Vietnam - Vietnam, wracked by economic woes, plans new reforms

After four years of economic instability, Vietnam is embarking on reforms some believe could be its most significant since steps started in 1986 that ended stifling central planning and, eventually, turned the war-torn country into a tiger.

However, there's substantial skepticism that policymakers can fend off resistance to major change from state-owned companies and other interest groups, including private conglomerates, whose influence has surged.

Months of heated discussion have produced a consensus that Vietnam, wracked by Asia's worst inflation and other woes, needs to change tack, as it did 25 years ago when the "Doi Moi" (renovation) policy took flight.

"It's not just talk anymore. This is serious business now," Vice Minister of Planning and Investment Dang Huy Dong told Reuters. "We've gone through careful analysis, painful analysis, to see where the shortcomings are and areas for improvement."

It's far from certain, though, that the government will pursue reforms that are broad enough and deep enough to fix debt-ridden state banks and rein in inefficient state enterprises (SOEs) such as Vietnam Shipbuilding Industry Group, or Vinashin, which embarrassingly defaulted last year.

"The Vietnamese economy, once again, is at a crossroads," said Le Dang Doanh, a reform-minded economist who has advised current and former leaders.

And this time, in Doanh's view, moving decisively down a reform path is "more difficult because it touches powerful interest groups that are operating behind the scenes."

SHIFTING GROWTH MODEL

At a crossroads in the mid-1980s when the economy was moribund, liberalisation that unleashed individuals and industries made Vietnam into a rising star. But in recent years, the star has burned out, and the country has evolved from one of Asia's most promising economies into one of the most unstable.

The government hopes to shift its economic growth model away from reliance on cheap labor and capital, and has identified three areas of focus -- banks, public spending and SOEs -- but it is not expected to unveil a single "big bang" reform.

Proponents of major change hope it might unfold like Doi Moi did, as a process; Doi Moi was launched in 1986 but did not accelerate until the early 1990s, and over time Vietnam transformed from a post-war basket case to a budding regional powerhouse.

There are optimists who believe Vietnam will make substantive change that undercuts what the World Bank calls "recurring and increasingly severe" economic instability.

World Bank economist Deepak Mishra, who describes Vietnam as in "unchartered territory," is encouraged by how much officials are talking about change.

"Nobody has seen anything like this in the recent past," Mishra said. "My hunch is we're not going to see massive clarity about the future course of action immediately, but after five or 10 years when we look back we may say, yeah, there was a real change that started in 2011."

Economists agree about what the state should do, said Pham Chi Lan, a respected economist who has been invited by top leaders in recent weeks to discuss the country's woes.

But then there's the big question: how far will the leadership go in implementing an agenda of major structural change?

"If the leaders accept this," said Lan, "they will be leading this country to a second Doi Moi."

REFORM OR STAY BEHIND

There is little dispute about the challenges.

Inflation has surged well above 20 percent twice in the past three years while foreign exchange reserves have slumped and the Vietnamese dong has lost more than 20 percent against the dollar. Vietnam's external debt has risen above its peers to more than 40 percent of gross domestic product (GDP) while credit-to-GDP has soared to 125 percent.

Foreign direct investment pledges have slumped, dropping 22 percent this year so far from the same part in 2010. Last year, all three major ratings agencies -- Fitch, Moody's and Standard & Poor's -- downgraded the country of nearly 90 million people.

Experts say the root of Vietnam's boom-to-bust dilemma lies in excessive investment in inefficient state-owned corporations, which suck up capital and have diversified wildly from their core competencies into sectors such as property and stocks -- both of which have faltered.

Growth since Doi Moi has been based on increasing capital investment and labor, but that is increasingly less able to drive the economy, said Nguyen Dinh Cung, deputy head of the government's top think tank, in a September report considered a cornerstone of the government's reform discussions.

"Our economy is no longer able to maintain a high growth rate like the years before," wrote Cung of the Central Institute for Economic Management (CIEM).

In July, a once-in-five-years leadership reshuffle appears to have cleared the way for reform.

"We have to reform," said Cao Si Kiem, a member of the National Assembly's economic committee and a former central bank governor. "If not, it would be dangerous. The economy would be stuck behind and the faith of the people would decrease."

RESTORING PEOPLE'S FAITH

Kiem said the Politburo, the 14-man group at the pinnacle of political power, has concluded reform is needed to "restore people's faith." Party leader Nguyen Phu Trong gave the strongest and most public signal of top-level support for it in an October 10 speech reciting a litany of problems.

