[Vnbiz] Here comes Vietnam

[Tran Huu Hong Truong]

1

Institutional Investor

International Edition

Sep2006, Vol. 31, Issue 6

Here comes Vietnam

Investors have turned red-hot on Vietnam's booming economy. But with
privatization

sluggish, its banking system in shambles and its infrastructure under
strain, is Vietnam

inviting another false dawn?

There short years ago, recalls Klaus Rohland, the World Bank's country head
for

Vietnam, conversation on Hanoi's cocktail circuit was focused on the
question, "Do they

really want to reform?" So opaque was the communist government that nobody
was sure

if the country's leaders were serious about the modest agenda of economic
fixes it had put

forward. At that time the administration was just beginning to relax the
rules about

forming joint ventures and was looking at ways to decentralize its
investment decisions.

These days investors -- noting landmark listings of state-controlled
enterprises, good

progress on talks to join the World Trade Organization and a recent
leadership shuffle

that kept in place progressive politicians in say they are confident that
the country's

leadership, notwithstanding some resistance from old guard conservatives, is
committed

to progressive, market-led economic change.

"The only question today is whether the pace of reforms is fast enough,"
says Rohland.

Many investors are not waiting to find out. Foreign direct investment in
Vietnam surged

38 percent, to $5.8 billion, last year -- an amount that, measured against
GDP, is bigger

than Chinas massive $60 billion inflow in 2005. Though the Ho Chi Minh City
Securities

Trading Center (Hostc), often referred to as the Vietnam stock exchange, has
a

capitalization of just $2.5 billion, its index has soared this year, buoyed
by the

government's privatization plans and Vietnam's expected entry into the WTO
next year.

Still, the retail-dominated market's relative obscurity was a blessing in
disguise this

spring: It was largely insulated from the impact of May's emerging-markets
meltdown.

The current swell of optimism in Vietnam follows a half decade of robust
economic

progress, underpinned by the government's pro-reform policies. During the
past five

years, the local economy -- driven by robust exports and an explosion of
private sector

investment -- has averaged 7.4 percent annual growth. Last year it expanded
by 8.4

percent, making it Asia's second-fastest-growing economy behind China. That
impressive

growth was achieved despite an outbreak of 66 bird flu cases that killed 22
people over

the year through November 2005. Vietnam has since been free of the virus.

The reforms scheduled to be implemented over the next four years include
privatizations

designed to boost the stock market's capitalization nearly sixfold, from
$2.5 billion today

to as much as $15 billion by 2010; an overhaul of the banking system that
will see state-

owned banks listed and government support withdrawn; and the creation of a
more

independent central bank.

"We are in transition," former deputy prime minister Vu Khoan told
Institutional Investor

in an interview early this year. "Our priority is to ensure a perfect market
economy by the

year 2010."

Khoan, who is now a special foreign affairs envoy to prime minister Nguyen
Tan Dung,

stepped down as deputy prime minister in June after a leadership reshuffle
that followed

April's 10th National Congress of the ruling Communist Party. But no change
to the

government's reform plans are expected, and, indeed, the National Congress
has

reinforced the commitment to making Vietnam a modern industrialized nation
within the

next two decades. Vietnam is pushing to secure WTO accession by November,
when it

will host U.S. president George W. Bush and Asian leaders at the
Asia-Pacific Economic

Cooperation Leaders' meeting in Hanoi.

"There is renewed confidence' that Vietnam should continue on its present
course of

reform," says Carlyle Thayer, a Vietnam expert who is professor of political
science at

the University of New South Wales in Sydney, Australia. "They are so locked
into

integrating with the world economy that they can't turn back. That's just
not on the table."

Among the most vocal of Vietnam bulls is Merrill Lynch's Hong Kong-based
equity

strategist Spencer White. "You will be investing in Vietnam within two
years," he told

readers of an influential February research report titled "Vietnam: Asean's
New

Investment Frontier." White believes "Vietnam is beginning to deliver on a
decade of

promise." He predicts that stock market capitalization, boosted by the
listings of stateowned

enterprises, could almost triple, to $7 billion, by the end of next year.
"Buy equity

exposure now," he writes, "for your fund, for yourself or for your children.
Buy now and

tuck the investment away for ten years. In 2016 we can come back to discuss
compound

returns, the toys that you can buy or the college that they [your children]
will go to."

