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Vietnam Gets Tough on State Firms in Growth Push: Southeast Asia

Vietnam plans tougher rules to accelerate a revamp of state-owned enterprises, including firing chief executives, adding to efforts to clean up bad debt in the banking industry and revive the economy.

The finance ministry is drafting “strong and suitable” measures to force state companies to sell stakes in non-core businesses, Dang Quyet Tien, deputy general director of the ministry’s corporate finance department, said in an interview in Hanoi yesterday. An asset management company run by the central bank begins operations tomorrow to help clean up almost $5 billion of bad debt.

Vietnam’s government plans to complete a revamp of state enterprises by 2015 as it struggles to revive the economy, which expanded at the slowest pace since at least 2005 last year. Delayed structural reforms of banks and state companies could undermine investors’ confidence and worsen the nation’s growth prospects, the World Bank said in a report this month.

“SOEs and banks are large parts of the economy, so if you don’t make them more efficient and stronger, the economy will not grow as quickly,” said Matt Hildebrandt, Singapore-based economist at JPMorgan Chase & Co. “Even in a really well-implemented bank recapitalization plan, it would always take some time. Fixing SOEs or deleveraging them will be a multi-year, maybe decades-long process.”

The dong traded little changed at 21,233 per dollar as of 12 p.m. in Hanoi, according to prices from banks, compiled by Bloomberg. The benchmark VN Index rose for the first time in three days, adding 0.2 percent.

Slowing Growth

Prime Minister Nguyen Tan Dung is under pressure to rejuvenate economic growth that slowed to 4.9 percent in the first half, after one of the highest bad-debt levels in Southeast Asia crimped credit to businesses. The International Monetary Fund has lowered its projection for the nation’s growth this year to 5.2 percent from 5.8 percent.

Vietnam Shipbuilding Industry Group, the state-run firm known as Vinashin that had planned to build and export $1 billion of ships in 2009, almost collapsed in 2010 because it over-diversified and failed to manage its cash flow and debt properly, according to the country’s transport ministry.

After resolving to revamp state-owned companies, Dung approved a master plan in February to spur them to focus on their core businesses and accelerate public share sales to raise competitiveness and efficiency. State companies’ non-core investments, such as property and stocks, account for as much as 12 percent of their registered capital, Deputy State Auditor Le Minh Khai estimated last year.

Urgent Tasks

State-owned companies use up about 50 percent of state investment, tie up 60 percent of bank lending and account for more than half of the nation’s bad debt, according to Deputy Finance Minister Truong Chi Trung. Restructuring the state sector is one of the “most crucial and urgent tasks” to reform the economy, he said in a February interview.

Progress has been limited, the World Bank said in its report, citing a target of selling shares in 93 state companies last year against which “it seems” shares were only sold in 12. Vietnam Electricity, the national utility known as EVN, will auction 25.2 million shares in An Binh Joint-Stock Commercial Bank on Aug. 9, a year after the government ordered the sale.

The government’s strategy for cleaning up bad debt also “stands little chance of being effective in isolation,” and needs to be part of a broader financial restructuring such as reforming state-owned companies, given banks’ exposure to loans to such companies, the World Bank said.

Tougher Measures

“Stake sales in state companies have dragged on for so long because of large investment costs made years ago,” Tien said in the interview. “They don’t want to sell now” because declines in share prices and property values since then will result in losses, he said.

The finance ministry’s proposal, which will include the removal of chief executives should they fail to meet timelines for share sales, will be submitted to the prime minister for discussion with the cabinet in August, Tien said.

“We need this kind of strong administrative measure to force leaders of state-owned companies to actually move ahead,” he said. “The companies have been way too slow, and now they must take action or face punishment.”

The asset management company begins operations tomorrow, and will acquire non-performing loans from lenders. Bad debt stood at 7.8 percent of outstanding loans at the end of last year, the central bank estimated.

Lenders with bad-debt ratios of 3 percent and above will be required to sell their non-performing loans to the asset management company, according to a May 22 government statement. The company will initially have registered capital of 500 billion dong ($24 million) and resolve as much as 70 trillion dong of bad debt this year, according to the central bank.

“The current mandate of the AMC falls short of cleaning the banks’ balance sheets,” said Eugenia Fabon Victorino, a Singapore-based economist at Australia & New Zealand Banking Ltd., which yesterday cut its 2013 growth forecast to 5.1 percent from 5.6 percent. “It would take some time before the structural challenges are solved. Revamping the SOEs and dealing with low credit growth are necessary, but not sufficient.”

Bloomberg News