How far can Vietnam’s crackdown go?

Posted on August 29, 2012

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Ly Xuan Hai, former ACB’s General Director

Vietnam’s financial markets were unsettled last week by the arrests in close succession of two prominent businessmen associated with Asia Commercial Bank, one of Vietnam’s largest non-state lenders. Nguyen Duc Kien, ACB’s founder and still a shareholder, was arrested in Hanoi on August 20. It is alleged that three companies owned by Kien bought bank shares with funds raised to invest in property projects. Kien enjoys celebrity status in Vietnam as owner of the Hanoi Football Club and founder of the company that now runs the national football league. He is also said to be a close ally of the prime minister, Nguyen Tan Dung.

Ly Xuan Hai, who resigned as ACB’s general director on August 23, was arrested the same day for “violating state regulations on economic management”.

Speculation abounds in Vietnam that the arrests are linked to political conflict at the top of the ruling Communist Party. Whatever the relationship to internal party politics, evidence is accumulating that a wider crackdown on corporate misdeeds is well underway.

The first signs of change came with the 2010 arrest of Pham Thanh Binh, chairman of the bankrupt state owned shipbuilder, Vinashin. Binh and eight other Vinashin executives were convicted of misappropriation of state funds earlier this year. In May, police issued a warrant for the arrest of Duong Chi Dung, chairman of the money-losing state shipping company Vinalines. Although Dung has not yet been apprehended, nine other Vinalines executives have been arrested and charged with misappropriation of state funds.

The newspapers regularly report arrests of lesser known tycoons, often on charges of violating banking rules or other varieties of fraud. Rumours are also circulating about arrests of other well-known corporate bosses.

There is certainly no shortage of candidates. Corporate governance is notoriously weak in Vietnam, and nowhere more so than in the banking sector. Bank owners have invested in smaller banks and an array of finance and investment companies, which have in turn given loans to businesses related to and even directly controlled by bank shareholders. Some of the large state owned conglomerates have taken positions in joint stock banks, or opened their own banks, and have directed loans to their own subsidiaries, some of which are joint-stock companies at least partly under the control of SOE bosses.

Connected ownership and connected lending have contributed directly to Vietnam’s exceptionally rapid credit growth and high rates of non-performing loans. The quality of bank capital is also open to question, as bank owners have concealed interlocking ownership and debt relationships from the regulator in order to meet capital requirements.

Some of the large state-owned conglomerates are swimming in debt. According to the Ministry of Finance, debts at the electricity provider EVN exceeded $12.5bn in 2010, the most recent figures available. The construction group Song Da reported debt totaling nine times equity in the same year. Song Da is now undergoing restructuring with the assistance of a cash injection from the Asian Development Bank. Other candidates include Petrolimex, the monopoly petrol provider, and the Housing and Urban Development Group.

Highly indebted and unprofitable SOEs spell trouble for their lenders, which are mainly state-owned commercial banks. When the dust clears they will also need to be recapitalised.

Thus the government has plenty of reasons to launch of clean-up of the banking sector, even if this means ruffling some feathers in the financial markets. Nor is it surprising that the government’s first impulse is to approach the problem as a law enforcement matter. This is after all a government that still maintains “economic police” agencies at the central and provincial levels.

But simply criminalising banking rule violations makes two assumptions that do not hold in Vietnam. First, it assumes that the government, or agencies of the government were not involved, or at least complicit, in the build-up of illegal inter-relationships between financial institutions and other improper activities. Second, it assumes that misconduct is not a generalised characteristic of financial institutions small and large, and that the bad elements can be excised without interrupting the normal functioning of the system. That may be optimistic.

Transparency and accountability are the keys to identifying and reducing bank violations and systemic risk. Addressing the problems as a public security issue is not going to achieve these objectives on its own. The question is whether there is a constituency within the government that supports more stringent accounting and reporting standards, a stronger and impartial judiciary and a green light for Vietnam’s formidable printed media to report on public and private sector corruption.

