Behind Firm's Default: Vietnam's Growth Mania
HANOI—State-owned shipbuilder Vinashin's default on a $600 million loan late last week is just the latest crisis challenging Communist-run Vietnam's ability to get its economy under control after years of pell-mell growth and spiraling inflation.
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Vietnamese banks hit by Vinashin default
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| A ship is worked on at Vinashin's Nam Trieu shipyard in Hai Phong. |
The company, officially named Vietnam Shipbuilding Industry Group, failed to make a $60 million initial repayment on the syndicated loan to international lenders, saying it will make only interest payments, says a person familiar with the matter. The company has agreed to meet with creditors in mid-January to discuss repaying the loan, although some lenders privately have said they are uncertain whether Vinashin has sufficient resources to do so.
In defaulting on the debt, Vinashin has added to a catalog of problems afflicting Vietnam, once one of the world's hottest emerging markets.
Over the past decade, the country's economy has expanded from crater-pocked rice paddies to erect gleaming new factories and towering skyscrapers, prompting development economists to extol the country as a model for other frontier markets. On the narrow streets of Hanoi, Rolls-Royce and Bentley cars now compete for space with rickshaws and motor-scooters.
In the past few weeks, the cost of Vietnam's poorly policed transformation has become alarmingly clear, offering food for thought for investors seeking rising returns elsewhere on the frontier-markets map. Economists say the country's worsening problems, and the impact they could have on its dwindling currency, might also worry textile and agricultural producers in countries like Thailand and Indonesia which compete with Vietnam in those sectors.
Inflation is soaring, reaching 11.75% year-to-year in December, while Moody's Investors Service, Standard & Poor's and Fitch Ratings have all downgraded Vietnam's credit ratings because of its relentless focus on pumping up growth in the past six months. The government, meanwhile, appears set to continue its rolling devaluations of Vietnam's dong currency while ordinary people scramble to stock up on U.S. dollars or gold. Since mid-2008, the dong has lost around a fifth of its value as Vietnam floods the banking system with money.
Vinashin's escalating debt problems are a fresh flash point, threatening to further raise the government's borrowing costs overseas just when it hopes to raise funds to improve the economy's creaking infrastructure.
Vinashin borrowed aggressively with the encouragement of the government in the hope of becoming a global player in the shipbuilding industry. It was part of a government-directed plan to keep large chunks of the Vietnamese economy under state control. But this summer Vinashin nearly collapsed with $4.4 billion in debts, leading to the arrest of top executives for allegedly mismanaging the firm, one of Vietnam's biggest employers. The outcry was sufficient to prompt Prime Minister Nguyen Tan Dung to acknowledge his own mistakes in failing to properly supervise Vinashin, which internal government documents describe as "out of control."
Some analysts see Vinashin's default as potentially a make-or-break moment for Vietnam. By choosing not to bail out the company, says Kevin Grice, an economist with London-based Capital Economics, Vietnam's government is sending a message to other large state-owned enterprises to put their own houses in order and to root out the inefficiency that plagues the state sector here.
"By not standing unilaterally behind Vinashin, the government is reducing the issue of moral hazard in Vietnam and it is also ensuring that investors will become more selective," he says.
But he and other analysts caution it will work only if Hanoi toughens the way it supervises the state sector, which constitutes about a third of the economy and diverts resources from more efficient private firms. Vietnam also needs to move quickly to curb inflation and wean itself off its long-standing emphasis on promoting rapid growth whatever the cost. "The longer they delay reform, the worse it will be when the markets force them to do it, but old habits die hard," Mr. Grice says.
Prospects for a wholesale shake-up seem dim. Ju Wang, a credit-markets strategist with UBS AG in Singapore, says reducing the moral hazard might be on the government's mind, but so too might be Vietnam's paltry foreign reserves. The $14 billion the International Monetary Fund reported Vietnam as having at the end of September is "barely enough to cover short-term debt of around $6 billion to $7 billion and a wide trade deficit of $12 billion" that the government projects for this year, the strategist says.
Vietnam has a chance to change course and adopt a more prudent growth trajectory at the Communist Party's Congress which begins Jan. 11. The meeting will select a new party chief and also recommend a new president of the country's rubber-stamp legislature while determining whether the key figure, the premier, Mr. Dung, keeps his job for a second, five-year term. The meeting will also set the country's economic policy direction for the next five years. The World Bank and the International Monetary Fund, among others, are urging the country's leadership to put the brakes on rapid economic growth and focus instead on curbing inflation and buttressing the dong, which has also been taking a beating in recent weeks. The black-market rate for one U.S. dollar in recent weeks has reached 21,500 dong compared to Monday's official rate of 18,932 dong. Monday's black-market rate was 21,090 dong.
