Vietnam’s Pinched Wealth Promoters

Vietnamese shares halved their 20 percent frontier index gain in the immediate wake of the arrest of a business tycoon whose interests include ownership of the twenty-year old Asia Commercial Bank also held by Standard Chartered, which received central bank liquidity after a brief depositor run. Specifically he was accused of operating unlicensed investment firms as officials try to clamp down on irregular gold, currency and stock trading which have invited factional infighting in the Communist party leadership as Prime Minister Dung abandons his original hands-off economic approach. Executives at shipbuilder Vinashin got lengthy prison terms for mismanagement after the conglomerate defaulted in 2010 with $4.5 billion in debt in violation of internal and external controls, and the lavish lifestyles of the connected elite have prompted a backlash as GDP growth lags the previous 7-8 percent China-like norm. Bad loans, mainly from state-owned units to directed borrowers, reached one-tenth the total in June, and were concentrated in property, securities and non-core enterprise activities. Moody’s reaffirmed its negative outlook on the banking sector and the IMF calculates the recapitalization cost at 5 percent of GDP. Foreign access is capped at 30 percent of equity, and while the ceiling may be waived in future deals outright privatization of key lenders is not under consideration, especially in view of recent entrepreneurial overreach. Policy rates have come down 500 basis points as inflation dipped to 5 percent, but the credit mess will overwhelm the double-digit target for money supply expansion. The budget deficit goal of near 5 percent of output may also be missed on higher spending, although funding is facilitated by the 2-year government bond yield now at 9 percent. The trade gap has improved on lower imports to join weaker demand for commodity and electronics products in Europe and China. The mogul’s apprehension and bank crisis speculation hammered the prices of US-listed ETFs which are a major conduit, despite progress toward a bilateral free trade agreement under the auspices of the trans-Pacific Partnership to be pushed by Washington at the September APEC summit in Russia.

In contrast with the IPO lethargy in Vietnam and the rest of the region Malaysia has completed several high-profile transactions that may help set the stage for elections due by early next year. Domestic demand has been aided by civil servant and pensioner income hikes, which along with fuel subsidies will keep the fiscal deficit at 5 percent of GDP. VAT introduction has been delayed and good oil has offset electronics export performance, although both public and private debt is up sharply where foreign banks and investors are active. Their government securities holdings have doubled to 40 percent of international reserves in a transformation not formally cited among the Administration’s economic ambitions.