Complacency threatens Vietnam reforms

The government has only a limited window to implement meaningful reforms before investor interest fades.

Bui Quang Vinh, Vietnam’s minister of planning and investment, said in November that final conditions for making listed companies eligible to scrap foreign-ownership limits would be published by the end of December.

It didn’t happen.

Investors are angry but not surprised. Hanoi is notorious for announcing grand reforms that get strangled at the implementation level. Foreign ownership is a classic example. The prime minister, Nguyen Tan Dung, decreed in June that the 49% limit on foreign ownership of public companies would be scrapped. Instead, each company’s board of directors could vote to change the limit to any amount or abolish them.

Investors welcomed the surprise announcement. Kevin Snowball, CEO at PXP Asset Management in Ho Chi Minh City, called it a “recognition that without a bold move to real reform, this market will remain stuck in institutional investor purgatory until the dusk of time”.

This advance was almost immediately hedged by line ministries and securities regulators, however.

In September new rules were introduced stating FOL limits would be reviewed for sensitive sectors and be subject to individual ministry guidelines. For example, Vinamilk, a highly regarded private company that is 45% owned by the state, saw its stock rise on rumors that its existing foreign stakeholders might now seek to acquire controlling stakes. But regulators suggest that such companies could see foreign limits retained by, say, the agriculture ministry, if it wanted to declare retaining state ownership were a matter of national security.

Although the Vinamilk example is speculative, the September warning was then followed by the issuance of a ridiculous negative list of more than 200 “sectors” deemed too sensitive to fall under foreign sway, giving investors the sense that various ministries were finding any excuse to prevent foreigners from buying their companies.

Privatisation, another priority for the prime minister, has likewise suffered from a poor record of follow-through. Dung has repeatedly asserted big state-owned companies such as MobiFone, Vinatex and large subsidiaries of PetroVietnam would be sold off, only for the company’s management to delay and prevaricate, usually in cahoots with their ministries.

When a big company finally does get privatised, the result is hardly to the benefit of investors. Vietnam Air did officially transform into a joint-stock company in 2015, but with a free float of only 3%. Such hesitance is driven by the fear among ministries of selling the crown jewels for a song, or being ripped off by savvy foreign fund managers and bankers. Such tactics could be excused if they were used to test market prices in the run-up to a big follow-on placement.

But such placements never take place. Indeed, big SOEs are often ‘equitised’ but remain in a Vietnamese market limbo in which they are not allowed to actually trade on a stock exchange.

The government is not a monolith. It is a seething cauldron of factions and vested interests. Power in Vietnam is deliberately kept diffuse. The prime minister’s office is only one of four main sources of authority, along with the Communist Party secretary general, the president, and the chairman of the legislature’s standing committee. The military and various ministries such as energy and agriculture, or provincial authorities, also enjoy a high level of autonomy. Few of these people have much personally to gain by liberalising Vietnamese finance or private enterprise. There are also some figures that are true believers in the state continuing to command the heights of the economy.

But the Party leadership also learned a lesson in 2010 when economic mismanagement nearly sank the country – and endangered the Party’s credibility. A vibrant, growing economy is also necessary to sustain Vietnam’s political independence vis-à-vis China, its historical rival.

There are therefore compelling reasons behind the prime minister’s efforts to drag Vietnam’s economy into something like modernity. However the urgency has dissipated. The currency, inflation, interest rates, bank lending, real estate prices – everything has stabilised. Foreign direct investment has not only kept the economy afloat in the hard times, but is now turbocharging Vietnam towards faster growth; the country is a clear winner from the completion of the Trans-Pacific Partnership trade deal with the US and other Pacific Rim countries.

In such an environment, authorities seem to have lost focus on ensuring financial reforms are passed and acted upon. They are confident in the economy’s growth, in foreign direct investment, and in the appetite among foreign portfolio investors for a slice of Vietnam’s rising consumer market.

Now is the time to get these reforms implemented, and implemented well. Now is the time to foster a broader market, improve corporate governance and transparency, and ensure a more level playing field for all investors. Making capital work more efficiently to support the country’s dynamic private sector can make the difference between the current 6.5% GDP growth rate and hitting double digits.

Terence Mahony, vice chairman of VinaCapital, said: “If Vietnam can grow up, be a little less corrupt, and a little more welcoming of foreign ownership, it has a good future.”

But if the country’s ruling elite settles on more delays and half-baked reforms, it will fail to develop the capital markets required to sustain its private enterprise. It will see capital start to dwindle as interest rates in the US rise, especially if China avoids a hard landing.

Small economies are always at the mercy of global events, some of which are quite predictable. They are also vulnerable to investors reacting badly to domestic decisions. The Vietnamese leadership will embark on a quinquennial leadership shuffle. Dung is expected to defy the mandatory retirement age and become Party secretary-general, with one of his henchmen becoming prime minister. That would be welcome, as Dung is a reformer, but if a left-wing hardliner becomes PM, it could upset people’s expectations. The overall direction for the country is not in doubt, but the tempo certainly could change.

Vietnam may find that if investors can’t get the kind of access required, then when the hard times inevitably return, the leadership’s range of choices will be narrow and unpalatable.


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