Communist Viet economy not in a rosy state

Prime Minister Nguyen Tan Dung of Vietnam at the 20th Association of South East Asia Nations summit in Phnom Penh, Cambodia, on Tuesday.

April 3, 2012
By JAMES HOOKWAY
The Wall Street Journal

PHNOM PENH—Vietnam Prime Minister Nguyen Tan Dung said he is stepping up plans to revamp the Communist-led country's bloated state sector that have led to a series of debilitating credit-rating downgrades and pressured Vietnam's fragile currency.

In written responses to questions posed by The Wall Street Journal on the sidelines of a regional summit in Cambodia, Mr. Dung said he plans to push Vietnam's state-owned enterprises into closer competition with the private sector to make them more efficient, and to revive a stalled series of partial privatizations, a process known in Vietnam as "equitization." Creating a more level playing field between the private and state sectors, Mr. Dung said, "is one of the key components of economic restructuring."

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Vietnam's once-booming economy has foundered in recent years, thrown off balance in part by burgeoning debts at some of its sprawling state-owned enterprises. Mr. Dung's government previously had adopted a policy of encouraging Vietnam's big state-owned firms—which control about 40% of the country's economic output—to diversify into new industries and provide a powerful counterweight to a deluge of foreign investment into the nation.

The strategy in many cases backfired. In some instances, state-owned enterprises took on unmanageable levels of debt or invested in businesses that they didn't fully understand. Shipbuilder Vinashin, for instance, nearly collapsed under $4.4 billion in debts in the summer of 2010 and later defaulted on some of its foreign obligations after moving into businesses as diverse as brewing and tourist resorts.

That debacle forced Mr. Dung, a 62-year-old former security chief who was appointed Vietnam's top day-to-day executive in 2006, to acknowledge his mistakes in a televised apology to the Vietnam's parliament. One lawmaker demanded an unprecedented vote of no confidence, while Mr. Dung narrowly survived a behind-the-scenes leadership challenge at the Communist Party Congress in Hanoi in early 2011.

The Vinashin crisis also ushered in a rethink of Vietnam and its state-dominated economy among investors.

International credit ratings firms such as Fitch Ratings, Standard and Poor's and Moody's MCO +0.57%Investor Service cut Vietnam's debt ratings, while investors abandoned the country's stock market. The crisis badly tarnished Vietnam's international reputation. It put downward pressure on Vietnam's dong currency, and helped drive up inflation, which only now is dropping back to the 14% on-year mark, as of March, after peaking at 28% in August last year.

On Friday, a Vietnamese court sentenced Vinashin's former chairman and chief executive, Pham Thanh Binh, to 20 years in prison for ignoring regulations governing the management of state-owned enterprises in order to speed up some of the shipbuilder's ill-fated projects. Mr. Binh said he was a victim of the global economic slump in 2008, rather than any conscious disregard for Vietnam's rules.

Eight other former executives at the firm, formally known as Vietnam Shipbuilding Industry Group, were also sentenced to lengthy prison terms, and Vietnam's government is taking additional steps to stop the rot at some other state-owned enterprises.

Mr. Dung recently removed the chief of Vietnam's state electricity generator after the company diversified into the mobile phone business instead of focusing on building up the country's sorely depleted generation capacity. Successful state firms such as Vietnam Oil & Gas, or PetroVietnam, too, have pulled out of high-profile real-estate ventures as the government recalibrates the state-owned enterprises' role in Vietnam's economy.

In his comments to The Wall Street Journal, Vietnam's premier said his government will now focus on determining the scope and scale of the country's state sector.

"We will define the role and functions of the state and state-owned enterprises in a socialist-oriented market economy," Mr. Dung said, adding that the government will "accelerate equitization to diversify the ownership of state-owned businesses."

Vietnam's leader said his goal is to "retain only a number of key state-owned enterprises in certain industries."

There are signs now that Vietnam is regaining confidence as inflation recedes. The country's central bank recently eased back on interest rates in order to stimulate more growth, while investors have been cautiously returning to Vietnam's equity markets. Over the weekend, Vietnam and the European Union also agreed to begin talks on developing a free-trade agreement.

Mr. Dung told The Wall Street Journal that closer economic integration within Southeast Asia will also help spur on Vietnam's economy.

He predicted that plans to drop tariffs in the Association of Southeast Asian Nations in 2015 will encourage a fresh surge of foreign direct investment into the region, and will make it easier for Asean-based nations to invest more heavily in each other's economies—something which Mr. Dung said is "particularly significant" for the region's less-developed economies.

—Nguyen Anh Thu in Hanoi contributed to this article.