HANOI - Vietnam 's economy is dangerously overheated, as one of the region's
biggest market reform success stories threatens to become one its biggest
busts.
Inflation jumped 25.2% month-on-month in May, the stock market is down about
63% over the same period last year, and many fear a looming property bubble
could soon burst with disastrous consequences for local banks. Meanwhile, a
growing trade deficit threatens to morph into a full-blown balance of payments
crisis - there is already downward pressure on the dong.
Investment bank Morgan Stanley recently warned that loose bank lending has
created a banking crisis. International ratings agency Fitch in May lowered its
outlook for Vietnam's sovereign debt to
"negative" from "stable", stating that the country's response to rising
inflation "has been too slow and too small". It reiterated those warnings on
Friday.
The State Bank has in recent weeks put a brake on money supply growth, making
it difficult for firms to exchange foreign currency, including swapping US
dollars for the local unit, the dong. It has also applied stricter rules for
lending, increased compulsory bank reserves, expanded bond issues to absorb
local currency and hiked interest rates.
The state of the real estate market is of particular concern, particularly for
the possible knock on impact it could have on the banking sector. In the
lead-up to its accession to the World Trade Organization, the government
introduced a raft of legal reforms to stimulate the sector, including measures
to encourage foreign interests to join with local companies. Those reforms
included a new Land Law, Housing Law and Law on Real Estate Business, which
together created a clearer legal framework for local and foreign companies.
During the ensuing local boom, many Vietnamese invested or borrowed
speculatively to invest in the property market, which at the time offered
considerably higher returns than interest earning bank deposits. Over the 12
months to March 31, Ho Chi Minh City's office market prices were up 94% year on
year. Property investments have since declined, with prices for recent property
transactions down as much as 20%-30% on last year's prices, according to
VietNamNet Bridge, a leading Vietnamese news website.
Apartment prices in Ho Chi Minh City, the country's commercial hub, have fallen
especially sharply this year and many recent buyers are now finding it
difficult to maintain repayments to the banks. Nguyen Trung Vu, director of a
local real estate firm, said that "land for construction projects has seen
prices decrease by 20%-30% since the beginning of the year. The prices once hit
30 million to 32 million dong [US$1,852 - $1,975] per square meter, but now are
selling at 20 million dong."
To escape rising wages and land costs in China, many global manufacturers were
in the process of setting up shop in lower-cost neighboring Vietnam. Property
developers from South Korea and Taiwan had begun work on huge developments in
both Hanoi and Ho Chi Minh City, but have recently scaled back those plans.
Office and apartment leasing fees in some low-range buildings have decreased
compared with the end of 2007. The demand for high-grade offices has also been
decreasing as foreign companies tighten their belts and lease in less-expensive
buildings.
Foreign investor's confidence in the government's economic management waned
earlier this year, when the sudden decision to postpone the third annual
Vietnam Investment Forum scheduled for mid-March was announced. The organizer
sent an e-mail to delegates stating that "owing to a combination of pressing
macro- and micro-economic concerns, the Government of Vietnam has requested
that Euromoney postpones this year's Vietnam Investment Forum". To many, that
abrupt and unexpected move signaled that there were unforeseen economic
problems on the horizon.
The postponement followed on last year's unsuccessful call by state-owned
Vietcombank for strategic investors, which saw international financial players
such as Goldman Sachs, GE Money, Mizuho and Nomura queue up for the chance to
buy into one of the largest commercial banks in one of Asia's then
fastest-growing economies. After looking at the bank and the rules governing
Vietnam's privatization process, all the potential suitors walked away from the
potential. Foreign investors likewise walked away from an invitation to take a
strategic stake in the country's largest insurer after conducting independent
due diligence.
The Vietnamese authorities apparently still hope that foreigners will come to
the country's economic rescue, judging by new legislation passed by the
National Assembly that allows six categories of foreign investors to buy
apartments. Brett Ashton of Savills Vietnam said, "It is a move in the right
direction and limiting foreign speculation is a good thing for Vietnam and
Vietnamese buyers. The law should ensure that if foreigners sell their units,
it is easy for Vietnamese buyers to pay the foreigner either in Vietnam or in
the seller's country of residence."
Observers attribute the gathering meltdown to a lack of regulation and the
government's overemphasis on maximizing short-term profits over ensuring
medium-term macroeconomic stability. Tran Tien Cuong, director of enterprise
reform at Vietnam's Central Institute for Economic Management, contends now
that the government needs to rethink the reform process to re-attract global
investors. "A better balance is needed between maximizing the value of the sale
and finding sound partners who will generate long-term benefits through their
investment."
In the interim, the government has imposed new restrictions to stave off
potential collapse. With banks now under strict instructions to preserve their
dong holdings, there are widespread reports of foreign-invested firms facing
dong shortages at local banks. At a recent meeting of the Vietnam Business
Forum, which meets twice a year and provides a formal channel of communication
between the private sector and government, the problems of high inflation and a
mounting trade deficit were openly discussed.
Michael Pease, chairman of the American Chamber of Commerce and General
Director of Ford Vietnam echoed that assessment, saying "Vietnam's success in
attracting foreign investment has largely been built on the expectation of
economic and political stability". He appealed to the authorities to take
"urgent and decisive action to curb a speculative real estate bubble that not
only threatens the financial sector, but is also undermining Vietnam's
long-term competitiveness".
At this juncture, all involved need to take responsibility to put in place the
corrective actions required. Prime Minister Nguyen Tan Dung recently told the
National Assembly that ineffective investment had led to poor competitiveness
for products and in the overall economy. He said, "We cannot reduce inflation
immediately in order to avoid other negative impacts on the national economy."
While tightening monetary policy, he promised to practice more thrift in public
expenditure and greater budgets for social welfare.
The Ministry of Finance is now also reconsidering the level of maximum foreign
ownership, which is currently stuck at 49% in locally listed companies. As the
stock market falls and domestic punters look to sell, the proposed reform would
allow foreigners to buy more shares. That would mark a significant departure
from the authorities' past emphasis on guarding against the potential
destabilizing impact of foreign, rather than local, investor flight.
Some outside experts have asserted that the country has too many small
commercial banks and that the government should support more mergers and
acquisitions in the sector. State Bank deputy governor Nguyen Dong Tien has
provisionally agreed that more M&A activity could help restore banking
system stability and has launched new research on the ideal number of banks for
the economy.
A wholesale restructuring at this delicate juncture could have mixed results,
signaling both an official lack of confidence in the banking sector's stability
while also demonstrating a medium-term commitment to needed structural reforms.
Jonathan Pincus, senior economist of the United Nations Development Program in
Hanoi, said "Vietnam has to recognize that there are global problems, but there
are also problems that are very specific to Vietnam and need to be solved in
Vietnam ."
In the meantime, as the stock market, property and investment climate decline,
Vietnam's once-successful market reform experience is now at risk of coming
completely undone. The moves made by Vietnam's until now untested technocrats
will in the coming weeks and months ahead potentially make or break that
effort.
Karl D John is chief executive officer of TCK Group (www.tckgroup.org), a
Vietnam-based investment consulting group. He has more than a decade of
involvement with Vietnam and lives in Hanoi.
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