VIETNAM: Price to pay

Posted on October 16, 2012

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Following a stint as one of Asia’s hottest emerging markets, Vietnam was forced to take a reality check when its bubble burst. Four years on, the convulsions are no less severe

Although she already has a decent job as an accountant at a logistics company in Hanoi, Trinh Thi Huyen is looking for extra work.

Her husband, who was a construction worker, has been unable to find a job for months because of the collapse of Communist-ruled Vietnam’s over-leveraged property market.

“I’m very afraid, when prices are increasing every day and I’ve earned the only income for my family for six months,” she says.

After two decades of growing prosperity, when Vietnam became one of Asia’s hottest emerging markets, many Vietnamese like Huyen have been forced to take a reality check as the economy over-heated in 2008 and has gone through a series of painful convulsions ever since.

In this photo taken Sunday, Sept. 9, 2012, a street vendor cycles past the Central Bank of Vietnam in Hanoi, Vietnam. Once seen as an emerging Asian dynamo racing to catch up with its neighbors, Vietnam’s economy is mired in malaise, dragged down by debt-hobbled banks, inefficient and corrupt state-owned enterprises and bouts of inflation. Photo: Na Son Nguyen / AP

Gross domestic product grew by just 4.4% year-on-year in the first half of 2012, compared with a year earlier, well down from the pre-crisis trend of more than 7%, as the government choked off money supply in a bid to fight the latest of two concurrent inflation spikes.

At the end of September, Moody’s cut Vietnam’s rating by one notch to B2, the lowest rating it has ever had for the country. Moody’s rating is two notches below Standard & Poor’s BB-minus and one notch below Fitch’s B-plus rating.

The recent arrests of a number of prominent businessmen, including Nguyen Duc Kien – the founder of ACB, one of Vietnam’s biggest private-sector banks – on allegations of financial crime have shaken sentiment further. They have refocused attention on the country’s heavily indebted and badly-managed banking sector.

With Vietnam’s authoritarian government reluctant to release clear and timely information about the arrests and the real state of the banks, foreign investors and Vietnamese remain nervous about the outlook.

“The main problems are non-performing loans and the effectively frozen property market, with a lot of deeply indebted corporations,” says Jonathan Pincus, who heads a Harvard University programme that teaches economics and policy to government officials in Ho Chi Minh City, Vietnam’s financial centre.

“The first priority is to deal with the bad debt. The economy is deleveraging now, and this can either take a long time or the government can introduce policies that will accelerate it. They’ve talked about it but haven’t done it.”

Whatever happens next, the challenges facing Vietnam are not new, and the solutions are likely to be tough to implement.

In the heady boom years around Vietnam’s accession to the World Trade Organization in 2007, many investors, aid donors and the government overlooked deep-seated problems such as corruption, weak regulation and under-investment in health and education.

As foreign money flowed in, the government expanded credit rapidly, with cheap money channelled to large state-owned companies and politically-connected private conglomerates. Bank credit as a proportion of GDP grew from around 20% in the late 1990s to 136% at the end of 2010, making Vietnam one of the most heavily indebted countries in Asia.

Much of this easy money was pumped into inefficient state companies and speculative stock and property market investments rather than productive businesses. But as Vietnam suffered the first of two quick-fire inflation crises and the global financial crisis began to spread – the inevitable fall-out occurred.

State-owned giants Vinashin, a shipbuilder, and Vinalines, a shipping line, are two of the most prominent companies to have collapsed amid billions of dollars of debt and wasteful, non-core investments. More than a dozen executives from both companies have been charged or convicted of economic crimes and face long sentences in Vietnam’s unforgiving jails.

The political fallout from the failure of Vietnam’s turbo-charged growth model has mostly been contained within the hermetically-sealed Communist party.

POLITICAL FLAK

Some economists and investors see a silver lining in the ongoing turmoil, arguing it is a sign that the government is finally starting to confront the scale of the problems the country faces.

“We are optimistic about the government’s resolve to clean out bad debts as well as reform the state-owned sector and public investment,” says Trinh Nguyen, a regional economist at HSBC in Hong Kong. “The question is how fast this will happen.”

Despite the government’s focus on supporting the state sector, it has been Vietnam’s far more dynamic, and mostly foreign-invested, manufacturing sector that has kept the economy going.

Vietnam’s competitive exports of clothes and electronic goods have continued to grow regardless of the slowdown in the developed world.

The embattled prime minister, Nguyen Tan Dung, recently cut the national growth target for this year to 5.2% to take account of the deteriorating situation.

Given its recent history and the performance of neighbours like Indonesia, which is forecast to grow at more than 6% this year, that is not much to write home about.

But Vietnam can live with lower growth for a few years if the government learns the right lessons from the resilience of the manufacturing sector. If it promotes a level playing field that drives competition and productivity gains in the medium term, the country can capitalize on its natural advantages of a young, cheap workforce and strategic location between China and the rest of south-east Asia.

“We expect growth to remain sub-trend in the next two years,” says HSBC’s Nguyen. “But should Vietnam carry out reforms as expected, the economy could be well positioned to compete when the global economy recovers.”

F.T.

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