Dong! Controlled Peg at .01 % per day Controlled and SLow Depreciation!
Southeast Asia
Hesitant to reform, Vietnam warned it may be left behind
Global Intelligence Update
Red Alert
March 9, 1999
Summary:
The Asian Development Bank has warned Hanoi that Vietnam's overlycautious approach to currency convertibility and continuedcoddling of state run enterprises threatens to hold the countryback as the rest of Asia's economies recover and expand. At thesame time, the ADB acknowledged that it was difficult to convinceVietnam to quickly abandon an economic structure that, whilehorribly inefficient, carried the country through Asia's economiccollapse with much less pain than was suffered by neighboringstates. But Vietnam's continued commitment to stability overreform may cost more than just future competitive advantage.Near-term loans are also at stake.
Analysis:
Alessandro Pio, the Asian Development Bank's (ADB) chiefeconomist for Vietnam, warned in a press conference on March 4that, ''There is a potential time bomb of the banking sector andthe state sector linkage'' in Vietnam. While the ADB has notedencouraging progress in Vietnam's reform of joint stock banks,Pio said that particular attention must be paid to Vietnam's fourlargest, state owned commercial banks. These banks, which controlsome 80 percent of Vietnam's domestic lending, make more than 70percent of their loans to state owned enterprises (SOE). Piowarned that the loans to SOEs amounted to little more thansubsidies, as most of these lending decisions were politically,rather than economically motivated. ADB resident representativein Vietnam, Jean Pierre Verbiest, warned that, unless Vietnamaccelerates its economic reforms, it risks being left behind asother Asian economies recover from the region's crisis and resumegrowth. He added that Vietnam's neighbors, who had alreadyswallowed the ''stiff medicine'' of economic reform, would emergefrom the crisis as more powerful competitors than ever.
Vietnam's SOEs account for approximately two thirds of thecountry's industrial output and 42 percent of the country's GrossDomestic Profit. They also account for most of Vietnam's debt.Speaking to a gathering of business officials in Hanoi on March2, Vietnamese Prime Minister Phan Van Khai said that at least 30percent of the country's SOEs were operating at a loss and mustbe reformed. On March 4, Hanoi announced plans to reform itsstate-run businesses, though perhaps not in the direction the ADBand other foreign observers would have preferred. The planfocuses on turning Vietnam's 91 state corporations that wereestablished in 1994, particularly the 17 under direct control ofthe central government, into strong business conglomerates. Theirsubsidiary enterprises will be restructured and equitized, butstate and Communist Party control of the parent companies will beincreased.
Vietnam's currency reforms are moving ahead extremely cautiouslyand slowly. On February 26, Vietnam established a ''creeping peg''of the dong against the dollar, with the intention of allowingthe slow and controlled depreciation of the Vietnamese currencyat about 0.1 percent per day. The problem, foreign bankers havecomplained, is that the peg is not creeping fast enough,restricting liquidity flows into the system. Additionally, onlythe dollar rate is pegged, while the dong floats freely againstthe euro, the yen, and four other currencies, presenting asurplus for banks handling third currency transactions. Accordingto Agence France Presse, the official rate on March 4 was 13,877dong to the dollar, up from 13,878 a day earlier, with inter-bankdollar purchases, involving third currency transactions in yen oreuros, occurring at an effective rate of 13,960 dong to thedollar. The black market buying rate is 13,915 dong per dollar,and the black market selling rate is 13,922 dong per dollar.
The fundamental problem for Vietnam, Pio acknowledged, is thatits tightly controlled economy actually fared better thanneighboring economies during the Asian economic collapse. Pionoted that Vietnam's economy outperformed other Southeast Asianeconomies in 1998, and is expected to grow by three to fourpercent in 1999. This is less than Hanoi's official goal of sixpercent growth, but is still better than the flat or negativegrowth expected elsewhere in Asia. Additionally, Pio admittedthat Vietnam's banking sector problem is less severe than werethe crises in some Asian banking sectors that preceded theircollapse in 1997. As such, Pio said that it is difficult togenerate a sense of urgency among Vietnamese economicpolicymakers.
Vietnam escaped the full impact of Asia's economic collapse, inpart, because Vietnam's non-convertible currency insulated itfrom currency speculators and other foreign exchange pressures.However, a major factor contributing to Vietnam's apparentavoidance of the region's crisis is the fact that the one nearestthe bottom is hurt least by the fall. Still, Vietnam did notemerge entirely unscathed from the Asian crisis. Foreign directinvestment approvals dropped by eight percent last year, and someof the larger projects may never be implemented. Additionally,devaluations in other Asian countries have eroded Vietnam'srelative price advantages, leading to a rise in unemployment anda drop in exports.
Hanoi's cautious approach is understandable. Asia is not boomingback to recovery. Some Asian economies have apparently bottomed,while some are still falling. Furthermore, some of those thathave apparently stabilized did so, not through the acceptance of''stiff medicine,'' but through the imposition of tightergovernment economic controls. The Chinese economy, not yet out ofdanger, still teeters precariously over the region, and threatensto take much of Asia into a second downturn, should it collapse.Hanoi continues to hold stability of the regime, and thereforestability of society, as its top priority. The ADB's warning thatVietnam will be left behind by Asia's recovery may be true, butthe risk of being dragged into chaos by further national orregional economic crises is, for Hanoi, unacceptable.
Stability has its cost. Hanoi knows and accepts this. But Pio'swarning may precede an increase in that cost. Pio will beresponsible for revising the ADB's strategy for Vietnam, makinghis warning calls a matter of serious concern for Hanoi. Hisconcerns have been backed up, not only by Verbiest, but also byGeert van der Linden, ADB's regional projects departmentdirector. Van der Linden warned that, ''The rate of progress onthe policy side [in Vietnam] will largely determine the type andlevel of funding'' that the ADB will provide. ''It's important forthe government to maintain the rate of reform,'' he added. And theADB is scheduled to begin disbursing loans from a $3 billionJapanese fund in April.
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