cambodia saw mass anti-government protests in 2013.
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
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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 onethird 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.
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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 antiterror 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
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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 counterterrorism chief stated that Islamist militants were now using parcel bombs and targeting minority groups to
push their radical agenda.
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. 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.
Also noteworthy is that in early 2013, Indonesian police foiled a plot to bomb the Myanmar embassy in
Jakarta. The militants were apparently motivated by their desire to avenge the plight of Rohingya Muslims
in Myanmar, who are regarded as being violently persecuted by the Myanmarese government and society.
Going forward, there are concerns that the Rohingyas could become a rallying cause for South East Asian
Islamist militants. By the start of 2014, concerns had also arisen that more Indonesians were joining the
Islamist rebels in Syria's civil war, and that their experiences there would allow them to learn new terrorist
skills that could be used in Indonesia on their return.
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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 2014, 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 December 10, 2013, the Philippine government signed a power-sharing agreement with MILF that paves
the way for the establishment of a new autonomous Muslim territory, to be called Bangsamoro, which is
expected to replace the ARMM before President Benigno Aquino III's term ends in mid-2016. Bangsamoro
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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 initial 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.
Meanwhile, on September 9, 2013, as many as 500 insurgents from a rogue faction of the MNLF occupied
parts of Zamboanga City in Mindanao, taking hundreds of people hostage. The rebels then declared the
independence of Muslim Mindanao. Government forces subsequently stormed the city, and ended the siege
after 20 days. The crisis served as stark reminder of the lingering security threats in the region. We caution
that the MNLF rebels' act of aggression could undermine the peace process between the government and
MILF, given the former group's loose linkages with the latter.
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 5,926 deaths and
10,593 injuries, mostly civilians, by December 31, 2013. Of these, 3,461 were Muslims, and 2,431 were
Buddhists, with the remainder coming from other groups. The local Muslim 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, and occasional bombings, but successive Thai governments have all failed to
bring the conflict to heel, despite a variety of economic incentives and military measures, and negotiations.
Despite the durability of the insurgency, the militants have generally 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
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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 has been a long-standing 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 citystate.
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-anda-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
Page 48
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 has been 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
did 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. On November 11, 2013, the ICJ ruled that
Cambodia had sovereignty over an area immediately surrounding the temple, but not over a nearby hill.
Both claimants appeared to accept the verdict.
Page 49
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.
Page 50
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 Myanmar 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. The Rohingya cause has the potential to galvanise Islamist militancy,
according to some security experts. 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.
Myanmar's 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.
Page 51
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
Page 52
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 long-term 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.
Page 53
Global Industry Overview