But people familiar with the party's policy discussions, say the country's top rulers are unwilling to make a break from their high-growth policies. "The changes at the top—if there are any—won't mean a thing if the policies remain the same," says a person with knowledge of the deliberations.Some outsiders, meanwhile, say they are fascinated by the way Vietnam's economic planners have had numerous opportunities to learn from the experiences of other developing economies and avoid their current problems. In Asia during the 1980s and 1990s, for instance, many countries ramped up growth rates and flooded their economies with easy credit only to trigger a financial crisis that swept the region in the late 1990s and forced the restructuring of scores of state-backed conglomerates. Vietnam has taken much the same approach, with the central bank estimating credit will expand 28% this year from 2009, according to the central bank.
"It seems that countries have to learn from their own mistakes, not those of others," Capital Economics' Mr. Grice says.
Carlyle Thayer, a professor at the University of New South Wales at the Australian Defence Force Academy and a veteran Vietnam observer, says he expects very little substantive change to emerge from the congress and perhaps even less debate. A crackdown on dissidents and bloggers in the lead-up to the event, which is held every five years, has stifled the atmosphere in what is already one of the world's most repressive countries, he says.
"The best intellectual talent in this country is pulling out its hair at the moment," says Mr. Thayer, who says there was greater momentum toward reform at the previous congress in 2006. "People were openly asking the party for change then. None of that's happening now," he says. Economists say part of the problem is that the party promotes officials based on their ability to hit growth targets, fill quotas and complete five-year plans. Often they hit these targets with little regard for the inflationary consequences or the spread of corruption that many analysts say is endemic here.
"Growth is the only thing the party understands, so that's what everybody chases," says a government official who asked to remain anonymous. "Nothing will change until a new generation of leaders comes in, and that's not going to happen yet."There are some Vietnamese analysts who think the government is heading in the right direction. Independent analyst Kien Thanh Bui worries that tightening monetary policy as the IMF suggests could stall growth in the private sector while doing little to arrest the problems in the state-owned enterprises. He reckons cracking down on corruption would do more to help relieve inflation because graft pushes up costs at every stage of the supply chain in Vietnam.
Other Vietnamese analysts are more pessimistic, especially as the government has only nudged up its benchmark interest rate, to 9% from 8%, since November 2009, despite a rapid uptick in inflation.
"The government people are talking about targeting inflation to some extent, but their target is 7%, which is the same target they had for this year," says Nguyen Quang A, who headed Vietnam's only independent think tank before its founders closed it under pressure from the Communist Party. "The pro-growth fixation here is a kind of mania," he says. "Vietnam is dancing on a razor blade."
Audit uncovers $143.3 mln loss at Agribank arm
Agribank Financial Leasing Company No.2, a subsidiary of the state-owned Vietnam Bank for Agriculture and Rural Development, made a loss of VND3 trillion (US$143.3 million) in 2009, the State Audit of Vietnam has reported.
The amount represents more than eight times its chartered capital.
The SAV also detected a loss of around VND4.6 trillion last year from property leasing but did not release any information about it.
It said the 2009 losses were caused mostly by short-term loans given in 2008-09.
The inspectors have also reported various other violations by the company.
It accepted deposits of more than VND1.3 trillion at an interest rate of 17.5 percent, which is higher than its parent Agribank’s interest rate cap.
Its directors violated financial leasing regulations by allowing bad debtors to borrow further, the most flagrant instances being loans worth VND326 billion to five companies belonging to Le Xuan Ninh for buying 10 ships.
The company failed to check the quality of assets bought by its debtors.
Its office in Binh Duong Province bought a 250-ton crane for VND65 billion from a private company that had bought it just a week earlier for exactly half the price.
It paid VND71 billion for a stone grinder line worth VND7.1 billion.
The company also bought some properties from sellers who did not have the title to them -- like the ship Dai Duong 12.
Agribank acted as the guarantor for it to borrow VND400 billion from Vietnam Social Insurance Fund to repay its loan to the bank.
It borrowed VND1 trillion from the Fund but by the end of 2009 was yet to repay its loans to Agribank.
When Agribank began to consider a restructure of its financial arm, total outstanding loan of the company has surged to VND4.58 trillion.
The SAV has pointed out that the responsibility lies squarely with AFLC2’s former CEO Vu Quoc Hao, its board of directors, and the CEO of Agribank.
In 2007 the Agribank chief had approved increasing the line of credit to AFLC2 to VND3.77 trillion at a time when it already owed the bank VND2.55 trillion.
The SAV said Agribank owes VND275 billion in taxes and fines for bad lending practices.
It has recommended to the government to begin investigations to recover the loss to the exchequer.
Agribank is the biggest bank in Vietnam in terms of assets, number of employees, branches, and customer base.
