From Tiger to Pussycat: How Vietnam’s Economy Got Off Track

Posted on October 1, 2012


Almost exactly two years ago this week, Christine Gregoire, the governor of the U.S. state of Washington, was in Vietnam handing out french fries made from potatoes grown in her state at a Kentucky Fried Chicken outlet in Ho Chi Minh City. Gregoire, accompanied by representatives of more than 50 companies from home, was in Vietnam trying to drum up business with America’s former military adversary. But the most important stop on Gregoire’s itinerary may have been a ribbon-cutting ceremony for a new deepwater shipping terminal at Cai Mep.

Things looked hopeful then. But now the venture, like so many others in Vietnam, is plagued by red ink and scandal. It’s sadly not an unusual story. The country looked on track to take its place as an Asian tiger economy, a smaller version of its giant neighbor to the north, China. The nation boasts a large youthful population, a very high literacy rate, abundant natural resources, agricultural self-sufficiency, a stretch of coastline to rival California’s or Thailand’s, and a strategic position amid the trade routes of the Pacific. Instead, Vietnam is now looking increasingly like a basket case—and an example for just-emerging countries such as Burma of exactly how not to manage the opening-up of an economy.

The Cai Mep facility in Ba Ria-Vung Tau province, on the southern coast about 50 miles from Vietnam’s commercial capital, Ho Chi Minh City, seemed ideal—a joint venture between Seattle-based Carrix’s SSA Marine unit and Saigon Port, a division of state shipping complex Vietnam National Shipping Lines, known as Vinalines. After six years of preparation by SSA, the $160 million port christened by Governor Gregoire promised to fill a huge gap in Vietnam’s infrastructure. Fast forward, though, and it is suffering from a double whammy familiar to many foreign investors: the global economic slowdown coupled with local corruption.

The number of container ships calling at the port and two other foreign joint ventures operated by Vinalines plunged by half in the second quarter amid a price war among other port operators struggling with unused capacity. And Vinalines is foundering under a huge load of debt and an embezzlement scandal that led to the arrest in July of six of its executives. After a three-month Interpol manhunt, chairman Duong Chi Dung, once the head of the country’s maritime administration, was arrested abroad and extradited to Vietnam last month.

Vietnam, in short, has gone from global investment darling to poster child for mismanagement. Too much money flowed into the country over the past decade, particularly following its admission to the World Trade Organization in January 2007. Foreign direct investment that year surpassed the dollars going to Indonesia, the Philippines, Thailand, and the rest of the region combined, according to the World Bank. The country’s creaky communist institutions couldn’t absorb all the funds, leading to a textbook instance of what economists call capital misallocation.

“Vietnam offers a classic case of a small country that had greatness thrust upon it,” according to Ruchir Sharma, author of Breakout Nations and head of emerging-market equities at Morgan Stanley Investment Management in New York. “Its rulers were neither prepared nor competent to handle the huge inrush of foreign capital in the last decade.”

At first, the cash went to building what seemed like useful infrastructure, such as the Cai Mep port, roads, bridges over the Red River and the Mekong, and highways —though many show little sign of upgrades since the Americans left in 1973. Then it flowed into apartment buildings, including luxury residences. Many of these, particularly around Ho Chi Minh City, stand vacant or unfinished. And there were the industrial parks meant to house all those foreign manufacturers, built on the outskirts of cities by displacing rice paddies and pomelo farmers. Indeed, 20 of these parks covering some 3,645 hectares of former farmland were built in the Mekong Delta province of Cuu Long alone. Yet as of July, only 810 hectares of that space had been leased, according to a report in the official Vietnam news.

This overinvestment would have created a hangover on its own. But when the global financial crisis dented world trade and slowed foreign capital flows starting in 2008, Vietnam’s banks, prodded mightily by the government, stepped in to keep the money flowing. By HSBC’s reckoning, credit has grown fourfold over the past six years. Worse, the bulk of the money flowed to inefficient state-owned enterprises like Vinalines, led by political apparatchiks and the well-connected beneficiaries of a party spoils system. Vietnam’s 100 largest state enterprises are now indebted to the tune of about $50 billion, or more than one third of the country’s GDP, Reuters calculates. Should some of these conglomerates collapse—which hardly seems farfetched—it could trigger a huge banking crisis.

The arrest in August of one of the country’s richest businessmen, Nguyen Duc Kien, further exposed Vietnam’s shaky financial system. Kien was seized for alleged fraud and economic mismanagement arising from efforts to shore up the bank he founded, Asia Commercial Bank. The news had depositors lining up to pull out their money, sent stocks plunging, and caused a surge in the retail price of gold, the traditional refuge for Vietnamese savers.

