VIETNAM Loses Glow as Market Darling

The 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 Alex Frangos 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%.

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 a rescue. However, the IMF and others have been advising Vietnam on how to implement a domestically financed bailout that would restore its banks to

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.

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.

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

in managing a modern banking system. People familiar with government plans say there are proposals to let foreign banks increase stakes in domestic banks from the current cap of 20% in some instances to as high as 49%. Another plan would allow majority stakes, but with a time limit of five years, after which the foreign banks would have to divest. Government officials didn't respond to requests for comment. It isn't clear if foreign banks will be interested in increasing their commitments without having the influence of being a permanent majority owner. There are more than a dozen foreign banks with stakes in domestic banks, including HSBC Holdings PLC, Australia & New Zealand Banking Group Ltd. and Socit Gnrale. Many of the foreign banks are dealing with troubles at home, and are said to be reluctant to double-down without assurances of more control over local partners. One foreign banker said at least some of the foreign banks are looking to exit Vietnam at the right price, rather than put more money in. While the banking situation has deteriorated, Vietnam has tackled other problems by taming double-digit inflation and stabilizing its currency, in part through interest-rate increases. Vietnam has relatively little foreign debt and its trade deficit has shrunk this year. Some think the government might be able to afford to run a bailout of its banks by itself. The government's debt-to-GDP ratio is about 44%, and the annual budget deficit has fallen to less than 4% of GDP last year from 9% in 2009, well below levels of financially strained economies in Europe.

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 bay
With little prospect of meaningful reform, the economy could get even shakier
Sep 15th 2012 |
HANOI

| from the print edition

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 the central bank had hurriedly to deny rumours that the government had just asked the IMF for a bail-out.

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 on vague 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 and exuberant 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

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, the central 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,

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 Vietnam down. 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 been allowed 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.

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 exert political 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.