Global Political Outlook
BMI View: The year 2014 promises to be busy, politically, as many major emerging markets, including
Brazil, Colombia, Egypt, India, Indonesia, South Africa, Thailand and Turkey, will hold important
elections. That said, for the most part, we do not expect too much turmoil. Internationally, the key events to
watch are the ongoing rapprochement between the US and Iran, and Asia's maritime territorial disputes both of which could transform their regions.
The year 2014 promises to be busy, politically, as many emerging markets (EMs), such as Bangladesh,
Brazil, Colombia, Egypt, India, Indonesia, South Africa, Thailand and Turkey, as well as the European
parliament and the United States of America, will hold important elections. For the most part, we do not
expect any anti-systemic turmoil in these countries. In the cases of India and Indonesia in particular,
investors will be hoping that future governments will be able to revive the process of economic reform,
which has lost momentum in recent times. On the international stage, the main events to watch are the
ongoing rapprochement between the US and Iran, and Asia's maritime disputes, principally between China
and Japan, but also between China and the Philippines and Vietnam. Meanwhile, the Korean Peninsula
could see more tensions, mainly because of signs of a power struggle in the North. Below, we reiterate two
broad themes:
Theme 1: EM Policy Risks Still In Focus
The key theme we raised in our mid-2013 Global Political Outlook, published on June 28 2013, was policy
missteps in emerging markets - a topic we believe will remain in play for the foreseeable future. Essentially,
we increasingly subscribe to the view that the best years for EMs, in terms of rapid economic growth and
the pace of improvements in living standards, are over, and that governments will face greater challenges in
managing the expectations of voters who have become accustomed to the economic rewards of the 2000s.
At the same time, many voters will be chafing at the relative absence of benefits for themselves during the
boom years. These two phenomena mean that we will occasionally see outbursts of public unrest in EMs. In
Europe, meanwhile, political leaders will struggle to find a balance between fiscal austerity on the one hand,
and pro-growth policies on the other.
Page 54
Theme 2: The United States' Diminished Ability To Shape The World
The second important theme is the United States' diminished ability to shape global events. President
Barack Obama's decision in September 2013 to refrain from air strikes on Syria in favour of a Russianbrokered diplomatic initiative to dismantle Damascus's chemical weapons reflects a greatly reduced
willingness on the part of the American political establishment and voters to become embroiled in another
foreign conflict, especially in the Middle East. This reflects weariness after more than a decade of war in
Afghanistan and Iraq, which has claimed more than 6,000 lives of American troops, and injured tens of
thousands more. We still believe that the US has the wherewithal to intervene militarily in extreme
scenarios, such as a major North Korean attack on the South, or potentially against Iran's nuclear
programme if negotiations fail. For the most part, however, Washington will avoid foreign military
entanglements. The risk is that anti-American states such as North Korea and Iran, as well as competitor
great powers Russia and China, and even US allies, will perceive America as weak. This could result in
Tehran, Pyongyang, Moscow and Beijing acting more assertively in areas of interest to them, thus leading
to more regional tensions. That said, we do not expect this American war-weariness to last indefinitely. It is
quite possible that the next US president will seek to reassert America's global leadership, and that by that
time, American society will be recovering from the impact of the Afghan and Iraq wars.
Four Geopolitical Flashpoints
Iran-US Rapprochement - Now Or Never
The first few months of 2014 will be critical in determining whether the tentative rapprochement between
Iran and the US will succeed or prove ephemeral. The prospects of a genuine breakthrough are arguably the
best they have been since the late 1990s. In Iran, there is a relatively moderate president, Hassan Rouhani,
with a solid popular mandate (51% of the electorate voted for him in 2013) to tone down the country's
confrontationist stance and end its isolation. Moreover, Rouhani appears to have won at least lukewarm
support from Iran's ultraconservative supreme leader, Ayatollah Ali Khamenei. In the US, Obama is
extremely keen to achieve a foreign policy success as his legacy in his second term, and bringing Iran back
into the 'international community' would be a considerable achievement.
Nonetheless, there are obstacles on both sides, as well as sceptical third parties. Presidents Rouhani and
Obama face opposition from hard-liners in their own countries owing to the legacy of mistrust that has
prevailed since the Iranian Revolution of 1979 (anti-Americanism was one of the cornerstones of the
revolution). In addition, several Middle Eastern states close to the US, especially Israel and Saudi Arabia,
Page 55
do not trust Iran's leadership and fear that Obama, in his keenness to see a rapprochement, could sacrifice
their security concerns about Iran's nuclear programme. Furthermore, even if Iran and the US reach a quasipermanent deal to end the more controversial aspects of Tehran's nuclear programme, disagreements could
still emerge at a later date over fine technical details and implementation. Israel is well aware that even
though the US and North Korea signed a deal in 1994 to freeze the latter's nuclear programme, Pyongyang
went on to develop an atomic arsenal over the subsequent decade.
So long as the Iran-US rapprochement appears to remain on track, Washington will refrain from military
action, and Israel will feel tremendous pressure to hold off on air strikes (see 'Iran Deal Causes Discomfort,
But Military Action Unlikely', November 28 2013). However, there is still a risk that if Israel deems the US
to have neglected its security concerns, it could decide to act unilaterally. Meanwhile, if the rapprochement
visibly falls apart, hard-liners in the US could pressure Obama to act on the basis that all diplomatic efforts
to prevent a nuclear Iran have been exhausted.
Syria's Civil War - Manageable Stalemate
Syria's civil war has dropped off the international radar somewhat following Obama's last-minute decision
to refrain from ordering air strikes on regime targets in September 2013 in return for Damascus's pledge to
