[Vnbiz] Vietnam has second thoughts about WTO

[Romi]

*http://www.atimes.com/atimes/Southeast_Asia/IC02Ae02.html*

* *

*Vietnam has second thoughts about WTO**
*By Shawn W Crispin (Asia Times Online)

Less than two months after formally acceding to the World Trade Organization
(WTO), Vietnam's Communist Party leaders already appear to be having second
thoughts about their new global commitments to more foreign investment and
financial openness.

Vietnam's leaders are grappling with how best to manage foreign and domestic
speculation on the country's under-regulated formal and informal stock
exchanges, which have in recent months channeled a massive influx of US
dollars into the economy. Vietnam's bourse has rallied strongly,
skyrocketing 144% last year and accelerating an additional 44% so far this
year.

Foreign investors have plowed mainly into the small and illiquid equity
market's top 10 listed stocks, as well as over-the-counter bank and
pharmaceuticals shares, where foreign-led merger-and-acquisition activity is
expected to pick up, according to VinaCapital, a local investment bank.

The market euphoria has local financial authorities in a funk. That's partly
because huge capital inflows have limited the central bank's monetary-policy
options to manage inflation and is also starting to put severe strains on
its local-currency peg. To signal that the government might act, Vu Bang,
chairman of the State Securities Commission, the stock-exchange regulator,
has on at least one occasion urged investors to exercise "caution".

Last week, Permanent Deputy Prime Minister Nguyen Sinh Hung, a former
finance minister, acknowledged that the market is "concerned that we will
introduce some limits", according to press reports. To curb speculation, the
government has already delayed plans to increase the current 49% cap on
foreign share ownership and has imposed new restrictions against stock
lending by local banks. Those measures, however, have to date largely failed
to dampen the rally.

There are now growing indications that the State Bank of Vietnam could soon
move to impose capital controls on foreign-equity investors, including a
one-year lock-up on portfolio investment inflows. Foreign investment banks
operating in Vietnam, including Credit Suisse and the Australia and New
Zealand Bank, have already issued warnings to their clients about the
possible introduction of new restrictions.

It's unclear whether this week's regional stock-market meltdown has affected
the government's thinking, although the local bourse was relatively
unscathed by the foreign-led selloff. Any move will likely come after,
rather than before, Euromoney hosts its second annual Vietnam Investment
Forum on March 19 and 20, an occasion when last year the government
successfully showcased its free-market credentials to prospective foreign
investors.

Curtailing foreign-capital flows - particularly so soon after entering the
WTO - will inevitably earn Vietnam the opprobrium of free-market purists.
Critical Western media have already asserted that just by considering
capital controls, Vietnam's economic mandarins have gleaned the wrong
lessons from the 1997-98 Asian financial crisis. That is, rather than
resorting to administrative fiat, policymakers should allow market forces to
correct any pricing distortions that speculators may have built up in the
stock market.

That simple argument, of course, is debatable in light of the reams of
academic literature that demonstrate financial liberalization without proper
sequencing of capital-account reforms can wreak unnecessary havoc on a
developing country's economy and banks, as was the case in Thailand in 1997.
Nor is there a technocratic consensus on the efficacy of capital controls,
particularly in cases where the restrictions are applied on incoming rather
than outgoing foreign portfolio investments.

*Unsteady architecture*
What is clear is that development of Vietnam's financial architecture and
regulatory regime has significantly lagged behind its trade-liberalization
drive, which was fast-track prioritized with the government's eye on WTO
accession.

Dealing on Vietnam's small and illiquid capital markets is a wild and wooly
affair. Trade volumes on the unofficial over-the-counter securities market,
even with the recent rally, exceed those at the official Ho Chi Minh
Securities Trading Center (HOSTC) by nearly three times.

While there are about 200 companies listed on the HOSTC, there are well over
7,000 unlisted joint-stock companies - many equitized from state-owned
enterprises or set up by private entrepreneurs - that trade their shares
informally. Moreover, nearly all bond transactions are currently conducted
over the counter, reporting to the HOSTC only for clearing and settlement
purposes. The informal markets emerged in response to the government's long
delays in developing and opening access to the formal capital market, which
was only established in 2000.

And "informal" may be an understatement. Independent, unlicensed brokers,
many of whom work behind the scenes for licensed brokerages, do a booming
unregulated trade buying and selling unlisted shares for clients. Many
operate out of open-air cafes in Ho Chi Minh City and settle official
certificates and cash within a few days of the transaction, taking a
0.5%commission on the trade's value.

So far the parallel system has worked without any hitches. But because the
settlement of unregulated trades has no legal protection, but rather relies
on the reputation of individual brokers, a sudden stock-market meltdown
could put the integrity of these brokers to a moral test and could leave
many middle-class punters high and dry - similar, perhaps, to the widespread
unregulated pyramid schemes that collapsed, sparked social unrest and spread
financial contagion through Albania's banking system in 1997.

