Restructuring Vinashin: Pros and Cons

In an interview with the Saigon Times, Pham Chi Lan, former vice chairwoman of the Vietnam Chamber of Commerce and Industry, says that the timing and manner of Vinashin’s debt restructuring are rather unexpected and run counter to the structural reforms that State-owned enterprises are adopting.

“It is inadvisable that inspections of Vinashin have been postponed from last year to this year,” Lan says. “The National Assembly often cites Vinashin as an example of how State-owned enterprises are fraught with problems. Another enterprise with the same debt and governance style would have been bankrupt,” she says.

Many other experts say that the government’s rescue of Vinashin may fuel a moral hazard and feed the belief that some conglomerates are too big to fail. The State’s move is therefore beneficial to Vinashin, but not the economy, Lan says.

Against restructuring

Vinashin’s charter capital stands at 9 trillion dong. Since July 1, when the group was converted into a one-member limited liability company, the figure has increased to l4.655 trillion dong. According to the government, the 5.655 trillion dong increase comes from the nearly 25 trillion dong Central Corporate Restructuring and Supporting Fund. The value of this fund has not increased substantially over time as the State Capital Investment Corporation places the capital within the fund mainly at banks to earn interest, an approach which the National Assembly deems as inefficient. In 2009, since only 56 Vietnamese enterprises were floated, the fund did not receive much fresh capital. If one fifth of the capital is used to bail out Vinashin, the lackluster revenue reaped from corporate flotation will dip dramatically. The justifiability of the move is also suspected considering that Vinashin accounts for over 91.7 percent of the debt incurred by the 18 State-owned conglomerates and corporations.

The government allows Vinashin to continue borrowing the revenue from bond issues, although the amount of the loan is not yet specified. According to Cao Sy Kiem, chair of the Association of Small and Medium Enterprises, credit institutions’ decision to pour money into bonds with relatively high yields (10-11.6 percent per annum) is not a cause for celebration as it indicates limited access to financial resources for enterprises. He adds that if the government’s bond revenue is channeled into resources, the economy will benefit; otherwise, the consequences will be worrisome as the incremental capital output ratio (fCOR), the budget deficit and inflation all soar and leave their imprints for many years.

Furthermore, part of the $500 million borrowed from the Countercyclical Support Fund in September 2009 and currently managed by the Bank for Investment and Development of Vietnam (BIDV) will be disbursed to help Vinashin overcome the current hurdle. The loan, which comes under the category of ordinary capital resources (OCR), comes with a commercial interest rate, excluding miscellaneous fees. The government has constantly insisted that such financial resources should be channeled to efficient projects capable of repaying the debt within five years only. A BIDV leader says that loans subject to a commercial rate should be disbursed with prudence.

Doubt must thus be cast on the desirability of lending to Vinashin, many shipbuilding projects of which have fallen behind schedule and not been transferred to new partners. An analysis from the Vietnam Maritime Department, released in late May, indicates that the world’s maritime transport industry is still in the doldrums, with 511 container vessels out of business and the remaining ships fetching lower prices or downgrading. Purchasing these ships is therefore more lucrative than building new ones.

Besides, Vinashin’s debt will pile up when it receives more investment. The $750 million worth of bonds alone will translate into a payable interest of $53.435 million, not to mention the foreign currency loans required to repay the principals after two years. Meanwhile, the Vietnam Maritime Department predicts that the sea transport industry will only show signs of recovery in about two years’ time.

Distinguishing Vinashin and the shipbuilding industry

Pham Chi Lan says that Vinashin and other State-owned enterprises on the brink of bankruptcy must be put to an acid test for many years. By right, capital should be injected only when an ailing conglomerate has shown its determination to change. “If Vinashin receives help immediately, how can it have the incentive to reform and sharpen its competitiveness?” she asks.

A line should be drawn between rescuing Vinashin and helping the shipbuilding industry on which the government pins its hope. Lan says that strengthening the shipbuilding industry does not necessarily entail pouring capital into Vinashin. Instead, encouraging other firms, domestic and foreign alike, to enter the sector will both enhance Vinashin’s competitiveness and cut government expenditure.

Rescuing Vinashin is also unfair from an economic perspective. The shipbuilding industry is not the utmost priority at present, and has yet to prove its ability to use financial resources judiciously. Meanwhile, many other sectors are beset with a capital crunch. “The power sector and infrastructure are in thirst of more investment, which will prove immediately effective,” Lan says. The dearth of capital has hampered development in the power sector and spelled trouble for society, the business environment, as well as other industries considered as competitive and beneficial to economic growth.

Lan remarks that Vietnam’s use of foreign loans to help Vinashin, which has long been saddled with inefficient capital use, may tarnish the country’s credibility as a debtor. “Foreign lenders may think that the loans will benefit particular interest groups rather than the public or the State. This is at odds with lenders’ goal of ensuring social security,” she says.

Tags: Vietnam shipping industry, Vinashin restructure