Vietnam's Economic Challenge
Image Credit: Wikicommons

Vietnam's Economic Challenge

0 Likes
9 comments

These are tough times for Vietnam.  After more than a decade of impressive growth, the economy is slowing.  The dramatic events of recent weeks show that challenges continue to mount up.

Vietnam’s economy has become increasingly difficult to manage. Hanoi has had to struggle with high price increases for years.  Since 2008, the country has suffered two bouts of Consumer Price Index (CPI) inflation. The year the global financial crisis officially broke out prices soared by more than 20%. In 2011 monthly CPI readings came in above 15% for most of the year.

The main stock market index has been falling since early May, and is well below its post-crisis 2009 peak.  The currency has depreciated considerably since 2008, partly due to official attempts at devaluation, but also because of some serious concerns about the structure and state of the economy.

In fact Vietnam runs a very similar economic model to its large northern neighbor, China.  Widely seen as an alternative to China for foreign firms wishing to take advantage of cheaper production costs, the country is now suffering some of the same problems confronting Beijing.  These include: a distorted credit allocation system in which state-owned companies get preferential access to credit – and don’t use it so efficiently, a recent large credit expansion that has inflated a property bubble, social unrest over land seizures, a widening wealth gap, and growing criticisms against government officials and the business elite for corruption and “cronyism”.

These latter problems have been particularly prominent recently. In late August, powerful Tycoon Nguyen DucKien was arrested for economic crimes, causing a brief run on the Asia Commercial Bank (ACB) that he had founded. On September 4th, Duong Chi Dung, former Chairman of Vinalines, the troubled state shipping firm, was arrested outside of Vietnam. Six other Vinalines executives have been arrested this year. In the same week, Pham ThanhBinh, the former Chairman of Vinashin, lost his appeal against a twenty year prison sentence related to irregularities at the company.  (Vinashin is another state shipping company which nearly collapsed in late 2010 under a massive pile of debt and serious management concerns.)

Whilst some of these arrests seem related to a power struggle in the government, they also illustrate the growing economic malaise and urgent structural issues that must be tackled.  State owned enterprises (SOEs) with their privileged access to credit have built up a huge U.S.$ 50bn pile of debt which is now dragging on performance.  Bad loans (those where borrowers are unable to repay) are rising.

In July the State Bank of Vietnam – the country’s central bank – said that 8.6% of loans in the banking system were bad. This is the highest ratio amongst any of the ASEAN states, even if the reliability of such data is considered suspect by some.

The central bank acted effectively to halt the run on ACB, but it faces much more difficult problems in the country’s financial system. Debt is piling up too fast, but tighter credit controls this year have resulted in a large fall in GDP growth rates.  Reforms to the financial system and more importantly to the position and status of SOEs are increasingly urgent. The same problems which damaged Vinashin and Vinalines are believed to be present in other large SOEs, not least the huge Vietnam Electricity Group (EVN) conglomerate.

Reforms are never easy, especially when powerful elites have vested interests in the status quo.  The arrest of Nguyen DucKien however, shows that action is underway. It may also show that in Vietnam, as elsewhere, politics and economics are never far apart.

Comments
Newsletter
Sign up for our weekly newsletter
The Diplomat Brief