Hanoi-based Peter Ryder, a former Salomon Brothers investment banker and
co-founder

of private equity firm Indochina Capital Corp., concurs. Last October his
firm, which has

been investing in Vietnam since 1992, bought 49 percent and management
control of

brokerage firm Mekong Securities for an undisclosed sum. The plan, says
Ryder, is "to

transform Mekong into the country's dominant investment bank."

"Vietnam has arrived," says Ryder, who moved to Hanoi in 1992. "The genie is
clearly

out of the bottle. It's not going to happen in a straight line, but by 2020
Vietnam will have

regained its place as the economic powerhouse of Southeast Asia, as it was
under the

French."

Maybe. But if such blue-sky visions are to be realized, Vietnam has a lot of
work to do --

and fast. The country's banking system is dilapidated, and despite
significant upgrading

of roads, power plants and ports over the past decade, the country's
infrastructure is

struggling to keep up with growth.

Vietnam, in other words, is under pressure to avoid the kind of false dawn
that has

tripped up investors in the past. International investors first gave the
country a try in the

mid-1980s during the launch of economic reforms known as doi moi, or
renovation

agenda. Under doi moi, Vietnam gradually moved away from a centrally managed

economy by allowing, and later encouraging, private enterprise and
abandoning a push to

collectivize agriculture. Despite the early promise, interest among outside
investors

fizzled when it became clear that progress would be painfully slow.

The most recent case of Vietnam fever hit in late 1994, when the U.S. lifted
its trade and

investment embargo on Vietnam. Investors rushed in, and the press made much
ado about

the birth of a new Asian tiger. Mark Mobius, the head of Franklin
Templeton's

International's Asia operations, predicted a stock market would open within
two years.

He quickly launched the Templeton Vietnam Opportunities Fund, raising $105
million.

Four years later the stock market was still not up and running, and the fund
was

struggling to find any significant Vietnam investments. Fund managers
changed its name

to Templeton Vietnam and South East Asia Fund and began investing in other
parts of

Asia. Some capital was invested in Thai stocks, just before that market's
implosion in

1997. U.S. investors sued, charging the fund with breaches of fiduciary
duty. (The case

was settled out of court with $64 million returned to investors and without
any

acknowledgment of wrongdoing.) But Templeton was not the only fund to suffer
defeat:

The Lazard Vietnam Fund, the Beta Vietnam Fund and the Vietnam Frontier Fund
were

among other first movers to close up shop after overly optimistic forays in
Vietnam.

"The bureaucracy takes a long time to arrive at decisions," says a senior
Hanoi-based

foreign banker. "The need for consensus building is deeply ingrained in the
culture."

"Vietnam's provinces are likened to individual kingdoms, and there's always
a tension

between central and provincial units," adds Thayer. "A big challenge for the
leadership is

getting consistent implementation of policies across the country."

Some old Vietnam hands believe history may be repeating itself and that
Vietnam might

once again fall short of its potential. "Outsiders' perceptions are
improving faster than the

underlying changes in the country," says Chris Freund, founder of Ho Chi
Minh Citybased

private equity investor Mekong Capital and manager of its $26.2 million
Mekong

Enterprise Fund. "I don't think the stock market will be as big as everyone
is expecting."

"Is this the tipping point?" asks Stoyan Tenev, an economist who follows
Vietnam for the

International Finance Corp., the private sector arm of the World Bank Group.
"Is it about

to take off and become the next tiger? It is safe to assume the country will
move forward

slowly and gradually. I don't think we are going to see takeoff in the near
future."

