Vietnam: SOEs still too big to fail

In the draft of Vietnam’s socio-economic development strategy for 2011-2020, Prime Minister Nguyen Tan Dung acknowledges the need to reform the country’s clunky state-owned enterprises.

In the draft of Vietnam’s socio-economic development strategy for 2011-2020, Prime Minister Nguyen Tan Dung acknowledges the need to reform the country’s clunky state-owned enterprises.

He even goes so far as to suggest that the country needs to nurture companies “with strong brand recognition” – not the sort of buzzword normally associated with top Communist Party officials.

The concern about the profusion of inefficient yet stifling SOEs, which have grown on the back of easy credit from state banks, is nothing new. But it has been brought to the fore by the near-bankruptcy of Vinashin, a government-owned shipping company that racked up debts of more than US$4bn as it expanded far beyond its original remit.

Ahead of a key Communist Party congress in January, when delegates will decide on the leadership and policy direction for the next five years, a number of officials have started to give the SOE reform agenda an extra push.

“Corporate governance in state-owned companies is an area that has been neglected,” said Le Song Lai, a director of the State Capital Investment Corporation, which manages the government’s stakes in SOEs, at a conference in Ho Chi Minh City on Wednesday, according to Bloomberg. “After incidents like Vinashin, the need for faster equitisation becomes more visible than ever.” (Equitisation is the Vietnamese government’s preferred euphemism for privitisation.)

That sentiment was echoed in an article in Thursday’s edition of the Viet Nam News, the government’s main English language mouthpiece, entitled “Vinashin collapse gives State a lesson“.

The need for reform was also emphasised by the World Bank this week. The organisation noted in its latest review of the Vietnamese economy that “Vietnam’s state‐owned enterprises have played an important role in the country’s progress, but have also become a source of long‐term vulnerabilities.” From the World Bank’s review:

Despite the government’s ambition to complete the transition to a market economy with a socialist orientation and to develop the private sector, Vietnam’s economy is still dominated by state‐owned enterprises (SOEs). In 2007, Vietnam adopted a strategy to exploit ‘economies of scale in production and technology’ by transforming large SOEs to “Economic Groups (EGs)” and gave them first mover advantage in sectors with increasing returns to scale.

While some of the EGs have served the cause of their existence (e.g., VNPT, EVN, Petro Vietnam, etc.), many have also contributed to magnify the economic instability. During the overheating in late‐2007 and early‐2008, the EGs invested heavily in the financial sector and real estate, exacerbating the asset price bubbles. In late‐2009 and early‐2010, some of them speculated against the Vietnamese Dong. Recently, it was revealed that Vinashin (an EG involved in ship‐building) has used resources obtained through government guarantees to invest in its non‐core activities, falsified financial reports, and is on the verge of default.

The message seems to be clear from all sides. But the SOEs represent a huge vested interest that is deeply entrenched within Vietnam’s opaque political system. Even if the will for reform is truly there, it is likely to be a slow process. In the meantime, one can expect to hear more buzzwords from the government before seeing any real change.- Financial Times

Tags: Vietnam companies, Vietnam enterprises, Vietnam SOEs