Vietnam speeds up privatization as risks subside


Jeremy Weltman
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The country will remain closed politically, but the authorities seem more determined than ever to address the fiscal problem, and that can only further improve an investor outlook underpinned by market-based economic reforms.

Vietnam’s economy is gathering pace around its political rigidity

Vietnam was one of the more notable improvers in Euromoney’s risk survey last year among the emerging and frontier markets across Asia.

The country gained a point overall in the survey’s scoring mechanism, resulting in a total risk score of 43.0 points from a maximum 100.

Analysts had previously downgraded Vietnam mainly due to heightened political risk in connection with a power struggle in the Communist Party of Vietnam (CPV).

That was won by general secretary Nguyen Phu Trong forcing out prime minister Nguyen Tan Dung, a political rival, and although the country has seen more repression, an ensuing corruption purge and sweeping overhaul of the civil service promises a more efficiently run bureaucracy.

As for the main credit rating agencies, Standard & Poor’s has maintained its BB- stable rating since 2012, but last year Fitch altered its BB- rating from stable to positive and Moody’s actioned a similar change on its lower B1 rating.

A mid-ranging tier-four borrower in Euromoney’s five-category split, Vietnam is broadly equivalent to a higher BB rating, especially since Azerbaijan (on BB+/Ba2) is roughly three points worse off and six places lower in ECR’s global rankings.

Apart from a comparatively high score for government stability stemming from the lack of opposition to single party rule, Vietnam still scores lowly on other political indicators, although scores for the regulatory and policymaking environment have improved lately.

That is because this year is likely to be a crucial one for economic reform, and particularly the privatization of state-owned enterprises (SOEs) the CPV has identified as crucial to improving efficiency and alleviating the state of its financial burden.

These sales have been delayed for years, but are now prioritized, aided by several regulatory changes. They include stakes in Habeco and Sabeco, two brewers, and in telecoms company MobiFone. A 23% of Vinafood II, a rice exporter, was successfully offloaded this week.

They are among more than 180 SOEs in which shareholdings will be divested, with 64 more identified for IPOs from more than 500 in total to be offered to private investors using either means by 2020.

Economic tiger

Pursuing an export-led strategy modelled on China, the country remains among the fastest-growing in the region.

In its latest Global Economic Prospects, the World Bank identifies Vietnam as one of six countries in East Asia producing real GDP growth of more than 6% this year.

It will be notably stronger than China for the first time in 2018.

Inflation, meanwhile, seems under control, and the State Bank of Vietnam (SBV) is seeking to further lower commercial borrowing rates after having instigated a 50-basis-points reduction in its benchmark rate (to 6.25%) in July, without destabilizing the exchange rate.

Lying 80th out of 186 countries in the rankings, Vietnam’s economic risks have mostly improved, pushing the country up three places from 83rd in 2016.

Rapid economic expansion has improved the scores for GDP growth and employment. A boom in exports and tourism is pointing to 7.4% annual growth for the first quarter of 2018, according to government estimates.

“Export performance has been strong in recent years and the export mix has been gradually moving up to higher value-added goods with electronics overtaking garments,” says survey contributor Markus Böcklinger, a sovereign and country risk analyst with Erste Group Bank.

This growth model is supported by Vietnam being part of the World Trade Organization, the Association of Southeast Asian Nations and the Trans-Pacific Partnership, and having signed free-trade agreements with most major economies.

Böcklinger notes that due to high export earnings the external debt is lower relative to FX earnings than in peer countries and a large share is based on concessional lending from multilateral creditors at favourable terms.

“Considering the size and structure of foreign debt as well as the current account, which should be broadly balanced in the next few years, Vietnam’s external position appears to be sustainable,” he says.

This is despite foreign-exchange reserves of only just above two months of import cover, which are still considered inadequate for an emerging-market economy.

Still, the SBV is quietly building up its FX reserves, which have grown to an all-time high of $60 billion.

Caution warranted

Despite the improving risk score, Vietnam remains well below tier-three status in Euromoney’s survey commensurate with investment grade.

Analysts taking part in the survey remain cautious over bank stability due to a high non-performing loan problem on loans to SOEs, which is no doubt larger than the authorities claim.

The survey score for government finances is low, with a fiscal deficit of 3.7% of GDP targeted for 2018, and a debt burden that is close to the 65% limit determined by the National Assembly, the 500-member unicameral legislature that meets twice per year.

This debt has increased sharply during the past decade owing to sizeable primary budget deficits and is elevated for a frontier market, and unsustainable in the long-run.

Fortunately, the deficits have narrowed from around 6% of GDP in previous years and privatization will bring in a useful stream of receipts.

If the authorities get this right, the country should be able to overcome changing trade regulations to produce decent returns, and while nothing is guaranteed many will agree that Vietnam is worth the risk.