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VIETNAM Loses Glow as Market DarlingThe Wall Street Journal
Until a few years ago, Vietnam was one of the world's hottest emerging
markets. Now it faces an urgent task: fix a beleaguered banking system or
watch its economy continue to slip behind faster-growing neighbors.
Piles of bad loans following the financial crisis have dragged down growth
in Vietnam and left banks weakened and reluctant to lend.
Vietnam, the darling of emerging markets in Asia just a few years ago, is
now struggling with companies unable to pay back debts. The WSJ's AlexFrangos explains how and why the economy has entered a downward
cycle.
The government recently acknowledged that nonperforming loansmany
made to inefficient state-owned companiescould be as high as 10% of
the banking system, substantially higher than reported by individual
banks. Fitch Ratings analysts think the number is as high as 15%.
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A record number of firms are declaring bankruptcy, and in the sprawling
urban areas encompassing Hanoi and Ho Chi Minh City, the landscape is
littered with stalled construction projects as builders run out of cash or put
on the brakes as demand for condominiums and office space dries up.
Vietnam fought off rumors in recent days that it was seeking an
International Monetary Fund bailout for its banking system. An IMF
spokeswoman said no requests for aid had been made. State Bank of
Vietnam Deputy Gov. Le Minh Hung said in a statement on the
government's website that the country had no intention of seeking arescue.
However, the IMF and others have been advising Vietnam on how to
implement a domestically financed bailout that would restore its banks to
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health. In its latest economic review the fund said that "quick and
comprehensive action" was needed to solidify weak banks and put the
economy on more solid ground.
Fears over Vietnam's banks intensified in August when one of the country's
most prominent tycoons, Nguyen Duc Kien, was arrested for allegedly
improperly lending money to real-estate projects. Efforts to reach Mr. Kien,
who now runs a number of private investment funds and owns Hanoi's
main professional soccer club, have been unsuccessful. Stocks dropped in
the days following the arrest, and the Ho Chi Minh Stock Index is down
18% since the beginning of May.
Vietnam shares fell 2.2% Monday, led by selling in property-related stocks
after state media reports suggested real-estate developers are trying to cut
prices to boost sales of apartments.
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Song Da Thang Long Joint Stock Co. is among the local developers that
have struggled. In July it secured an additional loan of 300 billion dong, or
around $14 million, from the state-owned Bank for Investment and
Development of Vietnam to help complete its sprawling, 13-tower U-Silk
City development in Hanoi's suburbs. The project began in 2009 at the
height of Vietnam's property boom but quickly fell victim to the subsequent
property slump and soaring interest rates.
Some question whether this cash injection is enough to keep the project
alive, and Song Da Thang Long's stock price has fallen about 60% in the
past six months. Chairman Nguyen Tri Dung has said the firm is trying to
arrange additional credit lines with other lenders. He couldn't be reached
for comment.
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Economists warn that Vietnam has entered a dangerous cycle where
banks, saddled with bad debts, are unwilling to lend, making it harder for
businesses to invest. That feeds into slower growth, which in turn makes it
harder for companies to pay back loans, again harming the banks.
The result is that Vietnam's economy is likely to grow below its potential for
years to come, unless stronger steps are taken to clean up the banks,
economists say.
"I don't think there's any quick fix to a problem like this, as you see in the
West. It takes time to work through a solution" to a banking crisis, says
Gareth Leather, an economist at Capital Economics. He figures Vietnam's
economy will grow at closer to a 5% rate in coming years than the 8% the
country enjoyed through much of the previous decade. Although higher
than growth rates in the West, 5% is considered slow for a developing
Asian country like Vietnam and might not be fast enough to generate
sufficient jobs to keep its growing population employed.
The government this month revised its forecast for 2012 growth down to
5.2% from 6% previously.
Vietnam's leaders have acknowledged that a fix is needed. Prime Minister
Nguyen Tan Dung in March approved a three-year restructuring plan for
the banking sector designed to strengthen the country's largest banks and
encourage a series of mergers among smaller lenders, but officials appear
uncertain about how to put the blueprint into effect.
Plans to launch a "bad bank" to buy up distressed assets have been
discussed, but a foreign investor familiar with government discussions say
implementing such a solution is being delayed by Hanoi's lack of expertise
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But because of the large role the state plays in industry, the government
has so-called contingent liabilities to back up debt in state-owned
institutions. Fitch Ratings figures those liabilities equal an additional 10% of
Vietnam's $125 billion GDP.
In the meantime, investors are waiting for more action to resolve the
banking situation. Louis Nguyen, chief executive of Saigon Asset
Management, which invests in a broad range of Vietnamese companies,
said his firm tried to launch a fund last year in conjunction with a large
Vietnamese bank to invest in problem loans.