give up its chemical weapons. In theory, Syria is supposed to be completely free of chemical weapons by
the middle of 2014. Nonetheless, the overwhelming majority of deaths in the conflict have been caused by
conventional weapons, and the fighting has continued throughout 2013. Earlier in the year, President Bashar
al-Assad's forces staged a comeback, and since then, the conflict has largely been in deadlock. The regime
appears to lack the ability to restore its authority over the whole of Syria, but the rebels do not appear to be
strong enough to seize the capital. Assad's regime has unity, and considerable domestic and international
backing (from Iran, Russia and China), whereas the rebels have suffered from fragmentation, divisions
between external backers (Saudi Arabia, Turkey and Qatar), and only lukewarm support from the West. An
international 'Geneva II' peace conference is supposed to be held in 2014, but it is highly unlikely that it will
end Syria's civil war.
On the domestic front, Syria is planning to hold a general election in 2014, but this is virtually certain to be
a heavily manipulated affair, assuming it even goes ahead. It is difficult to see how the government can
conduct national elections, given that it does not control the whole country.
We will remain vigilant towards unexpected developments, such as assassinations, defections, a palace
coup, a realignment of rebel factions or new outrage that leads to renewed calls for Western intervention,
Page 56
but the overall picture that is emerging is that of a long Bosnia-style war that could last for several more
years yet (see 'Syria's Parallels With Bosnia Offer Clues As To Endgame', May 29 2013).
Korean Peninsula - Greater Instability Ahead
North Korea will remain unpredictable in 2014, as its leader Kim Jong Un attempts to consolidate his
power. As 2013 drew to a close, it was evident that the country was in the grip of a major power struggle.
The latest and by far the highest-profile victim was Kim's uncle, Jang Song Thaek, who was the de facto
number two man in the regime. Jang was executed on December 12 for plotting to overthrow the state.
Meanwhile, Kim Jong Un has replaced the chief of the general staff and defence minister three times each
since early 2012, as well as retired many senior generals. The rapid turnover of the high command suggests
that Kim has experienced difficulties in controlling the powerful military. Jang's execution is likely to make
the regime even more unstable, for he was a highly experienced political operator who will not easily be
replaced. Jang was also believed to be a key proponent of economic reform, implying that his demise could
slow or even reverse the highly cautious liberalisation undertaken thus far.
A clearer picture of North Korea's internal dynamics may not emerge until April 2014, when the country is
scheduled to inaugurate a new parliament for a five-year term, and most state posts will be reshuffled. In the
meantime, we will remain vigilant towards signs of internal dissent, or even a localised uprising. Owing to
the opacity of North Korea, we caution that major political change could come with surprising speed. The
year 2014 is also symbolically important, because it will mark the 20th anniversary of the death of its
founder, Kim Il Sung.
As ever, it is quite possible that North Korea will seek to test the South, the US and Japan in some way. The
most likely course of action would be a military engagement with the South in the disputed West Sea area,
and we caution that there is a risk of a limited battle at sea or on land if Seoul retaliates against Pyongyang's
provocations. Alternatively, the North could carry out further missile or nuclear tests if it deems them
politically expedient.
Asia's Maritime Disputes - Maintain Vigilance
We expect relations between China and Japan to remain strained over the disputed Senkaku/Diaoyu Islands
in the East China Sea, as was the case throughout most of 2013. Beijing's decision on November 23 2013, to
declare an Air Defense Identification Zone (ADIZ) covering the islands has been denounced by Tokyo, and
Seoul, since the ADIZ covers a submerged rock (Socotra Rock, or Ieodo) claimed by South Korea (see
'China's New Air Defence Zone: Seven Crucial Factors', December 4 2013). The US has been flying
Page 57
military aircraft through the ADIZ, thus demonstrating China's lack of ability to enforce it, but Japan is
concerned that Washington's urging of American airlines to comply with the ADIZ's protocols implies that
the US quietly accepts the new zone.
Overall, with China and Japan increasing their aerial and naval activities in the area of the disputed islands,
the risks are rising of a collision or skirmish between aircraft or ships that leads to fatalities, which in turn
would raise tensions further (see 'Sino-Japanese Conflict Scenarios: Geopolitical And Economic
Implications', November 15 2013). There are two 'worst-case' scenarios we can envisage. Firstly, a civilian
airliner could be mistaken for a military aircraft and attacked, in a similar manner to the destruction of a
South Korean airliner for violating Soviet airspace in 1983. Secondly, China may decide to seize the
Senkaku/Diaoyu Islands by force, calculating that a short, sharp operation would work to its advantage and
that neither Japan nor the US would risk war with China over such tiny and uninhabited islands. However,
we believe that in the event of a Chinese seizure of the islands, Japan would respond militarily, as Prime
Minister Shinzo Abe has indicated. Despite the negativity surrounding Sino-Japanese relations, we still
believe that neither China nor Japan wants conflict, and we do not preclude a summit between their leaders
to ease tensions. Even so, the Senkaku/Diaoyu dispute will linger for the foreseeable future.
Attention must also be paid to China's maritime disputes with Vietnam and the Philippines in the South
China Sea. Beijing may conceivably declare new ADIZs in the sea, which would surely anger Hanoi and
Manila, and prompt them to boost military ties with the US. Therefore, China's assertiveness in its maritime
claims has already triggered a regional backlash. The result will be more tensions in the Asia-Pacific region.
Editor's note: Our full Global Political Outlook for 2014, covering each region of the world, is available to
subscribers at Business Monitor Online.
Page 58
Table: Election Timetable, 2014
Country
Election type
Date
Dominant party/
nominated
candidate
Opposition party/
candidate(s)
Expected
outcome
STPR*
Legislative
January 5
Awami League
Bangladesh
Nationalist Party
(BNP), Jamaat-eIslami, others
(possible boycott)
Too uncertain 65.8
Costa Rica
Presidential
February 2
Johnny Araya (Partido Luis Guillermo Solis

