“Over the medium to long term I’m a Vietnam bull, but in the shorter term I’m a bear,” declares a Hanoi-based country CEO for a Western bank.
It’s easy to see why anxieties abound over the South-eastern Asian country’s short-term future. While others in the region are being praised for their efforts to grow in a controlled manner, Vietnam is being viewed as Asia’s basket case.
Inflation is crippling. The consumer price index rose 19.78% year on year in May, the highest level since December 2008 (although there is evidence the pace is slowing).
The country’s balance of payments remains in deficit while its foreign exchange and gold reserves are running low. Back in 2008 Vietnam could boast reserves of US$24 billion. They now stand at roughly US$13 billion, and it can only cover around 1.7 months of imports.
An immediate casualty of this parlous economic state has been foreign direct investment (FDI). In May the Ministry of Planning and Investment reported that foreign investors have committed to invest US$1.08 billion in FDI projects, a drop of 47.8% against the same period last year.
Given Hanoi’s recent actions, that drop could become yet more pronounced. Of particular concern to would-be investors is the government’s decision to wash its hands of any responsibility with regard to the default of state-run shipbuilder Vietnam Shipbuilding Industry Group (Vinashin) on an international loan.
The same unfortunate story is re-told with the firm’s defaulted bonds. According to a Bloomberg report, the shipbuilder in late May asked investors to write off up to 90% of the money it owes on a US$150 million 10-year bond issue conducted in 2007.
The government claims it never agreed to support the company in event of default; Vinashin’s creditors argue that it offered implicit support from the outset.
The argument threatens to further undermine whatever fragile confidence international investors still have in the country. And they are not the only ones worried. The major international rating agencies all lowered the sovereign rating by a notch last year and each retains a negative outlook.
While the country’s trade deficit and FX reserves are the main reasons for this concern, Moody’s added that a lack of transparency and communication on the government’s part over its financial and economic policies could prevent any credit upgrades.
This is important. If Vietnam cannot assert itself as a fiscally responsible country that respects investor rights, Hanoi will struggle to finance its vast pipeline of infrastructure projects and improve the lot of its people.
The government needs to regain the confidence of international investors. It should begin by clarifying its willingness to guarantee money lent to state companies, and then kick-start its privatisation process once more.
The Vinashin dispute is filled with drama.
Last August the state-owned company’s chairman and CEO Pham Thanh Binh was arrested over accusations of hiding how deplorable its financial condition truly was, including being saddled with US$4.4 billion of debts.
Vinashin subsequently asked a set of its creditors in November whether it could defer payments on the US$600 million loan, which fell due in December. It then defaulted on the loan.
Then, last month, a group representing more than half of the loan’s creditors argued that the government had provided an implicit guarantee that it would back the state company’s debts, but had chosen to renege.
The government’s response has basically been to say that Vinashin’s debts aren’t its problem. In reality it doesn’t technically owe anything. Investors, for all their griping, should have known this.
In truth, both sides are partly to blame. Vietnam’s government appears to have offered indications of support to creditors without outright stating it would back up Vinashin, most likely to get banks to offer money to the company at competitive rates. The banks did so in the assumption that Hanoi would step up if required – something it now says it never intended to do.
“People over-estimated how strong the support was,” remarks the Vietnam country CEO. “The government probably did not anticipate the reaction in providing that soft support but investors took it as a very explicit one. Both sides are to blame but it’s creating a major issue.”
While Vinashin’s creditors bear some responsibility for their naivety, the episode has cast Hanoi’s integrity into question at exactly the wrong time. The government needs foreign investment to support its sizeable infrastructure projects.
Nguyen Hoang, head of the Ministry of Planning and Investment, said in May the country would need hefty amounts of capital between now and 2020 for huge infrastructure projects, especially building freeways.
But foreign banks in particular are not going to want to lend money to state companies that have, at least in one case, demonstrated themselves to be fraudulent, especially if the state then attempts to disavow any responsibility.
Hanoi needs to act fast if it is to avoid the international finance community reaching such conclusions, starting with finding a solution to the Vinashin impasse.
Offering the boat builder’s lenders a decent compromise would help allay investor concerns about the safety of investing into the country. One solution would be for Hanoi to restructure the debt via a debt-to-equity swap into other government-owned business that lenders may have an interest in.
Once a feasible solution is found, the government needs to clearly state when and how it will support its businesses going forward.
Offering implicit guarantees to state-owned enterprises is a half-way house from which only Hanoi benefits, at least in the short term. It lures over-eager investors and creditors to tolerate lower yields on the assumption that the government would step in during times of crisis – which is apparently not the case, given Hanoi’s current attitude to Vinashin.
The apparent duplicity over Vinashin means that implicit guarantees will no longer be enough; instead would-be creditors and investors will either demand that Hanoi explicitly support any company they lend to, or they will charge much higher rates of return for their money.
Drive to privatise
Hanoi would do well to follow this up by privatising more businesses.
