Vietnam: the calm after the storm?

Posted on August 31, 2012

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After the arrest last week of the founder and chief executive of one of Vietnam’s biggest private banks sent shockwaves through the nation, rumours swirled earlier this week about which tycoons might be next.

In a sign of the feverish atmosphere and the lack of trust in official information in Communist-ruled Vietnam, a number of leading businessmen felt obliged to appear in public to prove that they had not been thrown in jail.

After the panic of last week, when the stock market tumbled and there was a mini run on Asia Commerical Bank after founding tycoon Nguyen Duc Kien and chief executive Ly Xuan Hai were charged with financial crimes, some calm appears to have been restored.

But the high-profile arrests have re-focused attention on Vietnam’s heavily indebted banking sector and the ongoing political battle between Truong Tan Sang, the president, and Nguyen Tan Dung, the prime minister, who is thought be close to Kien.

Investors remain cautious about the outlook for the next few months.

Many believe that there could be more arrests of businessmen to come as political wrangling continues and various elements within the government and Communist party try to demonstrate their resolve in tackling the country’s deep-seated economic problems.

Annual GDP growth, which averaged more than 7 per cent in the decade before the latest bout of financial turmoil began in 2008, slowed to just 4.4 per cent in the second half of this year as the government choked off credit in an effort to fight inflation and renew confidence in the currency.

A fund manager in Ho Chi Minh City told beyondbrics: “I was near to closing a new deal but these arrests have made foreign investors very nervous. We’re looking for a good story to tell them but can’t find one at the moment.”

International ratings agencies, bemoaning the lack of transparency in Vietnam as well as rapidly rising bad debts, have suggested that they may downgrade ACB and other Vietnamese banks.

Fitch said that the recent events highlighted Vietnam’s vulnerabilities to shocks and “could put financial stability at risk, increasing the potential for negative rating actions on banks”, although “Vietnamese banks’ ratings are already among the lowest in Asia Pacific.” Moody’s warned that the arrests at ACB could hold “longer-term negative consequences for the bank’s franchise value.”

A Vietnamese business development manager at a multinational company in Hanoi said that there were many issues discouraging foreign investors at present.

“We’ve got an unstable economy, a maritime dispute with China, an unhealthy banking system and now maybe a political battle as well,” he said. “I wish I could explain to them what’s really going on.”

Echoing comments made by Jonathan Pincus in a beyondbrics guest blog post, Standard & Poor’s said that “timely reforms of the country’s state-owned enterprises and its banking sector are essential to build depositor and investor confidence in the system, especially when nonperforming loans are rising.”

Whatever happens in the next few weeks and months, this restructuring is likely to be a long and painful process.

F.T.

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