Vietnam's regulatory framework for the broad financial industry is still
ill-defined and ridden with conflicts of interest. Meanwhile, the lack of
modern information-technology systems means market regulators lack the
capacity to generate crucial data analysis and conduct proper market
surveillance. Instead, the State Security Commission (SSC) still focuses
more on entities rather than particular business functions, meaning that
until recently local banks involved in securities transactions were nearly
unregulated. And because the SSC operates under the auspices of the Finance
Ministry, its standing as an impartial custodian is also in doubt, as the
government competes with the private sector for capital to finance its
budget deficits and privatize state-owned enterprises.

In sum, that means regulators have few clues about how big the current
pricing distortions in both the formal and informal capital markets may be -
and, perhaps more crucially, exactly how exposed the country's already
financially wobbly local banks might be to both formal and informal
equity-market meltdowns.

As of mid-2005, state-owned commercial banks' non-performing loans
represented 15% of the total financial system's outstanding credits, or
about 8% of gross domestic product (GDP), according to the World Bank. Even
with recent foreign involvement in the banking sector, it is not yet
apparent that many banks have changed their fast-and-loose lending ways.
Rather, there have been widespread news reports about banks lending to
well-connected clients who use the borrowed funds to punt on the bourse.

*Too little, too late*
Last year's new Securities Law dealt with some but not all of these crucial
regulatory shortcomings. The World Bank has worked closely with Vietnam's
financial authorities to develop a comprehensive five-year Action Plan for
Securities Market Development, which commenced implementation only toward
the middle of last year.

"The market economy moves at its own speed," Klaus Rohland, the World Bank's
outgoing country director for Vietnam, said in February. "And we need to
make sure that the gap between a full-fledged market economy and
institutions that are needed to rein in the excesses of a market economy, is
narrowed as much as possible." It was a situation he characterized as
"almost a race against time".

As Vietnam's capital markets start to bubble, it's becoming increasingly
clear that the local authorities have moved too slowly in implementing
crucial financial-sector reforms. Policymakers are now no doubt trying to
arrive at a quick-fix formula that simultaneously staves off market
speculation but also maintains foreign-investor confidence in the
government's broad economic stewardship and economic reform direction.

Competing domestic and international constituencies is complicating the
policy process. Hanoi-based foreign consultants with close government
connections who communicated with Asia Times Online on condition of
anonymity say that newly appointed Prime Minister Nguyen Tan Dung is loath
to see a stock-market collapse so early in his tenure, and fears that the
political fallout of a financial meltdown that spreads to the banks would
badly hobble his government's ability to sell to the general public the
upside of deeper-reaching market-oriented reforms now in the pipeline.

Dung's credibility hinges heavily on his government's ability to implement
and manage WTO-mandated economic reforms while maintaining economic growth
and without upsetting the poor country's delicate socioeconomic balance.
That includes the tricky task of privatizing hundreds of inefficient
state-owned enterprises, which will inevitably lead to a massive dislocation
of industrial workers.

Notably, Vietnam traveled down a similar reform path in the early 1990s and
abruptly decided against any liberalization measures that could jeopardize
the Communist Party's hold on power. Then, an older, less market-savvy,
generation of communist leaders tentatively opened the economy to select
foreign investments, particularly in hotels and property. But when the signs
of foreign-led capitalism became too overt to the public eye, cadres quickly
imposed a raft of restrictive rules and regulations that, as intended, drove
foreigners back out of the market.

With WTO membership, foreign investors are now queuing up to set up shop in
Vietnam. But there are conflicting signals emerging from Dung's government,
particularly in connection with the recent decision to delay planned
measures to allow for greater foreign share ownership, which is now capped
at 49%. Amid the internal debate on capital controls, a reportedly
reactionary camp of party cadres has asserted its view that the government
should ease the pace of reform now that it has safely secured WTO
membership.

The counter-current, apparently led by Dung, which believes strong economic
growth, which was more than 8% in 2006 and is on pace to expand even faster
this year, opens a unique window of opportunity to push through tough
structural reforms - including measures to dismantle remnants of the
communist command economy, which during slower economic times would be
politically difficult.

Imposing capital controls on foreign-equity transactions until lagging
capital-market reforms are brought up to speed may oddly be agreeable on
both sides of the intra-party debate. Whichever way Vietnam's leadership
finally decides, fairly or unfairly, it will inevitably be interpreted by
international markets as a bellwether signal for the country's reform
direction.

*Shawn W Crispin** is **Asia** Times Online's **Southeast Asia** editor.*
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mail.saigon.com/pipermail/vnbiz/attachments/20070303/b77bc892/attachment.html