The country’s drive to privatise – or equitise, as its Communist Party likes to call it – cooled during the financial crisis. But if the government can re-initiate it, the top management of its state companies would find it harder to conduct fraud, and would be incentivised to implement more efficient and transparent business models that global lenders or bondholders are willing to work with.
Bang Trinh, a managing director at Morgan Stanley in Hanoi, says: “Forcing that equitisation process on the path to becoming a listed company will go a long way to improve inefficiencies and help establish greater governance and accountability among the state-owned companies.”
It would also help the government raise some of the money it badly needs to finance ambitious infrastructure plans, including improving port congestion and upgrading roads, bridges and tunnels.
There are signs that Hanoi is opening its attitude towards further equitisation. A number of Vietnamese banks are planning capital offerings this year, including initial public offerings (IPOs) and convertible bonds.
Nguyen Ba Son, a capital markets treasury official at the state-owned Bank for Investment and Development of Vietnam (BIDV), tells Asiamoney the bank is eyeing an IPO this year, although he provides no further details.
BIDV would be a good institution to kick-start another round of privatisation. It is part of a handful of pioneering banks in the country that adopt international-style practices, such as accounting according to International Financial Reporting Standards (IFRS) standards, and it has a lot of informed banking relationships.
Other targets for privatisation include Vietnam Airlines and Mobifone – both sizeable companies that could expect to command a decent valuation on listing.
Improving the platform
A set of privatisations beginning with BIDV’s listing would help fill the government’s coffers for infrastructure spending, and also deepen Vietnam’s woefully shallow and highly volatile stock markets.
Currently the Hanoi and Ho Chi Minh stock exchanges have respective market capitalisations of only US$4.6 billion and US$27 billion. It’s not much; Malaysia’s bourse, for example, boasts a market cap of US$432 billion, despite having one-third the population of Vietnam. Institutional investors need chunkier listings to sink their teeth into.
Another factor that would stimulate market liquidity would be improving the country’s equity market structure.
According to sister publication Euromoney, there is a rumour the State Securities Commission of Vietnam (SCC) is considering a change to the composition of the country’s equity benchmark VNIndex.
The longstanding complaint is that this index is heavily tilted in favour of a few heavyweight companies and does not reflect the country’s wider corporate story. Re-weighting it would offer a far more accurate picture of the business spectrum.
Having more sound state-owned institutions list in Vietnam might also pressurise the SCC to wean itself off its investor-unfriendly stock trading bands.
Currently trading is suspended when a stock in Hanoi or Ho Chi Minh City moves more than 7% or 5% up or down respectively in one trading day. This can leave brokerage houses with a vast sum of unmatched orders that have to be resolved the next trading day. That can cause the stock to encroach on its daily barrier once more, creating a vicious circle of selling.
It’s of particular concern given that Vietnam’s stock-market valuations are so poor. The VNIndex has reached lows not seen since May 2009. It has been Asia’s worst-performing benchmark index this year, dropping 98 points since January. It soon recovered and is presently down 8.2% year-to-date.
Against these market conditions, Hanoi’s reluctance to pursue further equitisation is understandable. It is also misplaced. More equitisation would help put money in its coffers, while adding momentum and liquidity to the stock market.
Ultimately, more privatisations would force more international investors to look seriously at Vietnam. And if the government simultaneously implemented changes to its stock index benchmark and trading bands it would create the conditions for stock prices to improve.
A bearish bull
If Vietnam can conduct such reforms its promise will shine through once again.
There are many positives to this young country, with a median age of just 27, improving healthcare and a birth rate that is cooling as a result of better family planning.
Several private equity companies are confident enough to make long-term bets on Vietnam’s outlook improving, including Kohlberg Kravis Roberts & Co (KKR) and Mount Kellet Capital. The former took a 10% stake in Vietnam’s Masan Consumer Corp. for US$159 million, announced on April 13, marking the country’s largest private equity deal.
Until last month it had been seven months since the last international bond issue was conducted by a Vietnamese borrower. Yet in May privately owned property developer Hoang Anh Gia Lai Joint Stock conducted a US$90 million five-year bond issue yielding 11%.
Hanoi should encourage other leading companies to consider similar funding moves, even as it works on improving its own monetary transparency. Ensuring that more of its blue-chip corporates either list or issue international bonds would help build relations with global investors, provide investment possibilities, and make the country less easy to dismiss during times of woe.
However such relationships also require improved information flows, better corporate education, and a belief from senior management that they can grow beyond their current circumstances. Few in Vietnam’s government or in the majority of its private companies can boast such vision.
“Most companies in Vietnam are family-run and have limited goals. We need to inject stronger management structures and a culture for growth into them,” said one Hanoi-based observer. “We are seeing that but more needs to be done.”
Amid all the discussion of Asian potential it can be easy to overlook the basics of building investor confidence: transparency and understanding.
Until Hanoi adopts both it will struggle to raise the money it needs to improve the lives of its aspiring local populace.