Still, Vietnam is considered by many investors to be the most promising
economy in

Southeast Asia -- an astonishing development, considering that just 15 years
ago it was

afflicted by grinding poverty. In 1990 the country's population stood at 66
million; more

than 50 percent of its people lived below the poverty line. Vietnamese boat
people were

washing up on shores across Asia in search of a better life. Today in a
country of more

than 83 million people, 20 percent of the population is classified as
impoverished, and 1.5

million new jobs are being created every year. According to Khoan, Vietnam's
per capita

income, which hit $640 last year, will reach $1000 by 2010. Slowly, the
country is

catching up with other emerging markets in the region: India's 2004 per
capita income

was $620, Indonesia's $1,140, and Chinas $1,500, according to the World
Bank.

Such improvement is attributed largely to the government's steadfast
dedication to its doi

moi agenda and to the cumulative effect of gradual reforms, implemented over
two

decades.

The New Enterprise Law, enacted in 2000, stands out as a key driver of
economic

growth. The law protects the rights of citizens to set up enterprises
without interference

from government officials. The change triggered an explosion of small
businesses, whose

numbers increased from 200 six years ago to 200,000 at the end of 2005. It
also led to the

elimination of more than 100 types of business licenses and thus reduced the
time and

costs needed to register a new company while limiting opportunity for
bribes. The

resulting growth helped consumption expand 20 percent last year. Export
earnings have

also surged, rising 22 percent in 2005, to $32 billion, after increasing by
31 percent in

2004. All of the country's main exports -- crude oil, textiles and shoes --
put in strong

performances. And the economy is already open to outside money: Firms with
foreign

investors account for more than 40 percent of the country's manufactured
output.

In May, investors were encouraged by another positive development: Hanoi
reached an

agreement with the U.S. on a trade deal that had been blocking Vietnam's
entrance into

the WTO. Membership in the trade organization will codify the rights of
nonnative firms

to invest in such sectors as banking, telecommunications, distribution and
retail. "It will

be a big boost to the economy," says Richmond Mayo-Smith, Ryder's Ho Chi
Minh Citybased

partner at Indochina Capital. "It makes Vietnam a safer market for
investors."

Thayer adds that WTO membership will add a new urgency to Vietnam's reforms.
"The

discipline will now be coming from outside," he says. "Vietnam is entering a
rules-based

system. What can the Communist Party do if it doesn't like the rules? It has
to adhere to

them. It can be taken to arbitration, and it will be forced to deliver."

The same reforms that are helping propel Vietnam's buoyant economy are also
raising

expectations for its embryonic stock market. Now one of Asia's smallest,
with only 37

small companies listed, the Ho Chi Minh City Securities Trading Center, as
the exchange

is formally known, was set up in mid-2000. It went into vertical ascent in
January 2006

following the listing of Vinamilk, the country's biggest dairy company and
the first major

company to list on the exchange. Vinamilk's arrival instantly doubled the
market's overall

capitalization to $1.1 billion. Since listing, the company's capitalization
has doubled to $1

billion, igniting a frenzy of excitement that caused the stock to surge 80
percent through

late May this year, to 545 points. Overall, the exchange's market cap has
soared from

$250 million a year ago to $2.5 billion at the end of July.

Saigon Thuong Tin Commercial Bank, or Sacombank, whose investors include

Australia's ANZ National Bank and the International Finance Corp., followed
Vinamilk

onto the exchange in early July, when it transferred across from the opaque
over-thecounter

market. "We wanted to be the first bank to list," Sacombank chairman Dang
Van

Thanh told Instituitonal Investor in an interview.

Ho Chi Minh City-based Asia Commercial Bank ($1.7 billion in assets), in
which

Standard Chartered Bank and the IFC are investors, will likely follow with
an IPO later

this year or next. The state-owned Bank for Foreign Trade of Vietnam, known
as

Vietcombank, and the Housing Bank of Mekong Delta will both be converted
into

shareholding companies this year in preparation for 2007 listings.

