Jan 29 (Reuters) - Tension with China about competing claims over portions of the South China Sea remains the top political risk in Vietnam, capable of creating international and domestic rifts.
Major arms purchases may soon be under discussion, even as economic growth slows. Late last year Prime Minister Nguyen Tan Dung offered a rare apology for Vietnam's economic problems, and said the ruling Communist Party should work to implement reforms more quickly.
RATINGS: (Unchanged unless stated)
Following is a summary of key risks to watch in Vietnam:
SOUTH CHINA SEA
In the South China Sea, the main risk is escalation of tension and even military hostilities. Last year China detained several Vietnamese for illegal fishing around disputed islands, and a meeting of regional powers failed to agree a framework for dealing with the dispute.
Many in Vietnam believe their close ties with the United States can counterbalance Chinese influence, but in July top U.S. diplomat Hillary Clinton said closer cooperation would depend upon Vietnam improving its human rights conduct.
The U.S. supplies Vietnam with non-lethal military equipment, but American officials said sales of lethal military goods would be off the table until Hanoi showed considerable improvement in human rights.
Neither Hanoi nor Beijing want a naval clash about the South China Sea, which is home to important fisheries and potentially deposits of oil and gas.
In December, China told Vietnam to stop exploring for oil in disputed areas, and to not harass Chinese fishing boats. That came months after China's top offshore oil producer CNOOC saying it would push forcefully to develop oil and gas in the South China Sea.
Hanoi's challenge is to keep its most important but perhaps most fraught diplomatic relationship on an even keel, while being seen as sensitive to pressure from a population that is highly suspicious of China.
What to watch:
- Arms deals. Vietnam wants to expand its surveillance and maritime patrol capabilities, meaning deals with Western defence firms worth hundreds of millions of dollars could soon be on the table.
- China's actions in the South China Sea, and moves by other claimant countries: Brunei, Malaysia, the Philippines and Taiwan. Involvement of the United States. China wants the United States to stay out of the dispute, but Vietnam sees Washington as a key ally.
- Public response, especially anti-China protests in major cities.
POLICY, INFLATION AND PUBLIC RESPONSE
Gross domestic product growth slowed to an estimated 5.03 percent in 2012, the government's General Statistics Office said, making it the slackest growth pace in at least 13 years.
The government wants to restructure the country's debt-laden state firms and its banking system, but critics worry that converting these plans into action could prove difficult, given the entrenched interests in the status quo.
The banking system is creaking under non-performing loans estimated at up to $15.6 billion, as much as 10 percent of total lending. State firms such as shipbuilder Vinashin, which almost collapsed in 2010 under $4.5 billion in debt, account for much of the problem.
Vietnam's economic policymaking, far from transparent, is a big concern for economists and investors.
In August 2012 a banking tycoon and another senior executive at a bank in Ho Chi Minh City were arrested, sending the stock index to a seven-month low on worries about bad debt, and the ability of the banking system to withstand shocks.
Land grabs by officials are a growing source of friction in a country where open criticism of the authorities is rare. In April, police detained 20 people involved in a clash over a disputed plot of land outside Hanoi, saying they obstructed officials.
As land prices have risen, officials have in some cases moved farmers off their land to make way for lucrative industrial projects. Disputes have also arisen over the amounts of compensation paid, decisions which are regulated by provincial authorities.
What to watch:
- Follow-through on the raft of measures to bring down inflation and stabilise the economy.
- The gap between black market dollar/dong rates and interbank rates, which are a key gauge of pressure on the currency. After a crackdown on the black market and the imposition of a cap on dollar deposit rates, the gap has been largely eliminated.
- Steps taken by the authorities to cut the trade deficit.
- Measures taken to restructure markets and businesses.
- Popular reaction to land grabs. If they provoke widespread public anger, and large numbers of people rally behind those whose land has been taken, it could prove a problem for the authorities. (Editing by Daniel Magnowski)