[Vnbiz] EIU Vietnam Financing Environment

[Craig Stevenson]

Vietnam finance: Financing environment
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 September 13th 2006

   FROM THE ECONOMIST INTELLIGENCE UNIT

                  Value of indexa   Global rankb   Regional rankc   2001-05
2006-10 2001-05 2006-10 2001-05 2006-10 2.5 4.8 76 71 16 15 a Out of
10. bOut of 82 countries.
c Out of 17 countries: Australia, Bangladesh, China, Hong Kong, India,
Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore,
South Korea, Sri Lanka, Taiwan, Thailand and Vietnam.

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The financial system continues to place constraints on business operations,
but during the forecast period there will be improvement in terms of the
quality and variation of available financing options. The banking system
will undergo some major changes following Vietnam's entry into the World
Trade Organisation, with foreign banks being permitted to play a greater
role in meeting businesses' financial needs. Restrictions are currently in
place on foreign banks' opening new branches and the amount of dong deposits
they can take. Since December 2004 US banks have been allowed to take dong
deposits from companies up to a limit equal to 400% of the bank's legal
capital. The previous limit had been 250%. EU banks were allowed to operate
under the same restrictions as US banks with effect from March 1st 2005, but
for other foreign banks the limit for raising dong deposits remains equal to
50% of the bank's capital. Facing limits in the amount of local currency
they can mobilise, foreign banks' lending activities have been stifled.

The banking system will open up, but SOCBs will remain dominant

Although the banking sector will become more open during the forecast
period, state-owned commercial banks (SOCBs) will remain dominant—they
currently account for around 70% of all lending. There are plans, however,
for the SOCBs to be equitised (part-privatised), which would force them to
operate on a more commercial footing. In late 2005 the government approved a
reform road map through which it plans to equitise all SOCBs, except the
Bank for Agriculture and Rural Development, by 2010. Paving the way for its
equitisation, Vietcombank successfully auctioned nearly D1.4trn (US$89m) in
convertible bonds in December 2005, and it could complete its IPO in early
2007. State control in Vietcombank is set to be reduced to no less than 70%
initially, before dropping to 51% by 2010. SOCBs have already been granted
greater autonomy in lending, and are purportedly no longer subject to the
constraints of directed policy lending, and this should help to increase
access to finance for other firms, including small- and medium-sized
enterprises.

Other distortions are being removed. For example, the SBV removed the cap on
interest rates for dong loans in 2002, a move that has enabled commercial
banks more freedom to manoeuvre and deal with short-term changes in market
liquidity. (Interest-rate spreads have widened steadily since then.) The SBV
has also introduced a number of measures aimed at improving the overall
regulatory environment. For example, in 2005 it introduced a new risk-rating
system, which regulates the proportion of loans that banks must keep in a
risk-fund reserve. However, despite these efforts, concerns about the
transparency of the banking system will remain high.

The stockmarkets expand, and become more important sources of financing

Vietnam's capital markets have evolved at a fairly slow pace, but the
country's two stockmarkets (one in Ho Chi Minh City and one in Hanoi) will
develop into more important sources of financing during the forecast period.
The main bourse, the Ho Chi Minh City Securities Trading Centre (HSTC),
which was launched in 2000, has expanded rapidly since early 2006, following
the listing of some large firms, including the largest joint-stock
commercial bank, Sacombank in July. Following Sacombank's listing, the
HSTC's market capitalisation reached around US$2.9bn (equivalent to around
5% of GDP), up from around US$500m at end-2005. There will be further
expansion in the size of the market in the forecast period, as a growing
number of large SOEs are set to be equitised and have their shares listed on
the market. FIEs are also now permitted to list shares. In early 2006 an
affiliate of Taiwan's Taya Electric Wire and Cable Company became the first
overseas firm to list, and a number of other firms have applied for and
received initial approval to be transformed into shareholding companies.
However, the process for foreign firms to list on the stockmarket currently
remains arduous, and many FIEs are likely to adopt a wait-and-see approach
before committing themselves to such a process. Moreover, trading on the
HSTC will remain volatile, partly reflecting the lack of an experienced
investor base in the country, which undermines the attractiveness of raising
funds by listing locally.
The Economist Intelligence Unit
Source: Country
Forecast<http://www.viewswire.com.ezproxy.umuc.edu/accessFullReport.asp?product_id=1930000193>
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