Araya win
Liberacin Nacional, (Partido Accin
PLN)
Ciudadana, PAC),
Jose Maria Villalta
(Frente Amplio), Otto
Guevara (Partido
Movimiento Libertario)
69.4
Costa Rica
Legislative
February 2
PLN
PAC, Partido Unidad

Social Cristiana
69.4
El Salvador
Presidential
February 2
Salvador Snchez
Ceren (Frente
Farabundo Mart para
la Liberacin
Nacional)
Norman Quijano
Too uncertain 49.6
(Alianza Republicana
Nacionalista), Antonio
Saca (Gran Alianza
por la Unidad
Nacional)
Thailand
Legislative
February
Puea Thai Party
Democrat Party,
others (possible
boycott)
Yemen
Presidential
February
Abdrabu Mansur Hadi tba
Yemen
Legislative
February
General People's
Congress
Colombia
Legislative
March 9
Partido de la U (Social Centro Democrtico

Party of National
coalition
Unity), Partido
Conservador
Partido de la
U win
68.5
Australia (South
Australia)
Legislative
March 14
Australian Labor Party Liberal Party
na
na
Turkey
Local
March 30
na
na
na
59.2
North Korea
Legislative
March
Democratic Front for

the Reunification of
the Fatherland
(Korean Workers'
Party)
na
Status quo
71.9
Afghanistan
Presidential
April 5
tba
11 candidates
confirmed
Too uncertain 39.6
Indonesia
Legislative
April 9
Democratic Party,
Golkar, National
Indonesian
Democratic Party-
na
January
Bangladesh
February
na
Too uncertain 62.5
Too uncertain 45.0
Islah (Reform), various Too uncertain 45.0

others
March
April
68.8
Page 59
Election Timetable, 2014 - Continued
Country
Election type
Date
Dominant party/
nominated
candidate
Mandate Party (PAN),
others
Opposition party/
candidate(s)
Expected
outcome
STPR*
Struggle (PDI-P),
Prosperous Justice
Party, GERINDRA
Iraq
Legislative
April 30
State of Law coalition Kurdish Alliance, Iraqi Too uncertain 36.9