Vietnam National Shipping Lines, or Vinalines, is plagued by debt. (Reuters-Landov)

Vietnam’s banking troubles are by no means confined to Asia Commercial Bank, whose founder’s ties to Prime Minister Nguyen Tan Dung sparked speculation that the Communist Party is redoubling efforts to crack down on corruption within the government. Central bank governor Nguyen Van Binh shocked the country in July when he warned that nonperforming loans constituted almost 9 percent of all lending—contradicting official data a few months earlier that had reported bad loans amounting to just 4 percent. The real number is likely to be far higher, foreign bankers say.

So banks need an injection of capital. The National Assembly’s economic committee estimated on Sept. 4 that around $12 billion would do it—but that’s probably just the start. With international reserves of only some $14 billion, according to the International Monetary Fund, that won’t be easy. The government could run the printing presses, but that would batter the country’s currency, the dong, and fuel inflation, which the authorities have tried with mixed success to tame.

Another way to improve matters would be to attract foreign capital back to Vietnam. But the once enthusiastic foreigners are shy now that they’ve been bitten. The country has managed only one international bond offering this year—a $250 million deal for Vietnam Joint Stock Commercial Bank for Industry and Trade, or VietinBank. That happened in May before things looked as bad as they do now, and even so the bank raised only half as much as it hoped despite paying an 8 percent yield. It was the first attempt to raise money after state-owned Vietnam Shipbuilding Industry Group, or Vinashin, defaulted on a $600 million loan.

All this, it might be argued, could stem from shaky economic fundamentals. But foreign investors are also now leery of trusting the government, and with reason. In the bankruptcy of Vinashin, for instance, Hanoi didn’t make good the debts of what was patently a state-controlled enterprise, sparking lawsuits by bondholders including New York investment firm Elliott Associates.

And if that sounds like the gripe of a sharp-elbowed U.S. hedge fund, there are other situations that cast doubt on Vietnam’s commitment to the rule of law. In one of these, International Textile Group (ITG), owned by U.S. private equity mogul Wilbur Ross, is battling with Phong Phu, its partner in a clothing joint venture set up six years ago in Da Nang. Phong Phu is controlled by state-owned enterprise Vietnam National Textile and Apparel Group, known as Vinatex. The dispute, over financial commitments, is supposed to be resolved through arbitration in Singapore. But government parties sympathetic to Vinatex have pressured a Vietnamese court to rule on certain matters between the two companies. Such involvement by the Vietnamese court directly contravenes the parties’ agreement to arbitrate in Singapore.

The combination of scarce domestic financial resources and a near-boycott of the country by international investors leaves Vietnam with few options. A bailout of some sort can’t be excluded. While China has the capital, it’s hard to imagine the Vietnamese surrendering even a glimmer of sovereignty to their historic adversary. The U.S., which is diplomatically snuggling up to Vietnam and other Southeast Asian nations as a bulwark against increasing Chinese power in the region, is rich but also has financial problems of its own. Washington could, however, easily assist in helping put together an IMF funding package. Such a deal might even lay the groundwork for a return of American naval ships to Vietnamese ports like Cam Ranh Bay.

Either way, the current disillusionment suggests that any money that flows to Vietnam will come with strings attached. Deep reform, including privatization, of the country’s lumbering state-owned enterprises and greater adherence to the rule of law will be required. Both would upset the ruling elite, whose Porsches and Bentleys vie with bicycle rickshaws in the clogged streets of old Hanoi. The justifiably proud Vietnamese won’t want to cede much, if any, influence to the likes of the IMF. But if they can find ways to change things cautiously for the better, they could yet offer a more positive example to Burma and other emerging economies.


Despite Slowing Economy, Vietnam Resists Reforms

Vietnam has made international headlines in recent weeks, but for all the wrong reasons. Vietnam’s dynamic economy, which until recently dominated news coverage of the country, has been replaced by accounts of economic decline, political infighting and the arrest of leading figures tied to the party leadership.

Until a few years ago, because of its remarkable economic growth — about 7 percent a year — Vietnam was considered one of the world’s hottest emerging markets and a rising Asian star racing to catch up with its neighbors. However, all of that is apparently over: The country’s economy has slowed sharply, signaling the end of its economic miracle. It is now facing serious difficulties, including rising inflation and high debt, and there are growing fears of an “economic meltdown.” Furthermore, with the boom years now gone, a number of entrenched structural problems are looming large.

