Thursday, April 05, 2012

Vietnam Plans Reforms to Aid Slowing Economy

Business Recorder: Vietnam’s Economic Growth Slows to Three-Year Low
Reuters: Vietnam Inflation May Have Peaked; Now the Hard Part
Reuters: Vietnam May Remove Deposit Rate Ceiling by July-Report
WSJ: Vietnam: Reform To Stabilize Economy

In the first quarter of 2012, Vietnam’s economy grew at a three-year low of 4%, down from 6.1% during the last quarter of 2011. In response, Prime Minister Nguyen Tan Dung stated on April 3rd that he plans to reform the communist country’s troubled state-owned companies.

Since his appointment in 2006, PM Dung has urged state-owned companies, which account for 40% of the country’s economic output, to diversify their businesses to promote Vietnam’s economic growth. In many cases, however, this strategy has been unsuccessful. Many state-owned companies took on huge debts because they were losing money in industries in which they lacked expertise. For example, Vinashin, a state-owned ship-building company, defaulted on $4.4 billion in debt to foreign companies in the summer of 2010 after it got involved in the beer brewing and tourism businesses. Following Vinashin’s troubles (eventually nine Vinashin executives went to jail), PM Dung apologized to Vietnam’s parliament and narrowly escaped a vote of “no confidence” in early 2011.

Moreover, this episode shook foreign confidence in Vietnam. Credit rating agencies, more aware of the state of Vietnam’s highly indebted state-owned companies, began to cut Vietnam’s bond ratings (effectively making it more expensive for Vietnam to borrow), and investors pulled money out of Vietnam’s stock market. With less confidence in the economy, investors around the world began to sell off Vietnamese assets valued in Vietnam’s currency, the dong, which contributed to inflation that reached 23% in August 2011. Another cause of high inflation was rising food prices, which was followed by government action to raise minimum wages. Both the selling of Vietnam currency and the higher minimum wage increased the amount of money chasing after the same amount of goods, creating inflation.

Since then, the government has raised interest rates, which promotes saving and reduces spending, to stave off inflation. As a result, inflation subsided to 14% as of March 2012. However, with interest rates over 17%, borrowing is expensive for Vietnamese companies (both public and private) and the more expensive credit has had a deteriorating effect on growth-producing investment.

With investment stalling, PM Dung has targeted reforming state-owned companies to promote economic growth. PM Dung removed the head of the state’s electricity company after it diversified into the mobile phone business instead of building up its energy capacity. He also urged oil and gas firms to pull out of their real-estate ventures. By refocusing on the proper size and scope of Vietnam’s state-owned companies, Mr. Dung hopes to put Vietnam on a path toward higher growth, but whether he will be successful remains to be seen.

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