Jonathan Pincus

Scandal Keeps Eroding Shares in Vietnam

Hanoi (Viet Nam News/ANN) (Source: Asia News Network (MCT) – Shares continued to tumble again yesterday on Vietnam’s stock exchanges in the wake of last week’s arrests of two major banking tycoons under investigation for financial fraud, reversing a small correction last Friday precipitated by bargain-hunting investors.

“Friday’s buoyancy was dampened back down by renewed sell-offs brought on by continued fears of the impact of the bankers’ arrests and grim economic data,” wrote FPT Securities Co. analysts on the company’s website.

The return of high inflation after two deflationary months had added to investor concerns over corporate earnings, they added.

On the Ho Chi Minh City Stock Exchange yesterday, the VN-Index lost another 3.38 per cent of its value yesterday to close at 386.19 points. The value of trades fell to just 645.2 billion Vietnamese dong (US$30.7 million), about half of Friday’s level, on a volume of 42.3 million shares.

Slumping blue chips led the market downturn. Twenty-eight of the 30 leading shares by market capitalisation and liquidity declined, most dropping to their floor prices, including insurer Bao Viet Holdings (BVH), property developer Hoang Anh Gia Lai (HAG), steelmaker Hoa Phat Group (HPG), PetroVietnam Finance (PVF) and financial conglomerate Ocean Group. The VN30 Index therefore fell 3.48 per cent to end the session at 456.32 points.

Military Bank (MBB) was the most-active share with nearly 3.3 million changing hands before it closed off by 3.6 per cent to 13,400 dong per share.

On the Hanoi Stock Exchange, the HNX-Index plummeted by another 4.44 per cent to close at just 60.31. The value of trades dropped 46 per cent from Friday’s level to 320.4 billion dong, while volume decreased 53 per cent to only 35 million shares.

The HNX30 Index – tracking the exchange’s 30 leading shares – gave up 5.4 per cent to conclude the session at 111.93 points.

VNDirect Securities Co. (VND) became the most-active share on total trades of 4.8 million shares but dropped to its floor price of 9,400 dong.

Foreign investors continued to look for bargains, becoming net buyers on both exchanges and picking up shares worth a combined net of 28.3 billion dong. Since last week’s fraud scandal broke, foreign investors have continued to buy up shares, picking up a net of 343 billion dong worth of shares last week.

LoanSafe

Vietnam Swings to Trade Deficit for First Time in Three Months

Vietnam reported that its trade balance swung to a deficit in August for the first time in three months as imports rose, signaling domestic demand may be growing after authorities eased monetary policy.

The shortfall was $150 million in August compared with a revised surplus of $579 million in July, the General Statistics Office said in Hanoi today. The median estimate of five forecasts in a Bloomberg News survey was for trade to be balanced. For the first eight months of the year, the deficit was $62 million.

Vietnam’s economy expanded 4.38 percent in the first half of 2012, down from 5.63 percent in the same period a year ago. The monetary authority has cut interest rates and told banks to reduce lending rates to spur growth, and while demand for Asia’s goods has faltered, faster credit growth in Vietnam will probably boost expansion in the second half, Australia & New Zealand Banking Group Ltd. wrote in a report last month.

“Given Vietnam’s stage of development, Vietnam would have a trade deficit if the economy was performing well,” Prakriti Sofat, a Singapore-based economist at Barclays Plc, said before the data. “Once you see growth pick up again, you’ll probably also see a gradual increase in investment and a return to manageable trade deficits.”

The dong traded at 20,905 per dollar as of 7:07 a.m. local time. The currency has gained almost 1 percent this year, outperforming peers including the Indonesian rupiah.

Exports fell to $9.8 billion in August from $10.19 billion in July, the statistics office said today. For the year to date, shipments have increased 17.8 percent to $73.35 billion.

Imports rose to $9.95 billion in August from $9.61 billion in July, the statistics office said. Imports have risen 6.7 percent to $73.41 billion so far this year.

Bloomberg

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