National List
Algeria
Presidential
April
Abdelaziz Bouteflika
(tbc) (National
Liberation Front,
National Rally for
Democracy)
Ahmed Benbitour,
various others
Hungary
Legislative
by April
Fidesz
Hungarian Socialist
Fidesz win
Party (MSZP), Jobbik,
E14-PM
70.2
Slovakia
Presidential
by April
tba
tba
na
65.2
South Africa
Legislative
April
African National
Congress (ANC)
Democratic Alliance,
Agang
ANC win
63.3
India
Legislative
April-May
Indian National
Congress (INC)-led
United Progressive
Alliance (UPA)
Bharatiya Janata
BJP-led
Party (BJP)-led
coalition
National Democratic
Alliance (NDA), others
62.3
Panama
Presidential
May 4
Jos Domingo Arias

(Cambio
Democrtico, CD)
Juan Carlos Navarro

(Partido
Revolucionario
Democrtico, PRD)
Arias win
71.9
Panama
Legislative
May 4
CD
PRD
Too uncertain 71.9
Malawi
Presidential
May 20
Joyce Banda
(People's Party)
tba
na
66.9
Malawi
Legislative
May 20
People's Party
Malawi Congress
Party (MCP), United
Democratic Front
(UDF)
na
66.9
EU
Legislative
May 22-25
na
na
na
na
Belgium
Legislative
May 25
Socialist-led six-party na
coalition
na
66.7
Colombia
Presidential
May
Juan Manuel Santos

(Partido de la U)
Oscar Ivn Zuluaga

Santos win
(Centro Democrtico) (2nd round)
68.5
Lithuania
Presidential
May
Dalia Grybauskaite
tba
na
70.2
Presidential
July 9
tba
Aburizal Bakrie
(Golkar), Megawati
Sukarnoputri, Joko
Widodo (Indonesian
Democratic PartyStruggle), Prabowo
Subianto
(GERINDRA), various
others
Too uncertain 68.8
Too uncertain 61.2
May
July
Indonesia
Page 60
Country
Election type
Date
Dominant party/
nominated
candidate
Opposition party/
candidate(s)
Expected
outcome
STPR*
Presidential
August
Recep Tayyip
Erdogan (tba)
tba
Too uncertain 59.2
Sweden
Legislative
September 14 Moderate Party-led

coalition
Social Democrats,
Opposition
Green, Liberal, others win
89.0
UK (Scotland)
Referendum
September 18 Pro-independence
Pro-status quo
Status quo
win
na
France
Legislative
(Senate)
September
Union for a Popular

Movement (UMP),
others
na
81.7
Canada (New
Brunswick)
Provincial
by September Progressive
Conservative
Liberal Party, New

Democrat (NDP)
na
na
Botswana
Presidential
October
Ian Khama
(Botswana
Democratic Party)
Duma Boko (Umbrella Khama win

for Democratic
Change, UDC)
Botswana
Legislative
October
Botswana Democratic Botswana Congress

Party
Party, UDC
Brazil
Presidential
October 5
Dilma Rousseff
(Partido dos
Trabalhadores, PT)
Aecio Neves (Partido na

da Social Democracia
Brasileira, PSDB),
Marina Silva, others
69.6
Brazil
Legislative
October 5
PT, Partido do
Movimento
Democrtico
Brasileiro (PMDB),
Partido Socialista
Brasileiro (PSB)
PSDB
na
69.6
Mozambique
Presidential
October
tba (Frelimo)
tba (Renamo)
Frelimo win
56.2
Mozambique
Legislative
October
Frelimo
Renamo (Resistncia
(Frente de Libertao Nacional
de Moambique)
Moambicana),
Mozambique
Democratic
Movement (MDM)
Frelimo win
56.2
Uruguay
Presidential
October 26
Tabare Vazquez
(Frente Amplio)
na
74.8
Legislative
November 4
Republicans (House); na
Democrats (Senate)
August
Turkey
September
Socialist Party
October
Pedro Bordaberry
(tbc) (Partido
Colorado), Jorge
Larraaga (tbc)
(Partido Nacional)
BDP win
72.9
72.9
November
US
Republic win 84.6