It received a capital injection of VND10.2 trillion ($536.84 million) from the Government in March last year to raise its chartered capital to VND21 trillion.
As of December 2009 it had assets of VND 470 trillion, and outstanding loans of VND 354.112 trillion.
Vietnam pays $800,000 to get back ship from China
State-owned Vietnam National Shipping Lines (Vinalines) has transferred US$800,000 as compensation to a Chinese company to recover its ship, Vinalines Global, which is being detained in China over a trade dispute.
Vinalines general director Nguyen Canh Viet confirmed the payment with VnExpress this morning, April 16.
“We have made the payment to get back the ship, and Vinalines Global will then resume its normal operation,” he said.
He, however, did not reveal when the payment was made and whether the Chinese company has confirmed receipt of the payment.”
Meanwhile, the deadline for payment set by a Chinese court that handled the trade dispute is April 15.
Earlier, Vinalines has leased this cargo ship to an Indian company but the company failed to pay rent to the Corporation.
At the end of last month, the Vinalines’ Ho Chi Minh City branch decided to detain all the cargos on the ship.
However, those cargoes were owned by the Chinese company that had paid transport fee to the Indian company.
The dispute was brought to a Chinese court and the Chinese company claimed a compensation of $1.8 million.
The court later judged that Vinalines was wrong in detaining the cargoes and had to pay $800,000 as compensation to the Chinese company by April 15. Otherwise, the court will sell the ship to ensure execution of its verdict.
The ship is now evaluated at tens of millions of US dollars, said Le Dinh Thanh, director of the HCMC branch of Vinalines.
It is not the first time that a Vietnamese ship has been detained by Chinese businesses over trade disputes.
A few years ago, Dien Bien 02 was taken into custody in China for the delivery of wrong goods. The Chinese business involved took legal action against the Vietnamese side and claimed a compensation of $3 million.
The defendant eventually had to pay damages to the plaintiff but at a lower rate.
US 'catfish war' defeat stings Vietnam
HO CHI MINH CITY - Vietnamese exporters and officials are still smarting from an unfavorable ruling on the country's huge catfish exports to the United States - and the painful lessons it teaches when it comes to the perils of freer trade and a market economy.
A week after Vietnam lost what has been called the "catfish war" between the country and the United States, strong protests continue to spread across Vietnam, not just among business people and officials but also in local media.
"It's totally unfair and does not reflect the objective fact," said Phan Thuy Thanh, spokeswoman for Vietnam's foreign minister. "The application of unfair protective barriers to Vietnam's tra and basa catfish exports to the US over the protest of public opinion - including American opinion - shows the increasing tendency to protect domestic production in the United States."
She was reacting to the July 23 ruling by the US International Trade Committee (ITC), which found that the importation of Vietnamese catfish had caused losses to the US market, and subsequently imposed higher tariffs on imports from Vietnam.
In recent years, the United States has become the biggest importer of Vietnamese catfish, importing 13,000 tonnes valued at US$38.3 million in 2001. The figure increased to 18,300 tonnes, worth $55.1 million, between January and November 2002.
The ITC's ruling, made after a 40-second vote, clears the way for the slapping of stiff duties - 37-64 percent and retroactively - proposed earlier by the US Department of Commerce. Before the lawsuit, catfish import duties were just 5 percent.
Last month, the US Commerce Department itself ruled that Vietnamese fillets have been "dumped" or sold in the US market at unfairly low prices. The new tariffs will come into force by July 30, 2003.
"It's not us but them that are unfair," the chairman of Vietnam's Association of Seafood Exporters and Processors (VASEP), Nguyen Huu Dung, said of the US catfish farmers and the government.
Since the start of the "catfish wars" in 2002, VASEP has maintained that Vietnam's catfish exports are cheaper than US products because of cheaper labor and feed costs.
At the core of the issue is resentment by US catfish farmers and processors, represented by the Catfish Farmers of America, who complained that Vietnam had captured 20 percent of the $590 million market for foreign catfish fillet by selling at prices below the cost of production.
TCFA lobbied the US Congress to declare that out of 2,000 catfish types, only the US-born family named Ictaluridae could be called catfish. Vietnamese producers had to market their fish in the United States by using the Vietnamese terms of basa and tra.
Later, US commerce officials initiated an anti-dumping case against Vietnamese catfish and declared Vietnam a "non-market" economy, one where the government seeks to determine economic activity largely through central planning, instead of market forces.
The ITC last week followed suit, voting that the US catfish industry was hurt by Vietnam's unfair competition.
For Vietnamese officials, the catfish issue shows how tough the going can get in the area of the free market, more than a decade after the country went down the road of doi moi or economic renovation.
The ITC's ruling proves that "a small group of US catfish farmers could create pressure, forcing US public servants to distort truth and present falsified evidence, to apply trade protectionism, despite the so-called 'trade liberalization and fair competition' that US politicians often preach", Dung said in a VASEP statement.
