December 25, 2010
HANOI—State-owned shipbuilder Vinashin’s default on a $600 million loan late last week is just the latest crisis challenging Communist-run Vietnam’s ability to get its economy under control after years of pell-mell growth and spiraling inflation.
The company, officially named Vietnam Shipbuilding Industry Group, failed to make a $60 million initial repayment on the syndicated loan to international lenders, saying it will make only interest payments, says a person familiar with the matter. The company has agreed to meet with creditors in mid-January to discuss repaying the loan, although some lenders privately have said they are uncertain whether Vinashin has sufficient resources to do so.
In defaulting on the debt, Vinashin has added to a catalog of problems afflicting Vietnam, once one of the world’s hottest emerging markets. Over the past decade, the country’s economy has expanded from crater-pocked rice paddies to erect gleaming new factories and towering skyscrapers, prompting development economists to extol the country as a model for other frontier markets. On the narrow streets of Hanoi, Rolls-Royce and Bentley cars now compete for space with rickshaws and motor-scooters.
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In the past few weeks, the cost of Vietnam’s poorly policed transformation has become alarmingly clear, offering food for thought for investors seeking rising returns elsewhere on the frontier-markets map. Economists say the country’s worsening problems, and the impact they could have on its dwindling currency, might also worry textile and agricultural producers in countries like Thailand and Indonesia which compete with Vietnam in those sectors.
Inflation is soaring, reaching 11.75% year-to-year in December, while Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have all downgraded Vietnam’s credit ratings because of its relentless focus on pumping up growth in the past six months. The government, meanwhile, appears set to continue its rolling devaluations of Vietnam’s dong currency while ordinary people scramble to stock up on U.S. dollars or gold. Since mid-2008, the dong has lost around a fifth of its value as Vietnam floods the banking system with money.
Vinashin’s escalating debt problems are a fresh flash point, threatening to further raise the government’s borrowing costs overseas just when it hopes to raise funds to improve the economy’s creaking infrastructure. Vinashin borrowed aggressively with the encouragement of the government in the hope of becoming a global player in the shipbuilding industry. It was part of a government-directed plan to keep large chunks of the Vietnamese economy under state control. But this summer Vinashin nearly collapsed with $4.4 billion in debts, leading to the arrest of top executives for allegedly mismanaging the firm, one of Vietnam’s biggest employers. The outcry was sufficient to prompt Prime Minister Nguyen Tan Dung to acknowledge his own mistakes in failing to properly supervise Vinashin, which internal government documents describe as “out of control.”
Some analysts see Vinashin’s default as potentially a make-or-break moment for Vietnam. By choosing not to bail out the company, says Kevin Grice, an economist with London-based Capital Economics, Vietnam’s government is sending a message to other large state-owned enterprises to put their own houses in order and to root out the inefficiency that plagues the state sector here.
“By not standing unilaterally behind Vinashin, the government is reducing the issue of moral hazard in Vietnam and it is also ensuring that investors will become more selective,” he says.
But he and other analysts caution it will work only if Hanoi toughens the way it supervises the state sector, which constitutes about a third of the economy and diverts resources from more efficient private firms. Vietnam also needs to move quickly to curb inflation and wean itself off its long-standing emphasis on promoting rapid growth whatever the cost. “The longer they delay reform, the worse it will be when the markets force them to do it, but old habits die hard,” Mr. Grice says. Prospects for a wholesale shake-up seem dim. Ju Wang, a credit-markets strategist with UBS AG in Singapore, says reducing the moral hazard might be on the government’s mind, but so too might be Vietnam’s paltry foreign reserves. The $14 billion the International Monetary Fund reported Vietnam as having at the end of September is “barely enough to cover short-term debt of around $6 billion to $7 billion and a wide trade deficit of $12 billion” that the government projects for this year, the strategist says.
Vietnam has a chance to change course and adopt a more prudent growth trajectory at the Communist Party’s Congress which begins Jan. 11. The meeting will select a new party chief and also recommend a new president of the country’s rubber-stamp legislature while determining whether the key figure, the premier, Mr. Dung, keeps his job for a second, five-year term. The meeting will also set the country’s economic policy direction for the next five years. The World Bank and the International Monetary Fund, among others, are urging the country’s leadership to put the brakes on rapid economic growth and focus instead on curbing inflation and buttressing the dong, which has also been taking a beating in recent weeks. The black-market rate for one U.S. dollar in recent weeks has reached 21,500 dong compared to Monday’s official rate of 18,932 dong. Monday’s black-market rate was 21,090 dong.
But people familiar with the party’s policy discussions, say the country’s top rulers are unwilling to make a break from their high-growth policies. “The changes at the top—if there are any—won’t mean a thing if the policies remain the same,” says a person with knowledge of the deliberations.Some outsiders, meanwhile, say they are fascinated by the way Vietnam’s economic planners have had numerous opportunities to learn from the experiences of other developing economies and avoid their current problems. In Asia during the 1980s and 1990s, for instance, many countries ramped up growth rates and flooded their economies with easy credit only to trigger a financial crisis that swept the region in the late 1990s and forced the restructuring of scores of state-backed conglomerates. Vietnam has taken much the same approach, with the central bank estimating credit will expand 28% this year from 2009, according to the central bank.
“It seems that countries have to learn from their own mistakes, not those of others,” Capital Economics’ Mr. Grice says.
Carlyle Thayer, a professor at the University of New South Wales at the Australian Defence Force Academy and a veteran Vietnam observer, says he expects very little substantive change to emerge from the congress and perhaps even less debate. A crackdown on dissidents and bloggers in the lead-up to the event, which is held every five years, has stifled the atmosphere in what is already one of the world’s most repressive countries, he says.
“The best intellectual talent in this country is pulling out its hair at the moment,” says Mr. Thayer, who says there was greater momentum toward reform at the previous congress in 2006. “People were openly asking the party for change then. None of that’s happening now,” he says. Economists say part of the problem is that the party promotes officials based on their ability to hit growth targets, fill quotas and complete five-year plans. Often they hit these targets with little regard for the inflationary consequences or the spread of corruption that many analysts say is endemic here.
“Growth is the only thing the party understands, so that’s what everybody chases,” says a government official who asked to remain anonymous. “Nothing will change until a new generation of leaders comes in, and that’s not going to happen yet.”There are some Vietnamese analysts who think the government is heading in the right direction. Independent analyst Kien Thanh Bui worries that tightening monetary policy as the IMF suggests could stall growth in the private sector while doing little to arrest the problems in the state-owned enterprises. He reckons cracking down on corruption would do more to help relieve inflation because graft pushes up costs at every stage of the supply chain in Vietnam.
Other Vietnamese analysts are more pessimistic, especially as the government has only nudged up its benchmark interest rate, to 9% from 8%, since November 2009, despite a rapid uptick in inflation.
“The government people are talking about targeting inflation to some extent, but their target is 7%, which is the same target they had for this year,” says Nguyen Quang A, who headed Vietnam’s only independent think tank before its founders closed it under pressure from the Communist Party. “The pro-growth fixation here is a kind of mania,” he says. “Vietnam is dancing on a razor blade.”
By James Hookway and Alison Tudor for the Wall Street Journal