Meanwhile, the country's biggest stock broker, Bao Viet Securities, is
expected to list this

month, and, according to vice chairman of the State Securities Commission Vu
Bang, the

Hanoi-based Vietnam National Reinsurance Co., founded in 1995 as the
country's first

reinsurance firm, may follow shortly. The upcoming year should also see IPOs
for two

Hanoi-based mobile phone operators, Mobi-Fone and VinaPhone. The motivation
for all

listings, says Bang, is a desire "to improve reputation and image and to
make it easier to

mobilize more capital."

As the list of companies planning to go public lengthens, investors are
encouraged by the

new Securities Law, set to take effect on January 1, 2007. The law, explains
Merrill

Lynch's White, will offer both a carrot and a stick. Beginning next year,
companies that

list on the main board will benefit from major tax breaks for four years.
For the first two

years, starting from the date of the listing, companies will pay no tax on
earnings; in the

subsequent two years, they will be taxed at only half the corporate tax
rate, which is 28

percent. Meantime, those companies that have already listed on the largely
disclosurefree

and pre-IPO over-the-counter market will be subject to the same rules of
disclosure

as those on the main board.

The law is expected to result in large-scale migration from the OTC market
to the main

board, says White. The OTC market is significantly bigger, with some 2,400
mostly

private companies listed and a trading that's up to seven times the main
board's $5 million

daily, says White. Although indicative prices are published in local media,
most deals are

sealed by agreement between buyers and sellers -- which can take place, for
example, in a

coffee shop -- and later reported to the company registrar.

Forcing OTC companies to comply with the same disclosure standards as the
main board

will remove what White considers "one of the major incentives that currently
keep

companies in the opaque confines of the OTC market." He believes the new
Securities

Law changes the listing dynamic "to an extent that is not widely appreciated
by many

overseas investors."

To encourage more global participation, the government raised the ceiling on
foreign

ownership of listed companies last October, from 30 percent to 49 percent.
Its hope is

that a wider variety of products for investors might eventually help the
stock market trade

more rationally. As it is, retail investors have pushed 2006 prices into the
stratosphere,

and valuations have become unattractive. Hostc stocks trade, on average, at
multiples of

about 15 times projected 2007 earnings, notes White; some banks on the OTC
market

trade at four to five times book value. Citigroup has been trading Vietnam
stocks since

last year, and Merrill in mid-August became the latest U.S. investment bank
to gain

approval to trade Vietnam-listed stocks. J.P. Morgan Chase & Co. says it is
now in the

process of initiating coverage of Vietnam equities.

Meanwhile, another market has sprung to life in Vietnam. Last September the
country

debuted on the global bond market, raising $750 million for a ten-year issue
priced with a

yield of 7.125 percent -- 60 basis points tighter than equivalent Indonesia
sovereign

bonds and 90 basis points tighter than those of the Philippines. The bond
was six times

oversubscribed, attracting interest from investors in Asia, Europe and the
U.S. with an

order book of some $4.5 billion.

Vietnam's issue marked a turning point in its relations with global
investors: Its

delegation carried out exhaustive road shows and provided all the
explanatory data

demanded by foreign interests. "It showed the country was more willing to
embrace

international investors than it ever had been in the past," says Jon Pratt,
Hong Kongbased

head of debt capital markets at Credit Suisse, sole underwriter for the
bond. Credit

Suisse fended off strong competition from Citigroup, whose determination to
land the

deal saw its executive committee chairman, Robert Rubin, make two 11th-hour
trips to

Hanoi. "Vietnam is now viewed by investors as one of the true emerging
economies in

Asia," says Pratt.

Former deputy Finance minister Le Thi Bang Tam, now head of the newly formed
State

Capital Investment and Trading Corp., told Institutional Investor in an
interview early

this year that "the government is encouraging big corporates like
Petro-vietnam, Vietnam

Shipping Co., Electricity of VietNam and some others to issue corporate
bonds."

Investment bankers believe the sovereign bond issue could open the door to a
mini-flood

of issues from state-linked corporations.

In May the state-owned Bank for Investment and Development of Vietnam issued
its first

domestic bonds. Arranged by HSBC, the 2.1 trillion Vietnamese dong ($134
million)

bonds had terms of 10 and 15 years with interest rates of 9.8 percent and
10.2 percent,

respectively. Credit Suisse's Pratt says his bankers have met with a large
number of state

enterprises that could be future issuers.