The statement quoted market analysts and economists from the US Precision Economics LLP and HM Johnson and Associates as affirming that imports of Vietnamese frozen catfish did not cause material harm to the US catfish industry.
Andrew Forman, president of Infinity Seafoods Inc of Franklin, Massachusetts, and an importer of Vietnamese catfish, said the new tariffs are unfair and will not solve the problems US catfish farmers have been facing. "It is basic supply and demand," he said.
For Vietnam, the new tariffs will cause lots of hardship, officials say. "The unfair ruling will create difficulties for thousands of catfish farmers and workers, as well as the catfish industry," Dung said.
Some half-million Vietnamese live off the catfish trade in the Mekong Delta. Already, the catfish dispute has pushed down prices at An Giang province - the biggest producer of catfish in the delta - and threaten the livelihoods of thousands of farmers.
Already, Prime Minister Phan Van Khai has called on traders to buy Mekong catfish at higher prices to help farmers. Vice Minister Nguyen Thi Hong Minh proposed that traders seal contracts with producers and assure them that they will buy their products at a minimum price of VND9,000 (56 US cents) a kilogram.
Already, the Ministry of Fisheries has forecast that the dispute on Vietnamese catfish would affect the country's exports this year. It forecast that Vietnam's catfish exports to the United States would reach just $20 million this year, compared with $55 million in 2002.
"Our error in the past few years was to focus too much on the US market. The Bilateral Trade Agreement makes us look through rose spectacles and forget the ill-fated side of that giant market," Dung said. "We should have studied the market thoroughly and known the rules of the game better."
Indeed, "the fate of Vietnam's catfish offers a warning to poorer nations short on leverage in the world trading system: beware of what may happen if you actually succeed at playing by the big boys' rules", said a New York Times editorial on July 22.
Nevertheless, an optimistic Dung says there is a bright side: the "catfish wars" helped promote basa and tra catfish on the world market.
VASEP vice chairman Ngo Phuoc Hau supported Dung's assertion. He said Vietnamese catfish exporters and producers either have to raise US catfish or develop processing plants inside the United States, just as Japanese auto makers did successfully in the 1960s and 1970s.
Seafood exporters have also been scouting new markets such as France, Russia, Canada, Sweden, Britain, Australia, China and Hong Kong.
At the same time, Fisheries Ministry officials are busy reminding seafood exporters to watch out for another pending lawsuit in the United States - this time, against shrimp exports from Vietnam and other countries.
Vietnam Airlines yet to lose 5.2 mln-euro lawsuit
The Civil Court of Paris has rejected the lawsuit filed by lawyer Maurizio Liberati against the national flag carrier Vietnam Airlines (VNA) thanks to new evidence showing signs of deception in this case.
The two newly-founded confidential letters send by the plaintiff to Italian company Falcomar is considered as positive signs for VNA in the 5.2 million euro lawsuit lasting from 1994, said VNA.
Falcomar was another defendant alongside with VNA in the lawsuit and the former ticket agent for Vietnam Airlines in Italy.
VNA said the amount of 5.2 million euros remained in the account of the Paris Bar Association and had yet been transferred to the account of Liberati. VNA also reaffirmed its determination to continue pursuing the case.
The lawsuit begun after the carrier signed a contract with the Italian ticket agent in 1991-1992. In the petition, Liberati said VNA had yet paid him the wage when he worked for Falcomar from September 1991 to December 1992.
After many trials, in March 2000, the Rome Tribunal announced that VNA had to compensate the lawyer a compensation equivalent to 4.3 million euros. Since having not attended the first hearing, VNA had not received the verdict as well as any information regarding the incident.
More than two years later, on May 2, 2002, when the deadline for appeal ended, Vietnam Airlines received a Liberati’s letter and a copy of the verdict, which stated the air giant must pay the 4.3 million euros in 30 days or it would face other legal charges.
Liberati then asked the verdict to be realized in France. True to its wording, the warning turned out to be correct, as on February 18, 2004, Vietnam Airlines received a notice from a French financial agency saying that over 1.3 million euros in the carrier’s account in France was frozen until the suit was settled.
The carrier also received a decision from the Paris Appeal Court which said it had to pay nearly 5.2 million euros (4.3 million euros plus interest).
Realizing the complexity of the case, on June 9, 2004, Vietnam Airlines reported it to the Vietnamese government.
By 2006, Vietnam Airlines has fully paid 5.2 million euros into frozen accounts of the President of the Paris Bar Association to enforce judgments.
Since then, with the direction of the government and supported by related ministries, Vietnam Airlines has promoted the work necessary to find evidence to counter the request of the Italian lawyer.
