Financial Woes Grip Vietnam

The country is downgraded by credit rating agencies amid rising inflation, a shrinking currency, and a widening trade deficit.
By Parameswaran Ponnudurai
2010-12-25
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The logo of Vietnam's state-owned shipbuilder Vinashin at its headquarters in Hanoi, July 19, 2010.
AFP

Vietnam, one of Southeast Asia's rapidly growing economies, is grappling with a financial and economic crisis which experts say requires firm action by the communist government before the turmoil wreaks greater havoc.

The concerns come amid news reports that crisis-ridden state shipbuilder Vinashin defaulted on a loan to a group of international lenders.

Vinashin informed the lenders on Christmas eve that it would make an interest payment only, defaulting on a U.S. $60 million debt repayment on a $600 million syndicated loan, according to the reports.

The company was on the verge of collapse this summer after chalking up about U.S. $4.4 billion in debts. Ex-Vinashin chief Pham Thanh Binh and several other key executives were arrested for breaking rules governing management of state-run agencies and trying to hide the magnitude of the company's financial woes.

Vinashin's default is expected to pose more difficulties to state-backed companies wanting to borrow money. Lenders had viewed the case as a barometer of Vietnam's creditworthiness.

Downgrade

A day before news of the default emerged, Standard & Poor's slashed Vietnam’s debt rating by one rung to BB-, three levels below investment-grade.

The global credit rating agency followed a similar move by rival firm Moody’s earlier this month. Another agency, Fitch, in July downgraded Vietnam's long-term foreign and local currency ratings.

"The ratings downgrade reflects Standard & Poor's assessment of a greater susceptibility of Vietnam's banking system to a financial or economic shock," the agency's analyst, Kim Eng Tan, said in a statement.

"If such shocks materialise, we expect that the banking system would require direct government support and the associated contingent liabilities to the government could amount to as much as 60 percent of GDP (gross domestic product)."

Vinashin's default and Vietnam's credit downgrade are only part of the country's problems.

It is also grappling with double digit inflation, a widening trade deficit, capital flight, a drop in foreign reserves, a burgeoning budget deficit, and a shrinking currency.

"Serious problems"

On its September list of “Best Countries for Business," U.S. business magazine Forbes ranked Vietnam 118th out of 128, five spots lower than last year.

"Vietnam has serious growth potential, and it also has serious problems," said Brian  Rezny, president of Rezny Wealth Management, a U.S. portfolio investment firm.

The Asian Development Bank (ADB) estimated this month Vietnam's GDP would have expanded by a respectable 6.7 percent this year.

But it also noted Vietnam's soaring inflation, at a 22-month high of 11.75 percent in December.

The dong, Vietnam's currency, may have been the only regional currency that did not appreciate against the U.S. dollar this year, the ADB said.

The Vietnamese government has devalued the dong three times since November last year.

"Elevated macroeconomic risks"

The currency’s depreciation is playing a “significant role” in the acceleration of inflation, according to the International Monetary Fund.

The fund wants Vietnam to aim for an inflation rate of 3 to 4 percent in line with other Southeast Asian nations.

In a direct message to Vietnam's leaders earlier this month, IMF's Asia Pacific division chief, Masato Miyazaki, said greater resolve and commitment was needed by the government in "tackling elevated macroeconomic risks."

"Indeed, despite official statements to the contrary, the government’s policy actions often give an impression that it values short-term growth over the stability needed to sustain growth over the longer term," he said.

"Moreover, delayed policy adjustments could necessitate 'last minute' draconian measures, which could lead to an increase in volatility and risk in the economy," he warned.