"Every investment bank under the sun is running through Vietnam," says Tony
Foster,

Hanoi-based managing partner with law firm Freshfields Bruckhaus Deringer.
"It's gone

from lukewarm to red-hot."

Vietnam's rapid rise is also drawing multinational corporations eager to
benefit from the

nation's cheap, highly literate and energetic workforce. In February, Santa
Clara,

California-based Intel Corp. announced plans to build a $300 million
facility for testing

and assembling chips in Ho Chi Minh City; it will employ 1,200 workers.

"Lots of companies do not want to be 100 percent dependent on China, and
Vietnam is

seen as the best alternative in Asia," says Mekong Capital's Freund. The
$5.8 billion that

flowed into Vietnam as foreign direct investment in 2005 was up from $2
billion in 2001.

The banking market in particular has proven attractive to overseas money,
say investors,

even though the antiquated banking system is one of the key targets for
reform. Bad loans

account for 15 percent to 20 percent of the country's total, and despite the
government's

attempts at reform, a World Bank report published late last year said, "It
is not at all clear

that the restructuring measures have made them truly profitable.. It is
likely that new

nonperforming loans were being created more or less at the same speed at
which the old

ones were being solved (or rather, written off), if not faster."

Still, foreign interests have begun to move in and have chosen to eschew
state-run entities

in favor of smaller, better-managed joint stock banks. Following ANZ Bank's
March

2005 purchase of a 10 percent stake ($27 million) in Sacombank, Standard
Chartered

Bank in June bought 8.56 percent of Asia Commercial Bank for $22 million. In
January

this year HSBC Holdings bought 10 percent of Vietnam Technological and
Commercial

Joint Stock Bank, or Techcombank, for $17.3 million, and in March,
Singapore's

Overseas-Chinese Banking Corp. agreed to buy 10 percent of Vietnam
Joint-Stock

Commercial Bank for Private Enterprises, or VP Bank, for $15.7 million.

The banking market has tantalizing appeal for global investors. Asia
Commercial Bank's

assets have soared from $638 million in 2003 to $1.7 billion now. President
and CEO Ly

Xuan Hai believes assets can grow to between $5 billion and $6 billion in
five years.

"Maybe that is a little bit ambitious, but we are an ambitious bank," he
says. "The

potential in this market is huge. Total deposits are equivalent to only 63
percent of GDP

compared to an average in the region of 100 to 150 percent."

Adil Ahmad, the Ho Chi Minh City-based head of alliances for ANZ Bank who
now sits

in an office next to Sacombank chairman Dang Van Thanh, adds that since he
arrived in

Vietnam in 2000, banking industry assets have quadrupled, from roughly $13
billion then

to approximately $54 billion now.

While the government rushes to update its banking sector and cash in on the
current wave

of outside interest, it must also keep pushing reform on two other key
fronts: privatization

and infrastructure development.

The World Bank says that more than 2,000 state-owned enterprises in Vietnam
have thus

far been turned into shareholding companies. However, it noted in a December
2005

report, that "hardly any of them have been listed." In June last year the
government

directed 178 joint stock companies (with majority stakes held by the
government) to list,

along with another 75 state enterprises. But, notes the World Bank report,
"progress has

been poor." Nobody quite knows why. Posits the bank, "One reason could be
that the

timetable set out by the decision does not match the enterprises' business
plans."

Public facility upgrades are not happening fast enough to please investors,
either; in one

2005 World Bank survey, one in five respondents said they consider
infrastructure

shortcomings an impediment to investment. Demand for electricity has been on
the rise,

increasing by 15 to 20 percent each year; ports are nearing capacity,
particularly in the

Ho Chi Minh City area, and roads in major cities are increasingly congested.
Still, the

government has made huge progress upgrading the infrastructure over the past
decade,

already having spent about 9 percent of its $50 billion GDP on the task.
That figure is

forecast to rise to about 11 percent annually between now and 2010.