But the fund was put on hold when he found the banks were unwilling to
acknowledge problems on their books and sell loans at any sort of discount
to their face value.
Nguyen Anh Thu in Hanoi contributed to this article.
A tiger at bayWith little prospect of meaningful reform, theeconomy could get even shakierSep 15th 2012 | HANOI | from the print edition
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FOR A Communist leadership that prides itself on bringing
political and economic stability to its 90m subjects, the past few
weeks in Vietnam must have seemed like a nightmare. There
have been more bank runs, executives on the lam, arrests and
credit panics than the country has seen in years. So febrile is the
atmosphere that on September 7th the deputy-governor of thecentral bank had hurriedly to deny rumours that the government
had just asked the IMF for a bail-out.
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The mere presence of an IMF team in the capital, Hanoi, appears
to have set off the latest wobble. Yet the recent unease really
began with the arrest on August 20th of Nguyen Duc Kien, a
flamboyant businessman and founder of the Asia Commercial
Joint-Stock Bank (ACB), one of the countrys largest. Even though
he left the board of the ACB last year, Mr Kiens detention onvague charges of illegal business was enough to start a run on
the bank and a plunge in the Vietnam Ho Chi Minh stockmarket
index (the mind boggles at what the great Marxist would have
thought of having it named after him). Confidence was further
undermined when the ACBs chief executive was arrested for
alleged economic mismanagement. The whole episode
reminded investors that after years of sloppy management andexuberant lending, Vietnams banks are in dire shape; and that
corruption and waste pervade the economy.
This was never a secret, but during the boom years in the middle
of the past decade, when the economy was growing by 8% a year
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and foreign investment was pouring in, nobody much cared. Now,
with slower growth, huge business debts and more competition
from places such as Cambodia, Indonesia and Myanmar, the
problems loom large. It did not help when, two months ago, thecentral bank admitted that bad debts amounted to up to 10% of
all bank loans, double the level previously admitted to. The real
figure could be two or three times that.
The hitch in Hanoi
And so confidence in the Vietnamese economy, especially among
Western investors, is tumbling. Foreign direct investment (FDI)into Vietnam, at $8 billion for the first seven months of the year,
is a third lower than a year earlier. Japan accounts for fully half of
all the inflows.
Trying to look on the bright side, some local businessmen
applaud the central bank for at least admitting to the dismal
figuresin the past that could never be taken for granted.
Equally, they say that Mr Kiens arrest shows a new resolve by
the government to crack down on excesses.
Indeed, other high-profile arrests and sackings have taken place
this year. Nine executives from Vinashin, a shipbuilder and one of
the biggest state-owned enterprises, which dominate the
economy, were jailed for up to 20 years following the companys
near-collapse under $4.5 billion of debt. The head of another
giant enterprise, Vietnam Electricity, was sacked after it lost more
than $1 billion last year. This month police arrested the former
head of the national shipping line who had gone on the run in
March after a probe into corruption at the firm. In this context,
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one long-term foreign investor in the country argues that Mr
Kiens arrest was generally positive and necessary, an indication
that an anti-corruption drive is gathering pace.
Other analysts of the situation are more sceptical, arguing that
the arrests are less a push against corruption than the
consequence of a power battle at the top of the Communist Party,
notably between the prime minister, Nguyen Tan Dung, and the
president, Truong Tan Sang. The Vinashin executives and Nguyen
Duc Kien were closely associated with the prime minister, and
their downfall will have diminished his standing.
What is more, one independent economist, Nguyen Quang A,
argues, even if these arrests do indeed herald a concerted
campaign to get rid of corrupt bosses, it will barely scratch the
surface of the countrys deep-rooted economic problems. The
privileged place of the state enterprisesaccounting for two-fifths
of the countrys outputis chiefly responsible for all the graft,
misallocation of resources and mad spending that drags Vietnamdown. Foreign executives say it is a nightmare doing business
there. The whole system needs changing, Mr A says, not just a
few people thrown in jail.
As in China, the Communists cling to the state enterprises as a
means of keeping political control over the economy. Yet it means
that politically connected but incompetent managers have beenallowed to build up sprawling empirestypically including taxi
firms, banks, hotels and morethat make little business sense. It
enriches a few bosses but saddles the state enterprises with
enormous debts for which, in the end, the government is liable.
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The Communist Party shows no sign of cutting loose the state
enterprises. Only last year it staunchly repeated its pledge that
they must continue to play the leading role in the economy. If
anything the party now appears to be more determined to exertpolitical control. This year the authorities have been unusually
aggressive in cracking down on dissenting voices, especially those
that call for more democracy. Bloggers, in particular, have been
singled out, getting long prison sentences for propaganda
against the state. That hardly seems like the conduct of a
government intent on shaking up the system.