(House);
too uncertain
(Senate)
Page 61
Country
Election type
Date
Dominant party/
nominated
candidate
Opposition party/
candidate(s)
Expected
outcome
STPR*
US
Gubernatorial
(36 of 50
states)
November 4
na
na
na
84.6
Australia
(Victoria)
Legislative
November 29
Liberal-National
coalition
Australian Labor Party na
Lebanon
Legislative
November
Interim government
na
Too uncertain 45.2
Namibia
Legislative
November
SWAPO
Rally for Democracy

and Progress, others
SWAPO win
70.8
Romania
Presidential
by November
Crin Antonescu
tba
(Social Liberal Union,
USL)
na
67.1
Uzbekistan
Legislative
December
Uzbekistan Liberal
Democratic Party
na
ULDP win
60.8
Bolivia
Presidential
December
Evo Morales
(Movimiento al
Socialismo, MAS)
tba
Morales win
50.6
New Zealand
Legislative
by Dec 2014Jan 2015
National Party,
backed by ACT,
United Future, Maori
Party
Labour Party, Greens Too uncertain 84.0
na
December
NB Election dates are subject to change at short notice; * STPR = Short-Term Political Risk Rating, out of 100, with 100
the best; na = not applicable, no clear party, or no house view; tba/tbc = to be announced/confirmed. Source: BMI, World
media
Page 62
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 nonlinear 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
Page 63
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).
Page 64
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.
Page 65
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:
Page 66
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
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
Page 67

BMI Vietnam Defence and Security Report Q2 2014

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Q2 2014

Vietnam Defence & Security

Part of BMIs Industry Report & Forecasts Series

Business Monitor International

2014 Business Monitor International

Vietnam Defence & Security Report Q2 2014

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

Armed Forces ........................................................................................................................................ 19

Defence Trade ....................................................................................................................................... 20

Macroeconomic Forecasts ............................................................................................... 23

Industry Risk Reward Ratings .......................................................................................... 27

Vietnam Security Risk Ratings .................................................................................................................... 28

Market Overview ............................................................................................................... 29

Business Monitor International

Vietnam Defence & Security Report Q2 2014

Regional Overview ............................................................................................................ 41

Global Industry Overview .................................................................................................. 54

Table: Security Risk/Reward Ratings Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Business Monitor International

Vietnam Defence & Security Report Q2 2014

BMI Industry View

Business Monitor International

Vietnam Defence & Security Report Q2 2014

Key BMI Forecasts

Business Monitor International

Vietnam Defence & Security Report Q2 2014

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.

Development of new defence partnerships gives Vietnam options and flexibility.

Outstanding territorial claims, specifically with China, could lead to conflict.

Low defence budget restrict operational capacity.

Antiquated, Soviet defence platforms are in need of upgrading

Systemic corruption remains a problem.

Business Monitor International

Vietnam Defence & Security Report Q2 2014

SWOT Analysis - Continued

Inefficient and uncompetitive state-run defence establishment.

Russia and India have offered wide-ranging assistance in Vietnam's military

Recent pattern of engagement with US could lead to increasing military cooperation if

Access to second-hand US equipment, including P-3C Orion maritime patrol aircraft,

Defence diplomacy with a range of countries, including Australia, Israel and

Business Monitor International

Vietnam Defence & Security Report Q2 2014

SWOT Analysis - Continued

The Vietnamese economy is vulnerable to global shocks: a downturn could lead to

Business Monitor International

Vietnam Defence & Security Report Q2 2014

Vietnam Defence SWOT

The recent launch of Vietnam's first domestically developed warship demonstrates

Lack of capital to invest in research and development (R&D).

Infrastructure needed to produce larger platforms.

Vietnam may struggle to afford advanced technology from Western countries.

A new initiative aimed at streamlining inefficient state-run enterprises by 2020 could

The construction of advanced SIGMA-class corvettes, procured from the

Business Monitor International

Vietnam Defence & Security Report Q2 2014

SWOT Analysis - Continued

Government orders for naval vessels are strengthening domestic industry.

Technology transfers are expected to be bargaining points.

Open to joint ventures.

Given Vietnam's increasing appetite for defence equipment a number of European