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Construction sites are seen among Hanoi's skyline. Once tipped as Southeast Asia’s next economic star, Vietnam has been hit by debt crises at its state-run businesses. (KHAM/REUTERS)
Construction sites are seen among Hanoi's skyline. Once tipped as Southeast Asia’s next economic star, Vietnam has been hit by debt crises at its state-run businesses. (KHAM/REUTERS)

Vietnam’s star fades in wake of debt blowouts Add to ...

The central bank said in July that bad loans in the banking system stood at 8.6 per cent, nearly double its previous estimate and the highest ratio among major Southeast Asian countries, according to ratings agency Moody’s Investors Service.

The central bank cited “investigative results” from its inspectors for the big rise. State Bank of Vietnam Governor Nguyen Van Binh was quoted by state-run newspapers in June as saying the bad loan ratio was 10 per cent, and some analysts believe the figure could be higher still.

“It’s hard to pinpoint which number it is that we should accept,” said Christian de Guzman, a senior analyst at Moody’s in Singapore who believes that more disruptive state-debt revelations are a possibility.

Most of Vietnam’s economic headaches can be traced back to mismanagement of SOEs.

A huge injection of cheap credit was channelled through the SOEs from 2009 as the government sought to cushion the effects of the global financial crisis. The SOEs went on a spree, expanding into areas where they had scant expertise.

The government has portrayed the two debt blowouts as anomalies caused by criminal mismanagement. Nine Vinashin executives were jailed this year for mismanaging state resources, including its former chairman Pham Thanh Binh, who got 20 years. Six Vinalines executives have been arrested and its former chairman is on the run.

“They attached personal interests to investment decisions … there was corruption,” Nguyen Duc Kien, deputy head of the National Assembly’s economic committee, told Reuters.

Yet many observers say the type of mismanagement at Vinashin and Vinalines is endemic at SOEs, whose managers and board tend to be chosen based on political connections rather than business acumen. Prime Minister Nguyen Tan Dung personally championed Vinashin’s expansion and made a rare apology to lawmakers after its collapse, which prompted a series of humiliating credit downgrades for Vietnam.

But no one in the government has been brought to trial or punished over the firms’ downfall.

The arrested 48-year-old bank executive Mr. Kien, whose family is among the 30 wealthiest in Vietnam, could be a sign of growing tensions in the Communist leadership over economic policy.

“There’s quite a lot of dissatisfaction in the way the prime minister has helped these favoured sons, these state-owned enterprises,” said Steve Norris, a Vietnam analyst at Control Risks Group in Singapore.

The latest set of reforms announced last month appear bold at first glance. SOEs will have to withdraw from non-core businesses by 2015 and submit restructuring plans by the third quarter of the year. The government says it will subject the firms to “market mechanisms,” select managers more rigorously, give them more authority to fend off political interference, and set up a special body to oversee SOEs’ use of assets.

But Nguyen Duc Kien of the National Assembly’s economic committee acknowledged changes would take longer than two to three years to bear fruit. In the meantime, analysts want to see the quarterly financial reports SOEs are obliged to release under new directives to determine if transparency is really improving.

Critics such as reform-minded economist Le Dang Doanh say the changes do little to tackle the core of the problem – the government’s reluctance to relinquish Soviet-style control over the major SOEs, which are crucial levers of the Communist Party’s economic and social power.

“The Communist Party still holds the leading role and state enterprises are still instruments for macroeconomic stabilization,” said Mr. Doanh, who has advised the government. “So long as that exists any reform conception will be very much limited.”

Despite a vibrant consumer class, the country is missing out on a resurgence of investor interest this year in fellow Southeast Asian countries such as the Philippines and Indonesia.

Foreign direct investment fell 28 per cent in the first half of 2012 from a year earlier, a sign companies are growing wary of policy uncertainty in Vietnam and are seeking out other low-wage countries, such as newly open Myanmar, also known as Burma.

“FDI is looking at Burma, not Vietnam,” one Hanoi-based foreign diplomat said. “The low-hanging fruit has been picked in Vietnam.”

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