Now the country is aiming to bump up the amount of funding it receives from
the private

sector, foreign investors and other financing channels. It has already
opened its doors to

build-operate-transfer arrangements, under which outside investors build and
run power

plants or toll roads and return them to the government after an agreed-upon
period. The

government's official plan is to issue infrastructure bonds of some $4
billion by 2010, but

private sector economists say they have heard it might increase that amount
by 75

percent. Still, investors worry whether a ponderous bureaucracy can execute
major

projects fast enough.

With accession to the WTO almost a certainty, the pressure is on Vietnam to
deliver, and

upgrading infrastructure may be the easy part. The more serious challenge
will be

upgrading inefficient state enterprises, which, says University of New South
Wales'

Thayer, will "very likely go under" if they fail to upgrade technology or
find international

partners.

In holding back access to sectors such as banking, services, distribution
and telecoms,

"Vietnam has been like a poker player holding its cards to its chest," says
Thayer. "Now

it's got to put the cards on the table and risk being trumped by someone
else who is more

efficient." The good news: Such pressure can only lead to progress.
Concludes Thayer,

"Even if Vietnam doesn't meet its objectives, it's going to go a long way
toward meeting

them."

Are Vietnam's banks ready for change?

To prosper, Vietnam's government must reform its antiquated banking system.
Burdened

by bad loans -- experts believe they might amount to 15 to 20 percent of
total lending --

banks suffer from the country's communist legacy and the lingering effects
of statedirected

lending policies. The financial system also lacks adequate laws allowing
banks

to seize the assets of bad debtors.

Modernization is essential as the country readies itself to join the World
Trade

Organization, perhaps as soon as next year. In its "Vietnam Development
Report 2006,"

published last December, the World Bank warns that after WTO accession,
Vietnamese

banks that fail to make substantial changes won't be able to compete with
global players

in the local market. "In the absence of determined banking reform," the
report notes, "the

situation at state-owned commercial banks is bound to deteriorate."

Vietnamese officials feel the pressure. "The deadline for opening the
banking market to

foreign competition is 2010," says Hanoi-based Dang Thanh Binh, deputy
governor of

the State Bank of Vietnam, the country's central bank. "That's the goal we
have for

opening the banking sector without limitations -- and the minimum option for
WTO

accession."

Change won't come easily, though. Like China's banking sector, Vietnam's is
dominated

by four state-owned institutions: Vietnam Bank for Agricultural and Rural
Development,

Vietcombank, Bank for Investment and Development of Vietnam, and Industrial
and

Commercial Bank of Vietnam. Together they account for some 75 percent of
total

banking assets (about $54 billion). Then there is the Development Assistance
Fund,

which channels policy lending for the government. With outstanding loans of
some 76.93

trillion Vietnamese dong ($4.88 billion), it is the second-biggest lender.
There are also 36

so-called joint-stock commercial banks -- privately run banks in which the
state owns a

minority share -- and four joint-venture banks. Vietnam has 27 foreign bank
branches.

In recent years the government has injected 10 trillion dong into the Big
Four banks to

boost their capital. Now the government is talking tough. "The commercial
banks have to

take their own responsibility, and they are not allowed to borrow money from
the state

budget," says former deputy Finance minister Le Thi Bang Tam, now head of
the newly

formed State Capital Investment and Trading Corp., a government holding
company set

up to make state-owned enterprises more efficient.

Tam adds that the government wants to attract foreign strategic investors to
the state

banks. Today any foreign investor can own up to 10 percent of a Vietnamese
bank; in

aggregate, foreigners can own up to 30 percent. The individual ceiling is
expected to be

raised to 20 percent when Vietnam joins the WTO.

The central bank today is little more than an arm of the government, with
the National

Assembly, not the State Bank, calling the shots on monetary policy. A
roadmap for

banking reform proposed by the State Bank early last year would create an
independent

central bank consistent with international best practices. Still, says Binh,
"Reform of the

State Bank of Vietnam will require a remarkable change in thinking."

-- Kevin Hamlin

 

 

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