Having been one the fastest growing economies in Asia over the last decade or so, recently Vietnam has been experiencing a number of serious headwinds, raising questions about the government’s ability to manage the situation the economy now finds itself in.
On Thursday last week, Standard & Poor lowered Vietnam’s sovereign credit rating, citing concerns about the nation’s banks. The Wall Street Journal reports S&P said the move also reflects Vietnam’s low-income economy, developing financial system and other issues that increase its vulnerability. It said Vietnam’s banking system is susceptible to a financial or economic shock that could significantly test government resources as it will increase borrowing costs for both the government and enterprise.
S&P Thursday lowered Vietnam’s foreign currency rating to BB- from BB and the local currency rating to BB from BB+, also maintained a negative outlook on the Southeast Asian nation’s long-term credit ratings. It affirmed the short-term ratings at B and the recovery rating at 3. S&P credit analyst Kim Eng Tan warned that the firm could lower Vietnam’s sovereign credit ratings if its financial stability weakens further or if lending growth outpaces economic growth.
Moody’s, citing rising inflation, along with the risk of a balance of payments crisis and the debts of nearly-bankrupt state-owned shipbuilder Vinashin, also downgraded Hanoi’s bond rating this month. Bloomberg reported Vietnam’s five-year bonds dropped the most in a month last week as inflation accelerated to a 22-month high.
This follows The Wall Street Journal reporting on Friday that beleaguered Vietnamese shipbuilder Vinashin has defaulted on a loan to international lenders and has told them it will make only interest payments.
The Vietnamese government has been struggling to restrain inflation that’s being stoked by economic expansion, higher food costs and a weaker currency. Growth in consumer prices quickened to 11.75% in December, the fastest pace since February 2009, according to figures from the General Statistics Office (GSO) in Hanoi.
The government has devalued the dong three times since November last year. The currency’s depreciation is playing a “significant role” in the acceleration of inflation, according to the International Monetary Fund. The central bank raised interest rates on Nov 5th. Average dong deposit rates are 12.44% while average lending rates are 14.96%.
S&P quotes an analyst saying Vietnam’s central bank needs to have a “clear and consistent” message on monetary policy to re-establish its credibility.
The GSO said consumer prices would likely rise 9.2% in 2010, well up from 6.88% last year and higher than the government’s target ceiling of eight per cent. In December alone, prices rose 11.8 per cent against the same month last year and two percent from November, according to the GSO.
The hike has been led by soaring food costs. Official data shows food prices were up 10.7 per cent year on year in December, and 3.3 per cent higher from the previous month.
The World Bank said in a recent report: “Rising prices of commodities and manufacturing products remain the key drivers of the recent hike in the inflation rate.” The Bank has also said that inflation is historically high in Vietnam due to the government’s traditional policy of emphasising growth over macroeconomic stability.
At an annual meeting of donors earlier this month, Japanese ambassador Yasuaki Tanizaki spoke of “growing concern” at the country’s currency and price rises (Japan is Vietnam’s biggest bilateral donor).
“It’s a priority for Vietnam to adopt effective measures to restore public confidence in (the) dong and improve communications with the market to stabilise its currency,” he said. The dong has been devalued three times since late last year and has lost nearly a third of its value against the US dollar over the past three years, according to a recent World Bank report.
Vietnam remains burdened by entrenched inflation—which reached 11.09% in November, the fastest pace in 20 months—and a trade deficit which the government expects to reach $12 billion this year. Combined, they have undermined the Vietnamese dong and triggered three devaluations of the local currency since late last year.
After the State Bank of Vietnam lifted its benchmark rate on dong-denominated loans by one percentage point last month, the government has unveiled a series of new policies to ease the pressure, but to little effect. Economists say the country’s worsening problems, and the impact they could have on its dwindling currency, might also worry textile and agricultural producers in countries like Thailand and Indonesia which compete with Vietnam in those sectors.
