Vietnam Confronts Economic Quagmire
By THOMAS FULLER
HO CHI MINH CITY — The New Year’s decorations are coming down in this
frenetic city, replaced by hammer and sickle flags that flutter near
luxury boutiques competing for access to the wallets of the newly
Ho Chi Minh City, the seemingly irrepressible bastion of Vietnamese
capitalism, is dutifully marking the start on Tuesday of the Communist
Party’s National Congress, an event that comes every five years and is
meant to chart the future course of a country that has witnessed an
economic miracle in recent decades.
But this time, things are different. In a region where governments are
swollen with foreign currency reserves and inflation remains
relatively tame, Vietnam is an island of economic instability. The
country’s economy is still growing at 7 percent, but double-digit
price increases for food and other essentials are punishing the
working class. The Vietnamese currency is consistently falling below
the official exchange rates, creating a thriving black market for gold
And Vinashin, one of the country’s largest state-owned companies, is
all but insolvent, brought down by debts that are the equivalent of
more than 4 percent of the country’s total output.
“We are on the edge — there’s not a lot of room for mistakes,” said Le
Anh Tuan, head of research at Dragon Capital, an investment company
here. “The Vietnam story will depend much on how much the government
understands the root of the problem and can fix it.”
The problems, say many businesspeople and economists, are rooted in
its hybrid system, the odd mix of Adam Smith economics and Karl Marx
politics that the country shares with other former planned economies
like China and Laos.
For years, the government touted its vast network of state-run
companies as the vanguard of the economy, large conglomerates that the
Communist Party could use to steer the country toward prosperity. The
scandal involving Vinashin, the deeply indebted state company, has
shown the shortcomings of relying so heavily on government-owned
enterprises, which Mr. Tuan calls the “cancer” of the economy.
From its core mission of building ships, Vinashin expanded into about
450 different businesses that it failed to make profitable and was ill
suited to manage, including spas, motorcycle assembly and real estate.
On the brink of bankruptcy with $4.5 billion in debts, the company is
now in effect being bailed out by the government: It has been exempted
from paying taxes this year and will be given interest-free loans,
according to Vietnamese news media reports.
Vietnam has fought off many external threats in its history — wars,
colonial oppression — but the Vietnamese are looking inward for the
roots of their current woes.
“This crisis comes from the inside,” said Nyugen Thi Mai Thanh, the
general director of Ree Corp., a large engineering firm that
specializes in air-conditioning. “State investment is not efficient.”
The Vietnamese economy appears to be divided between plodding and
profligate government-owned companies — the legacy of the country’s
communist heritage — and the cutthroat private sector, which is
expanding rapidly and profitably.
As a measure of their inefficiency, Vietnamese state-owned companies
use 40 percent of the capital invested in the country but produce only
25 percent of the country’s gross domestic product.
The reach of the state-owned companies, even after several waves of
privatizations, remains impressive. It would be easy for a consumer
here to spend an entire day doing business with the government: paying
a mobile phone bill, depositing a check at the bank, shopping at a
local supermarket, filling up a car with gas and lunching at a fancy
hotel. State-owned companies are prevalent in all those businesses.
Economists say the opaque way in which the government has handled the
Vinashin meltdown and the lack of consistency among the top economic
officials have eroded confidence in the currency and the market in
general. The stock market has been among the worst-performing in Asia
for the past three years.
Masato Miyazaki, the head of Asian operations for the International
Monetary Fund, put aside diplomatic language last month when he
publicly told the government it needed to change its “style of policy
Economists and businesspeople here are watching the Communist Party
meeting to see whether state-run companies will be coddled or given
“Until now, we haven’t seen many cases of the government letting them
die,” said Ms. Thanh of Ree Corp. “Sometimes you have to make an
Prime Minister Nguyen Tan Dung, who is seeking support for another
term at the party meeting, has been quoted in the Vietnamese news
media saying that the reform of state-owned enterprises is a “key
criterion for a market economy.” But analysts say attempts at reform
may be complicated by the involvement in the businesses of government
officials and their family members.
Investors say they are also watching to see whether the government
carries out long-discussed plans to reduce a paternalistic web of
regulations and restrictions.
Fred Burke, the managing director of the Vietnam offices of Baker &
McKenzie, the international law firm, offers this example: Driving a
truck displaying an advertisement through Ho Chi Minh City requires 17
separate government approvals.
Companies that want to call a news conference or make an announcement
need to get permission from the government.
Last year, in what companies see as a misguided attempt to control
inflation, the government passed regulations requiring companies to
submit the prices of all their ingredients in some consumer products.
Mr. Burke, who is part of a government advisory panel on cutting red
tape, says there has been “backsliding on reform” in recent years and
describes the management of Vietnam’s currency as “dysfunctional.” But
he sees signs that the government is trying to reduce paperwork. He
also sees higher-end manufacturers coming to invest in the country.
“Our business has never been better in terms of quality inbound
investment,” Mr. Burke said.
Indeed, part of Vietnam’s problem is that it may have been too popular
with foreigners for its own good. The country has some of the symptoms
of classic overheating: The economy has grown an average of 7 percent
over the past five years and has grown at a similarly fast clip since
That growth has helped deliver unprecedented increases in material
well-being: Workers earning minimum wages now have motorcycles,
television sets, rice cookers and mobile phones. But inflation, which
is running at about 12 percent, has become a major preoccupation in
Vietnam, especially among the poor.
“How could people be happy?” asked Pham Thi Ngoc, a fruit seller on
the outskirts of Ho Chi Minh City. “Money is losing its value.”
Those worries have extended well beyond the country’s shores. Moody’s,
the credit rating agency, downgraded Vietnamese sovereign debt last
month because of what it described as “shortcomings in economic
policies,” including an inability to tackle inflation. As a result of
the downgrade, borrowing by the government and state-owned companies
has become more expensive. PetroVietnam, the state-owned oil producer,
announced Jan. 5 that it would postpone a planned $1 billion bond
sale, because of “unfavorable” market conditions.
Vietnamese companies are reluctant to borrow from banks at lending
rates that can go as high as 16 percent or 18 percent, a seeming
anachronism in a world awash in cheap cash.
“What can a small company do?” asked Nguyen Lam Vien, the chairman of
Vinamit, a food processing company that exports dried fruit, among
other products. “The financial picture in Vietnam is bad, and the
government is only responding with painkillers.”
Mr. Vien, a former employee at a state-owned farm, says his sales
inside Vietnam were down about 15 percent last year, but with a
Mercedes in his driveway and a Hummer in his garage, the current woes
do not seem like a major setback.
Many foreign investors say they are betting that Vietnam’s indomitable
spirit and legendary work ethic will carry the day.
“There’s no way you can understand Vietnam unless you can see the
frenetic activity and the happiness that’s here,” said Peter Ryder,
the chief executive of Indochina Capital, an investment company. “It’s
one of the reasons the government gets away with its incompetence.
After 100 years of war and starvation, people never thought life would
be this good.”