Vietnam's credibility is literally at sea, thanks to state-run Vietnam Shipbuilding Industry Group, better known as Vinashin, which has been lurching from high-profile drama to drama, like a bad soap opera. First, former Vinashin president and chairman Pham Thanh Binh was arrested in July. And, by September, six Vinashin officials had been detained.
The latest news is that Vinashin reportedly asked for a deferral of a $60 million repayment due Monday, the first instalment on a $600 million loan arranged by Credit Suisse in 2007. This came after the chairman of Vinashin signalled last week in the local press that the company was not going to be able to find the money to make the repayment. There was no formal progress yesterday, but Vinashin has reportedly offered to pay interest on the loan payment as part of an attempt to work out a solution with the creditor group. A Credit Suisse spokesman declined to comment.
The government, which is overseeing a restructuring of the company that was established in 1996 to develop a shipbuilding industry, has said Vinashin must settle its own debts -- which total at least 86 trillion dong ($4.4 billion).
The trouble is, this isn't just about one company, it's impacting the nation. Vinashin had already cast the country in a bad light, most notably illustrated on December 15 when Moody's Investors Service cut the Southeast Asian nation's credit rating to B1 from Ba3 citing the risk of a balance of payments crisis. And yesterday the cost of credit default swaps (CDS) on Vietnam's sovereign debt jumped to its highest level in almost 18 months as investors sought to hedge their Vinashin exposure.
Vietnam watchers have been wringing their hands over the whole mess, noting that the government seems intent on investigating a handful, but not sorting out a debt that could poison other companies simply by the association of coming from the same country.
As Moody's noted when it announced its downgrade: "An unwillingness to support a seemingly strategic company, which was the sole beneficiary of Vietnam's initial global bond issuance in 2007, raises questions on the health of the public enterprise sector at large, and on the adequacy of official holdings of foreign exchange reserves."
Just a few years ago Vietnam was the darling of investors -- at least upon first glance. Its economy has been growing at an annual rate of 7% during the past decade, but it has also long struggled with a balance of payments deficit, and confidence in its currency, the dong, hasn't always been robust. Most Vietnamese prefer to deal in US dollars and international investors in a local business talk about shipping gold out of the company to move currency offshore.
To be fair, the government has had its hands full with problems that aren't entirely its own fault. First, it was fighting inflation, which peaked at 28% two years ago, and then it had to try to stimulate the export-dependent nation just as the financial crisis struck. Rising prices are once again a problem and indeed Moody's warned that inflation, which hit 11% year-on-year in November, was adding to downward pressure on the dong. It doesn't help that the currency trades on the black market well below the official exchange rate.
Earlier this month, the International Monetary Fund also urged Vietnam to get a grip on its economic problems, noting it needed a "coherent package" of measures including higher interest rates to re-establish monetary policy credibility and slow inflation.
"Despite official statements to the contrary, the government's policy actions often give an impression that it values short-term growth over the stability needed to sustain growth over the longer term," Masato Miyazaki, the IMF's division chief for the Asia and Pacific department, said in a statement on December 7. "Policy rates are still too low to counter strong market expectations for dong depreciation and high inflation."
Vietnam needs to swallow the medicine and make decisions that aren't popular now, but will be good for the long-haul. That means sorting out the Vinashin problem sooner rather than later.