Like China, Vietnam’s economy is dominated by state-owned enterprises (SOEs), which the government uses as a means of maintaining political control over the economy. However, many of the SOEs are run by politically connected and often incompetent officials, who are free to expand their businesses into areas where they have little or no expertise. As a result, corruption, poor management and, consequently, enormous debts are commonplace.

A notable example is the Vietnam Shipbuilding Industry Group, known as Vinashin, which almost went bankrupt with debts totaling $4.5 billion, or about 4.5 percent of the country’s GDP. Vietnam National Shipping Lines, or Vinalines, also ran up total debt of $2 billion. They are joined by other state-owned firms, including the Electricity of Vietnam Group(EVN), that are facing huge debts and seen as potential trouble spots, especially at a time of economic recession.

Two other deep-rooted reasons for Vietnam’s economic woes are cronyism, marked by close links between wealthy tycoons and top government officials, and the emergence of interest groups exercising increasing influence over Vietnamese politics. According to Carlyle Thayer, a well-known expert on Vietnamese politics, in this communist country, “[n]o one amasses great wealth without intimate connections with powerful members of the Vietnam Communist Party.”

The arrest last month of Nguyen Duc Kien, the founder of the Asia Commercial Bank, one of the country’s largest banks, serves as a case in point. Before his arrest for alleged “illegal business activities” on Aug. 20, Kien ran multiple businesses, including two soccer clubs, through which he amassed great wealth, reportedly estimated at nearly $1 billion. He was thought to be closely associated with Prime Minister Nguyen Tan Dung and his circle, including Dung’s daughter, Nguyen Thanh Phuong, who is also one of the country’s most high-profile private bankers.

Kien is not the only high-status boss to have fallen from grace recently. Vinalines’ former director Duong Chi Dung, who had been charged with alleged “economic crimes,” was captured on Sept. 5 after an international manhunt, and on Aug. 30, Vinashin’s former chairman Pham Thanh Binh lost his appeal against a 20-year prison sentence for “intentionally violating state regulations on economic management.” Like Kien, they were both considered to be close to Nguyen Tan Dung. For Thayer and other analysts, the detentions suggest an operation orchestrated by the prime minister’s rivals, notably President Truong Tan Sang, aimed at weakening Dung, who was seen as the architect of Vietnam’s high-growth but high-risk policies and an advocate for the South Korean chaebol-style conglomerates, such as Vinashin and Vinalines.

The string of arrests is also thought to be linked to the Communist Party’s ongoing “criticism and self-criticism” campaign, which is aimed at finding and rectifying shortcomings among the party’s top cadres. This exercise, though not unprecedented, was often seen as a ritual practice in the past. It has now become a major priority, because it is considered vital for strengthening the role of the party, whose legitimacy and even survival have been increasingly threatened. In fact, widespread public grievances over slipping living standards, an increasingly widening wealth gap and unjust land seizures have been exacerbated by sharply growing criticisms of the political and business elite for corruption and cronyism. Party leaders have begun to fear that the current levels of public discontent and resentment could create a direct threat to the regime.

However, while the imprisonment of Kien and other high-profile bosses demonstrate the party’s willingness to curb waste, corruption, mismanagement and cronyism among the business elite, they do little to resolve the country’s deep-rooted economic problems, nor are they even aimed at tackling them. Instead, Kien is seen as a victim of infighting among the country’s political elite or a scapegoat for their economic failure.

For some observers, endemic corruption, poor management and crony capitalism are not the root cause of Vietnam’s current economic disease, but rather only symptoms.According to Nguyen Dang Doanh, a leading Vietnamese economist, to deal with the multiple challenges it faces, Vietnam needs to carry out radical and progressive reforms, such as amending its current constitution, to allow “a balance and control of power, transparency and openness.” Economically, it also has to urgently and fundamentally reform all SOEs.

Doanh also underlines that to undertake such reforms, Vietnam needs strong political will and, particularly, “a strong reformist leader, who is willing to implement the reforms.” However, the latest signs are not encouraging: Vietnam’s crackdown on dissenting voices, especially those that call for more openness, democracy and transparency, suggests that the country’s leaders are neither ready nor willing to carry out vital reforms. It remains to be seen just what the consequences of that unwillingness will be.

Loc Doan is a research associate in the Asia Program at the Global Policy Institute. He is currently completing a doctoral thesis on interregionalism and the EU-ASEAN relationship at Aston University.