Vietnam has accused China of raising political tensions in the region following a territorial dispute in the South China Sea in May. Ministry of Foreign Affairs spokeswoman Nguyen Phuong Nga issued a statement saying that the Vietnamese navy will do everything necessary to firmly protect the independence, sovereignty and territorial integrity of the country. Hanoi aimed the warning directly at Beijing after claiming three Chinese patrol boats entered its territorial waters on May 26 2011 and intentionally cut a subsea cable before making threatening gestures toward the Vietnamese ships. We believe that Hanoi's hard-line approach to the dispute could serve as an effective deterrence against China's assertiveness in the South China Sea. However, we warn that this could come at the risk of undermining bilateral relations over the coming years.

In what we see as an aggressive move to stem public unrest, the Vietnamese government ordered a military crackdown on Hmong demonstrations in the north west province of Dien Bien on May 5. Around 5,000-7,000 protesters - mainly consisting of members from the ethnic Hmong population - took part in the demonstrations, demanding for democratic reforms and religious freedom. Although we acknowledge public unrest remains a threat to political stability in Vietnam, we see limited evidence to suggest a largescale political uprising could occur in the short to medium term.

Hanoi is under increasing pressure from international human rights organisations to release detained religious leaders and pro-democracy dissidents or risk further political pressure from the US, including possible economic sanctions. International rights groups including Human Rights Watch, Freedom House and Amnesty International are calling for Vietnam to be reinstated on the US government's Countries of Particular Concern list in 2011. This would classify Vietnam among a list of countries, including China, Myanmar, Eritrea, Iran, North Korea, Saudi Arabia, Sudan and Uzbekistan, that are deemed responsible for committing severe violations of religious freedom and human rights under the International Religious Freedom Act. We believe such a scenario would severely undermine Vietnam's credentials in assuming a leadership role within the Association of South East Asian Nations (ASEAN), and threaten its ambition to extend political influence in the region over the coming years.

Latest economic figures published by the General Statistics Office suggest a shift in the Vietnamese government's focus from driving economic growth towards fighting inflation and addressing macroeconomic imbalances is beginning to have a cooling effect on the economy. Vietnam's real GDP growth came in at a relatively subdued 5.4% year-on-year (y-o-y) in Q111, compared with 7.2% in Q410.

We expect economic activity to moderate over the coming months as the full impact of fiscal and monetary tightening continues to feed through the economy. This is in line with our forecast that economic growth will slow from 6.8% in 2010 to 6.3% in 2011. From our perspective, attempts by the government to cool the overheating economy are a positive move that will help facilitate a more stable growth trajectory for Vietnam over the longer term.

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