Vietnam arrests point to greater malaise

Posted on August 24, 2012

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Ly Xuan Hai, ACB’s former CEO

On Tuesday afternoon, 72-year-old retiree Trinh Van Yen rode his bicycle to the bank through a heavy Hanoi rainstorm.

“My son just called and told me that, whatever the weather is, I have to go to the bank and withdraw all my money,” he said.

The lender in question was Asia Commercial Bank, one of Vietnam’s biggest non-state banks.

The reason for the panic that drove Mr Yen and other depositors to withdraw hundreds of millions of dollars from ACB was the arrest of the bank’s co-founder, tycoon Nguyen Duc Kien, and the subsequent detention, announced on Friday, of the bank’s chief executive, Ly Xuan Hai, on suspicion of committing unspecified economic crimes.

Mr Kien, who also owns the Hanoi Football Club, is a “powerful behind-the-scenes figure”, says one investor who knows him. Many in Vietnam have linked his unexpected downfall to the power struggle between the prime minister, Nguyen Tan Dung, and his opponents, which appears to have intensified as the economy has deteriorated.

It is the latest twist in a slow-burn crisis that has rattled Communist-ruled Vietnam since 2008 and damaged its reputation as one of Asia’s hottest emerging markets.

“The ACB situation magnifies the general lack of transparency, weak corporate governance, fraud, corruption and illegal trading,” says Karolyn Seet, a banking analyst at Moody’s, the credit rating agency, in Singapore. “Vietnam is lagging way behind neighbours like Thailand, Indonesia and the Philippines.”

Successive inflation shocks have shaken consumers and employers, contributing to widening social inequality and undermining confidence in the currency. A drive by Mr Dung to create national industrial champions has gone badly wrong, with two large state shipping companies – Vinashin and Vinalines – collapsing under billions of dollars of debt.

The level of bad debt in the banking sector has reached “alarming” levels, according to the central bank, after a massive expansion in credit sparked a property and investment bubble.

Pham Trong Chat, deputy director of a fish sauce manufacturer on the island of Phu Quoc, says his company has been unable to obtain a $720,000 working capital loan and has had to halve its full-time workforce to 200, as sales have fallen 30 per cent.

Gross domestic product grew by just 4.4 per cent in the first half of the year, compared with a year earlier, well down from the heady pre-crisis trend of more than 7 per cent, which attracted a string of foreign investors from Standard Chartered, which bought 15 per cent of ACB, to Intel the US chipmaker.

Communist party insiders and analysts say that the crisis is not purely economic but also political, as top leaders have failed to adapt to the realities of Vietnam’s increasingly globalised market economy. Numerous attempts to reform wasteful state-owned companies and fight endemic graft have floundered.

“Reducing corruption is very hard because of [the] benefit to groups including state officials, provincial leaders and investors,” says Dang Hung Vo, one of many retired senior officials calling for more market-oriented reforms.

As economic growth has slowed, and social disorder seems to be on the rise from violent clashes over land to illegal factory strikes, infighting at the top of the party has increased.

Much of the anger has been directed toward Mr Dung, who some government and party officials say has been concentrating too much power in his office and showing favouritism to a narrow group of private conglomerates and state-owned companies.

After failing to oust Mr Dung at the past five-yearly Communist party reshuffle in 2011, his rival Truong Tan Sang, who holds the largely ceremonial role of president, has tried to outflank the prime minister by calling for more economic reform and a renewed anti-corruption drive.

In a stinging editorial published on Thursday, Mr Sang warned that Vietnam was under pressure because of “broken state-owned enterprises and the degradation of political ideology and the morals and lifestyle of some officials”.

Earlier this month, in a symbolic move, the party wrested direct control of the anti-corruption steering committee away from the prime minister and re-established its own internal affairs department.

“When the economy is in trouble and people are losing money, the party knows it will be blamed,” says one senior party official.

But, says Adam Fforde, a Vietnam political expert at Australia’s Victoria University, the political crisis is not just about one man. “There’s a political vacuum at the top in Vietnam and there is vast amounts of popular contempt for the leadership. It’s not easy to see how they will get out of this situation.”

Ben Bland

Vietnamese bank chief arrested

The chief executive of Vietnam’s Asia Commercial Bank, Ly Xuan Hai, has been arrested on suspicion of committing economic crimes, the latest twist in a scandal that has renewed concern about the country’s struggling economy and its heavily indebted banking sector.

Police raided the banker’s home and office in Ho Chi Minh City, Vietnam’s financial centre, on Thursday night and detained him for four months to conduct further investigations, the state news agency reported on Friday.

Mr Hai, who was educated in France and Belarus, could face up to 20 years in prison if found guilty of the charges of “deliberately acting against state regulations on economic management and causing serious consequences”.

Fast economic growth in Vietnam as been at the price of instability, with inflation crises, currency devaluations and corruption scandals at state-owned companies harming Vietnam’s reputation as an important emerging market.

Annual GDP growth, which averaged more than 7 per cent in the decade before the inflation crisis of 2008, slowed to just 4.7 per cent in the second quarter of 2012 as the government tightened credit in an attempt to curb inflation and restore confidence in the currency.

The central bank said on its website that Mr Hai had resigned from his job at ACB for personal reasons after it uncovered “mistakes” in his conduct.

ACB, which is 15 per cent-owned by Standard Chartered, was thrust into the spotlight on Monday when one its founders, Nguyen Duc Kien, was arrested on suspicion of conducting illegal business by failing to obtain the appropriate licences.

At the time, ACB said Mr Kien’s detention was not related to the bank’s activities.

But despite reassurances from the government about ACB’s position, anxious depositors have withdrawn hundreds of millions of dollars from the bank this week, forcing the central bank to pump more than a billion dollars into the banking system.

The arrest of Mr Hai, who has worked at ACB for more than 15 years, will make it harder for the Vietnamese authorities to convince depositors and investors that the growing scandal is not related to ACB, said Karolyn Seet, an analyst at Moody’s, the credit rating agency, in Singapore.

Ben Bland

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