As a consequence, the ratio of average debt to owners’ net equity of state-owned enterprises (SOEs) in 2011 reached 1.77, an extremely high figure compared to the US ratio of 0.7. Thirty SOEs had debt to equity ratios exceeding 3, and eight had ratios exceeding 10.
The strategy of SOE-based growth was championed by Prime Minister Nguyen Tan Dung, who set a target growth rate of 9.5 per cent per year from 2008 on. In service of that target, money supply was increased by 46 per cent and as much as 60 per cent of bank credit was allocated to SOEs — even though they accounted for only approximately 27 per cent of GDP. These actions immediately generated high inflation, which reached 23.1 per cent in 2008. But even though the Political Bureau of the Communist Party of Vietnam demanded inflation be dealt with, when it subsided to 5.9 per cent Nguyen pushed again for a high growth target — over the objection of many economists — arguing that stimulus was necessary to counter the effects of the global financial crisis.
When Nguyen prevailed, inflation increased with a vengeance, reaching 10 per cent in 2010 and then 18.7 per cent in 2011. At the same time, GDP growth slowed down: Vietnam grew at an annual rate of less than 6 per cent in 2011–12, much slower than the average of 8 per cent before Dung took over the prime ministership. This slowdown occurred even though Vietnam devoted as much as 40 per cent of GDP to investment, one of the highest rates in the world.
One problem is that the nation’s banking system has been ordered to serve SOEs’ financial needs, but the money has not been well spent. For example, Vinashin, a state-owned shipbuilding conglomerate that went bankrupt in 2010, set up almost 200 subsidiaries throughout the country, including a bank, a stockbroking firm, financial leasing companies, and many real estate and construction companies. Government officials and party members siphoned off money from these companies to benefit friends and relatives at the expense of the peasants, whose land was confiscated with abysmal compensation. At the time of its bankruptcy, Vinashin owed more than US$4 billion to its creditors. Vinashin is only one example among many.
Before the reforms in 1990, there were five banks in Vietnam, all of which were state-owned. Now, there are 41 private banks and 53 branches of foreign banks. In 2012 state-owned banks owned only 43 per cent of the total assets. This is a major accomplishment in the process of privatisation, although crony capitalism has brought the economy to the brink of collapse, undermining the achievements of reform.
Vietnam’s banks are so precarious because they were built on quicksand. Vietnam’s Law on Credit Institutions of 2010 simply copied the lax US law now widely believed to be at least partially responsible for the financial debacle in 2008. Commercial banks are allowed to engage in commercial banking, investment banking and insurance. Non-financial corporations are allowed to own banks and vice versa. In addition, banks can spin off companies issuing and trading stocks, bonds and financial derivatives. Banks are allowed to spend up to 40 per cent of their net equity to purchase shares of other corporations, and banks and corporations are allowed to own up to 20 per cent of other banks. Not only banks but banks’ shareholders are allowed to receive ‘investment in trust’ (ủy thác đầu tư) from customers that they themselves can also entrust to others.
This strange concept allows banks to engage in high-risk activities with depositors’ money. A case in point was the action of a banker, Nguyen Duc Kien, who set up two non-financial companies to issue private bonds to the bank he had shares in and of which he was a founding member. He then used the money to buy shares of other banks; with these new shares as collateral he again bought a 33 per cent stake in another bank.
The ‘anything goes’ attitude to support SOEs and their backyard affiliates is dangerous, to say the least. At least 8.6 per cent of outstanding loans of the banking system (this is a conservative figure, it could be as high as 14 per cent by some estimates) are bad debts. The rules are so lax that few reputable banks have a capital ratio (without risk-weighing) of less than 6 per cent.
Vietnam’s banking has to be reformed if the country wants to achieve a more stable economic development.
Vu Quang Viet is currently Consultant on Economic Statistics and was formerly Chief of National Accounts Statistics at the UN. His latest publication, ‘The Economic Crisis and the Financial System: a case study of Vietnam and the US’, was published in Vietnamese on Thời Đại Mới.