Vinashin, formally known as Vietnam Shipbuilding Industry Group, was among a series of state-owned conglomerates that expanded rapidly in recent years in a government-led effort to keep key sectors of the Vietnamese government in state hands. Because the financially strapped company has state backing, lenders consider the dispute a litmus test of the creditworthiness of Vietnam’s sprawling state enterprises as well as its overall economy.
Vinashin borrowed aggressively with the encouragement of the government in the hope of becoming a global player in the shipbuilding industry. The global financial crisis hit Vinashin hard when clients cancelled billions of dollars in orders, leaving the company on the brink of collapse this summer with around $4.4 billion in debts.
In defaulting on the debt, Vinashin has added to a catalog of problems afflicting Vietnam. Some analysts see Vinashin’s default as potentially a make-or-break moment for Vietnam. By choosing not to bail out the company, says Kevin Grice, an economist with London-based Capital Economics, Vietnam’s government is sending a message to other large state-owned enterprises to put their own houses in order and to root out the inefficiency that plagues the state sector here.
Reducing the moral hazard might be on the government’s mind, but so too might be Vietnam’s paltry foreign reserves. The $14 billion the IMF reported Vietnam as having at the end of September is “barely enough to cover short-term debt of around $6 billion to $7 billion and a wide trade deficit of $12 billion” that the government projects for this year, notes Ju Wang, a credit-markets strategist with UBS AG in Singapore.
The Asian Development Bank foresees risks centred on any premature easing of monetary or fiscal policies, or a perception of looser policy by financial markets and domestic investors.
“An early easing, or the perception of a relaxation, could derail the macroeconomic stabilization efforts, putting inflation on an upward trajectory and pressure on external accounts,” it warns.
The World Bank and the IMF, among others, are urging the country’s leadership to put the brakes on rapid economic growth and focus instead on curbing inflation and buttressing the dong, which has also been taking a beating in recent weeks with the black-market rate for dollars sometimes reaching 21,500 dong compared with Friday’s official rate of 18,498 dong—a premium of around 15%.
The Agency France-Presse reports rising food prices are expected to push Vietnam’s inflation rate to more than nine per cent this year, data showed Friday, piling pressure on the country’s leaders to restore economic stability.
Meanwhile, the AFP also reported on the weekend that around 24,000 workers at two South Korean plants in Vietnam have gone on strike over pay, bonuses and lunar new year holidays. In principle, workers need permission 20 days ahead of time before going on strike in Vietnam, where all labour confederations are state-controlled.
At the Tae Kwang Vina footware company in southern Dong Nai province, almost 20,000 employees refused to work Thursday and Friday, a company employee told AFP, declining to be named. She said management had agreed that the Tet lunar new year holidays could last eight days “but have not said anything regarding the requests for an increase in basic salary and Tet bonus”.
Tet falls on February 3 in 2011 and is the most important holiday for Vietnamese people. The employee said basic salary at the South Korean owned plant is now 1.3 million dong a month (65 dollars). This is roughly in line with what the government says is the country’s average monthly income of 1.365 million dong.
At a second South Korean-owned factory, also in Dong Nai province, 4,000 workers from the Namyang garment company did not turn up for work on Thursday in a demand for higher wages, Thanh Nien newspaper said.
At the Communist Party’s Congress which begins Jan 11th, Vietnam has a chance to change course and adopt a more prudent growth trajectory. The congress is set to select a new party chief and also recommend a new president of the country’s rubber-stamp legislature while determining whether the key figure, the premier, Mr. Dung, keeps his job for a second, five-year term. It will also set the country’s economic-policy direction for the next five years.
Those familiar with the party’s policy discussions, however, say the country’s top rulers are unwilling to make a break from their high-growth policies. “The changes at the top—if there are any—won’t mean a thing if the policies remain the same,” says a person with knowledge of the deliberations. Vietnam’s leadership seem unable to learn the lessons of loose credit policies from earlier crises in the region, with the central bank estimating credit will expand 28% this year from 2009.
Economists say part of the problem is that the party promotes officials based on their ability to hit growth targets, fill quotas and complete five-year plans. Often they hit these targets with little regard for the inflationary consequences or the spread of corruption that many analysts say is endemic here.