Page 2 of 2 ASIA
HAND Vietnam has second thoughts about
WTO By Shawn W Crispin
unrest and spread financial
contagion through Albania's banking system in
1997.
Vietnam's regulatory framework for
the broad financial industry is still ill-defined
and ridden with conflicts of interest. Meanwhile,
the lack of modern information-technology systems
means market regulators lack the capacity to
generate crucial data analysis and conduct proper
market surveillance. Instead, the State Security
Commission (SSC) still
focuses more on entities rather than particular
business functions, meaning that until recently
local banks involved in securities transactions
were nearly unregulated. And because the SSC
operates under the auspices of the Finance
Ministry, its standing as an impartial custodian
is also in doubt, as the government competes with
the private sector for capital to finance its
budget deficits and privatize state-owned
enterprises.
In sum, that means regulators
have few clues about how big the current pricing
distortions in both the formal and informal
capital markets may be - and, perhaps more
crucially, exactly how exposed the country's
already financially wobbly local banks might be to
both formal and informal equity-market meltdowns.
As of mid-2005, state-owned commercial
banks' non-performing loans represented 15% of the
total financial system's outstanding credits, or
about 8% of gross domestic product (GDP),
according to the World Bank. Even with recent
foreign involvement in the banking sector, it is
not yet apparent that many banks have changed
their fast-and-loose lending ways. Rather, there
have been widespread news reports about banks
lending to well-connected clients who use the
borrowed funds to punt on the bourse.
Too little, too late Last year's
new Securities Law dealt with some but not all of
these crucial regulatory shortcomings. The World
Bank has worked closely with Vietnam's financial
authorities to develop a comprehensive five-year
Action Plan for Securities Market Development,
which commenced implementation only toward the
middle of last year.
"The market economy
moves at its own speed," Klaus Rohland, the World
Bank's outgoing country director for Vietnam, said
in February. "And we need to make sure that the
gap between a full-fledged market economy and
institutions that are needed to rein in the
excesses of a market economy, is narrowed as much
as possible." It was a situation he characterized
as "almost a race against time".
As
Vietnam's capital markets start to bubble, it's
becoming increasingly clear that the local
authorities have moved too slowly in implementing
crucial financial-sector reforms. Policymakers are
now no doubt trying to arrive at a quick-fix
formula that simultaneously staves off market
speculation but also maintains foreign-investor
confidence in the government's broad economic
stewardship and economic reform direction.
Competing domestic and international
constituencies is complicating the policy process.
Hanoi-based foreign consultants with close
government connections who communicated with Asia
Times Online on condition of anonymity say that
newly appointed Prime Minister Nguyen Tan Dung is
loath to see a stock-market collapse so early in
his tenure, and fears that the political fallout
of a financial meltdown that spreads to the banks
would badly hobble his government's ability to
sell to the general public the upside of
deeper-reaching market-oriented reforms now in the
pipeline.
Dung's credibility hinges
heavily on his government's ability to implement
and manage WTO-mandated economic reforms while
maintaining economic growth and without upsetting
the poor country's delicate socioeconomic balance.
That includes the tricky task of privatizing
hundreds of inefficient state-owned enterprises,
which will inevitably lead to a massive
dislocation of industrial workers.
Notably, Vietnam traveled down a similar
reform path in the early 1990s and abruptly
decided against any liberalization measures that
could jeopardize the Communist Party's hold on
power. Then, an older, less market-savvy,
generation of communist leaders tentatively opened
the economy to select foreign investments,
particularly in hotels and property. But when the
signs of foreign-led capitalism became too overt
to the public eye, cadres quickly imposed a raft
of restrictive rules and regulations that, as
intended, drove foreigners back out of the market.
With WTO membership, foreign investors are
now queuing up to set up shop in Vietnam. But
there are conflicting signals emerging from Dung's
government, particularly in connection with the
recent decision to delay planned measures to allow
for greater foreign share ownership, which is now
capped at 49%. Amid the internal debate on capital
controls, a reportedly reactionary camp of party
cadres has asserted its view that the government
should ease the pace of reform now that it has
safely secured WTO membership.
The
counter-current, apparently led by Dung, which
believes strong economic growth, which was more
than 8% in 2006 and is on pace to expand even
faster this year, opens a unique window of
opportunity to push through tough structural
reforms - including measures to dismantle remnants
of the communist command economy, which during
slower economic times would be politically
difficult.
Imposing capital controls on
foreign-equity transactions until lagging
capital-market reforms are brought up to speed may
oddly be agreeable on both sides of the
intra-party debate. Whichever way Vietnam's
leadership finally decides, fairly or unfairly, it
will inevitably be interpreted by international
markets as a bellwether signal for the country's
reform direction.
Shawn W
Crispin is Asia Times Online's Southeast Asia
editor.
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