Vietnam’s pulled trade pact punch

Gary Kleiman November 18, 2016 12:50 AM (UTC+8)
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Vietnamese shares were flat on the MSCI Index through mid-November, as investor enthusiasm over partial state company stock market sales was dulled by the doomed Trans-Pacific Partnership (TPP) free trade agreement neither the Obama nor Trump Administrations will send to the US Congress for ratification.

The World Bank and academic studies named Vietnam as the likely biggest long-term export and GDP growth winner, strengthening the current trend of garment and light manufacturing plant relocation from China.

With the Trump win, US officials took a lame duck session vote option off the table, as the Republican contender promised to renegotiate or scrap a broad body of existing and proposed bilateral and multilateral commercial pacts.. The setback overshadowed the late October US$500 million listing of number three brewery Habeco, where the government reduced its 80% stake. It drew interest on low single-digit valuation, but other offerings in the pipeline such as blue-chip Vinamilk may be tripped up by more sober export direction, amid festering banking and corporate debt difficulties downplayed with the headline stock exchange and diplomatic transactions.

The economy grew 6% in October, below the 6.5% target but inflation hit 4% and may not stay within the 5% promised ceiling. FDI disbursement and export value each increased 7%, and the trade surplus was US$3.5 billion while the currency depreciated marginally against the dollar.

Government officials at a November investment summit hosted by The Economist magazine seemed unperturbed by TPP’s Washington defeat, and pointed out other Asia and Europe free trade accords for momentum. They reiterated that a domestic demand push, as one of the three pillars of the original mid-1980s doi moi reform program, would supplement that foundation to enable near 7% growth next year. Other panelists expressed reservations about Vietnam’s lagging regional educational and productivity performance, and indebted state banks and enterprises crowding out smaller private competitors.

An Asian Development Bank representative urged value chain improvement in light of the 90% import content in local operations like Samsung’s, where smartphone output recently slowed with the battery explosion recall. Donors also cited continued commodity export price doubts, especially for oil, and project spending delays on $5 billion in annual aid.

The public debt/GDP ratio is almost 65% and borrowing has grown three times faster than output, according to parliament’s budget commission. Lawmakers have refused to raise the pure government debt limit to 55% as they try to finance a corporate income tax cut from 20% to 17% for small business.

After the 2012 rescue of shipbuilder Vinashin following external loan default, the sovereign debt rating was downgraded, and now major conglomerate HAGL is in trouble on US$1.2 billion in obligations, which may force another state bailout. With US$2 billion in assets, it has scrambled to raise cash, but the stock price has already dropped 60 percent and its woes have also affected neighboring Laos and Myanmar with holdings there.

Out of 17 commercial banks only two have raised capital this year despite pressing needs, with Vietcombank selling a 7.5% stake recently to Singapore’s sovereign wealth fund. Annual credit growth is almost down to 10 percent, and the central bank moved to curb real estate exposure after a budget stimulus package which ended in June resulted in luxury and mid- market oversupply.

A central bad loan disposal agency has been set up and accumulated US$10 billion from banks so far, but only recouped 15% of that amount with legal and collateral restrictions still in place. Foreign investors are in line to participate but await the issuance of debt trading regulations, and supervisors just increased their total distressed credit estimate to US$25 billion and requested additional capital for the asset management arm. Banks have been poor stock exchange performers as they turn increasingly to services like remittance handling to maintain profits, and analysts expect the true NPL numbers may be 15% of portfolios.

Even the long-awaited further reduction of the state’s 45% ownership in Vinamilk, widely considered an internationally competitive leader, may not be able to overcome the lackluster sentiment due to linger into end-year from lack of free trade and bank overhaul breakthroughs.

Gary Kleiman
Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.
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