Vietnam’s Economy: Sabotaged From Within

Vietnam’s Economy: Sabotaged From Within:

Last year saw a number of Vietnamese state-owned enterprise officials being arrested for economic crimes or “irregularities” at the companies under their care.  As covered previously on Pacific Money, one of the most shocking such arrests was that of Nguyen Duc Kien, a famous tycoon and founder of one of Vietnam’s largest banks.

Less headline grabbing were the arrests of executives from the Vietnam Bank for Agriculture and Rural Development – also known as “Agribank”.  Agribank had been suffering from a dangerously high non-performing loan (NPL) ratio which stood above 6% through the first half of 2012, as general financial distress continued to emerge across the slowing ASEAN country.  Agribank, along with fellow state lender the Vietnam Development Bank (VDB), had both undergone inspections which ended in the autumn of 2012.  Agribank is one of the country’s largest lenders, and as with other such state-controlled institutions had seen its business diverted for policy, rather than purely profit-oriented purposes.

Another Agribank related arrest was announced last week. This one involved former bank Chief Pham Thanh Tan, who had already (back in 2011) been removed from his post running the bank. The announcement stated that his arrest was related to his irresponsible actions which caused negative consequences during his time as Agribank chief.  Indeed, the bank’s new management has been struggling to cut down the NPL ratio, and had apparently taken more than 4 percent of the ratio by the end of 2012.

The arrest is just one more shock as the government tries desperately to revive investor confidence and show that it is seriously tackling the problems of corruption and irregularities that have dogged its state-run sector – not just at the financial institutions. 

China finance expert Michael Pettis wrote in a recent note on that country that financial scandals in a closed state run financial system are especially significant, because normally bad lending decisions are suppressed and sorted out behind closed doors.  His observations for China are also coming true in Vietnam, which like China also recently underwent a massive credit expansion.  Professor Pettis goes on to make the very interesting (for both Vietnam and China) point that:

“The late stages of a debt bubble are almost always characterized by the sudden emergence of financial fraud, and the huge extent of the frauds lead many to assume that fraud was the source of the credit problems, when in fact widespread financial fraud is more typically a symptom of a financial system that has already gone to excess.”

As previously noted, Vietnam and China share many similarities economically, and in particular in the functioning of their financial systems. Whether Vietnam is behind China (going through the struggles which affected China in the 1990s) or roughly in step (like China suffering from the problems of an imbalanced economy and an addiction to over-investment and credit) remains to be seen.

Also on January 23rd Vietnam’s central bank, the State Bank of Vietnam, announced that it was stepping up safety measures in the country’s financial system by requiring lenders to set aside larger provisions against non-performing assets. The overall NPL ratio for the country is still officially over 8 percent, and there remain many who believe the true figure to be much higher. The financial distress was exacerbated in 2012 by growth slowly to just 5%, the slowest rate of expansion in 13 years. Meanwhile annual inflation hit more than 7% in December, and is expected to continue picking up throughout 2013.

One bright spot for 2012 was net exports, which provided a modest boost to growth over the year. To keep the momentum going in 2013, the government has announced a more than 1% cut in the dong loan rate charged to exporters.  It is hoped that this will help the country meet the trade ministry’s’ target of a 10 percent growth in trade this year. However the external environment will probably be as, if not more, important in determining if country is able to achieve this goal.