Vietnamese shares were down 10% on the MSCI frontier index through November but foreign direct investment will hit a record $14 billion, according to the Planning Ministry, as companies seeking competitive alternatives to China position for free-trade gains to come through the dozen nation Trans-Pacific Partnership. The World Bank projects the accord, which still must be approved in all member capitals and faces congressional objections over Vietnam’s labor and state enterprise policies in Washington, will lift output by 8% and exports by double that amount in the next two decades. HSBC Bank hailed its labor-intensive manufacturing attraction in another report predicting $1.5 trillion in sales by 2050, a tenfold increase. GDP growth through September this year matched China’s at 6.5% as garment producers in particular expanded production, but trade and budget deficits have also swelled and banking system stress lingers into the upcoming party leadership change to dampen TPP-driven enthusiasm.
Under the deal the US State Department insists that major state-owned firm, worker, environmental and Internet reforms are forthcoming, but human rights groups regularly criticize mistreatment of labor activists and the absence of independent unions. Hanoi responds that it is ready to uphold standards, with any violation of International Labor Organization rules subject to penalties, but observance remains a big stumbling block to additional double-digit export growth. At home resistance to the accord comes from farmers fearing new agricultural rivalry and communist party central planners asserting power ahead of 2016’s next five-year congress, which has undermined designation of “ market economy” status from both the US and European Union. They imposed recent price controls on milk to batter the share price of leading stock exchange listing Vinamilk. The law was championed by a top Politburo member in the running to replace Prime Minister Nguyen Tan Dung. Foreign chambers of commerce slammed the move as contrary to TPP’s basic open trading principles, within a pattern of accusing multinational consumer goods producers of cartel-like behavior with scant evidence.
In October Fitch Ratings maintained its high-junk BB-minus sovereign grade with a stable outlook, but warned of public debt and structural weaknesses. This year’s budget gap will be “sizable” at 6% of GDP as overall debt approaches 50% against the 65% statutory ceiling officials may soon revise. Despite negligible 2% inflation, benchmark domestic bond yields have risen 150 basis points to 6.5%, and external borrowing will also become more costly in 2017 with graduation expected from the World Bank’s concessional facility. The current account surplus has slipped to under 1% from 4% of GDP in recent years, and the trade deficit in the year to October was twice the previous $2 billion surplus. Gross foreign reserves were run down 20% to defend the exchange rate after consecutive small devaluations and band widening, Fitch reported. Bank asset quality and transparency is poor and the true non-performing loan level may be 15%, it added.
Moody’s in turn kept a negative view on bank capitalization and liquidity as credit continues to jump at a 15% annual pace, despite steep real interest rates in high single digits which exclude small company access. The traditional focus on state enterprise lending leaves a “shaky foundation,” and the asset management agency for balance sheet cleanup has barely progressed, the French financial group Natixis commented in a December study. Banks have been stock market laggards after releasing third quarter reports showing a 30% spike in “unrecoverable” debts.
However a bright spot is mortgage business, which has jumped 20% from a low base with property recovery following foreign ownership opening. The government has helped stoke an 80% rise in Ho Chi Minh City home sales with its own low-interest program threatening to repeat the pattern of the post-2008 crisis speculative bubble. Lawmakers have also just approved an aggressive $3 billion overseas bond plan for 2016 hoping to harness headline TPP-related investor interest, which will likely also result in overreach without pressing fiscal and financial system corrections.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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