Trong blamed global conditions as well as "shortcomings in the economy, an ineffective growth model and an outdated economic mechanism."

"We must restructure the economy along with renovating the growth model," he said, laying out the three priorities: public investment, finance and state-owned enterprises.

Tran Dinh Thien, director of the Vietnam Economic Research Institute at the state-run Vietnam Academy of Social Sciences, said that speech amounted to "an announcement of action, that the whole party has agreed on restructuring of the economy."

Talk on reform has advanced since the summer. Some proposals on the table have the potential to fundamentally change the relationship between government and business and reshape the economy.

Government ministries have been told how to restructure themselves, and SOEs have been told to shrink holdings in non-core businesses.

In September, the Finance Ministry proposed that the government compel state-owned firms to return 50 percent of their profits to the state and slash investments in non-core fields including banking, insurance and securities to 10 percent from up to 30 percent.

CORPORATE GOVERNANCE

Prime Minister Nguyen Tan Dung asked the Ministry of Planning and Investment to draft a plan to separate ownership and management at the biggest SOEs, such as oil and gas group Petrovietnam.

Lan, the economist invited to talk with leaders, said "It's a strong plan in which state-owned companies have to follow OECD standards of corporate governance. It's also modeled on China in having clear criteria of productivity and technology advancement, instead of investment and revenue."

Officials have signaled that the long-clogged pipeline of initial public offerings will reopen, and chunks of major SOEs not previously on the block will be sold, although timing is unclear given poor market conditions.

The government is also considering selling SOEs in industries where private and foreign-invested businesses are performing well, including seafood, textiles and coffee while retaining ownership in transport, oil and gas, and power.

On October 24, the prime minister ordered creation of an advisory committee for monetary and fiscal policy.

Also, the State Bank of Vietnam is working to avert a banking crisis by orchestrating consolidation of the crowded sector. Prime Minister Dung has asked the SBV to draft a plan for restructuring the commercial banking system.

FOOT-DRAGGING

Whether the initiatives bear fruit may hinge on how united the leadership is and how much interest groups such as SOEs drag their feet.

Trong, the party leader, is a clear supporter of action. Sources say President Truong Tan Sang, another party heavyweight, has also been talking up a new reform agenda.

Prime Minister Dung has met domestic and international economists. Attendees say the meetings have been unusually critical and candid, and that Dung demonstrates understanding of the problems.

Sources say one close Dung advisor now is Truong Dinh Tuyen, a reform-minded former trade minister nicknamed Mr. WTO for his role negotiating Vietnam's entry into the World Trade Organization in 2006.

Some critics, however, remain unconvinced about the convictions of Dung, whose economic management during his first five-year term helped create the current conundrum.

Analysts including Vietnam watcher Carl Thayer of the University of New South Wales say Dung emerged from the reshuffle as the most influential political figure.

Doanh, the economist who has given advice, said the reform plan that party leader Trong outlined took a "harder and more straightforward look" at shortcomings than a government report to the Central Committee -- hinting at a possible wrangle between the government and party.

'VERY BLURRED' REPORT

The government's report was "very blurred" on SOE reform, a critical piece of any true reform agenda, Doanh said.

The state sector has been shrinking and now accounts for about 40 percent of the economy, but it consumes an outsized piece of the investment pie.

As an indicator of where things could go, the report by Cung of CIEM proposed a complete cut-off of SOEs from special privileges, forcing them to live or die by the market.

"If they make losses and default, they should go bankrupt like other businesses. The State should provide no guarantees or debt payments," wrote Cung.

But talk is cheap, says Doanh. He and other analysts worry that conditions may not be "painful" enough for leaders to take truly bold steps.

"Sometimes you hear strong rhetoric, but what we need is action, not rhetoric," said the former official.

Entrenched interests may already be slowing things down.

The Ministry of Planning and Investment said in late October it had yet to complete its SOE reform proposal because it could not get data from the companies.

SOEs are also fighting the finance ministry's plan to restrict their investment in banking, insurance and securities companies, state media have reported.

"The difficulty is that the reforms directly impact the interests of some forces that the governing mechanism relies on," said Thien of the Vietnam Economic Research Institute, who's on a council advising the government on financial policy. "But not restructuring the economy is not an option."

Reuters

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