Asian whirlwind could soon prove Vietnam's problem too:

Financial Times (London)
Jeremy Grant

To some of the hardened ideologues in Hanoi, the Asian financial crisis may look like someone else's problem. While currencies and markets gyrate, communist-run Vietnam, with no convertible currency or stock market, seems an island of calm amid the capitalist turmoil.

But economists say such a view would be a mirage. The contagion that so quickly found victims in Asia has started to affect Vietnam's L15bn economy. "There are some extraordinarily worrying signs emerging," says Andrew Steer, the World Bank's Vietnam director. "It's obvious Vietnam is going to be affected much more than initially thought."

Regional currency devaluations have blunted the competitiveness of Vietnam's exports. Bankers say the currency is some 30 per cent overvalued. Any retreat by Asian investors will hit Vietnam hard. This means intense pressure on Hanoi's leadership to move ahead with stalled economic reforms, most urgently among the state-owned enterprises (SOEs).

Most of Vietnam's 5,700 SOEs are in a mess, crumbling in the face of foreign competition despite privileged access to loans and the cushion of tariffs. Most operate with obsolete machinery; up to a third of capital stock is useless. Official numbers show SOE output growing, mostly because statisticians lump the loss-makers in with lucrative joint ventures with foreigners, a significant distortion as 98 per cent of such ventures are with SOEs.

SOEs are lumbered with big debts, the result of politically inspired lending by state-owned banks. This threatens the banking system and, ultimately, Vietnam's fiscal position, the World Bank says. The fact the sector accounts for 41 per cent of state budget revenues means far-reaching reform is urgent.

Phan Van Khai, prime minister, recently announced a plan to cut away non-performing SOEs and concentrate on 300 of the most healthy. Another 150 will be auctioned off. But observers say the plan fails to level the field between SOEs and the private sector, seen as the best hope for building export-led growth. Nor does it yet have backing from the ruling Politburo.

"The Vietnamese process hasn't got as far as the Chinese. There is no consensus yet that the state withdraw from direct production," says Ari Kokko of the Stockholm Institute of Economics. The main impediment is vested interests. At the state-owned Dong Nai Paper enterprise, outside Ho Chi Minh City, its director, Bao Hoan, says the government should protect strategic industries.

"In terms of technology, we are 20 years behind other countries. If you ask SOEs to compete on equal footing [with foreign companies], it's like asking for a football match between Vietnam and the best British team." Some sympathise with the view that strategic industries need time to become competitive. But critics doubt that all the chosen 300 in Mr Khai's plan are strategic, suspecting the net has been cast wide to protect monopolies intertwined with the political elite.

"Aside from utilities, I don't see much justification for monopolies," says Jean-Luc Berlasconi, economist at the United Nations Development Programme. "They'll just provide some rent to the monopolists at the expense of the rest of society."

Economists say Hanoi must cut the links between SOE managers and ministries controlling access to business licences. But that will be hard, given many big SOEs are doing nicely out of the licence regime. The military, which controls many strategic SOEs, is also likely to resist such moves.

Vietnam is still feeling its way on privatisation. A pilot scheme has seen only 14 companies auctioned off, raising $15m. A stock market is years away. General Le Kha Phieu, appointed on Monday as Communist party general secretary, appeared to favour cautious moves yesterday. But Carlyle Thayer, professor of politics at the Australian Defence Force Academy, says: "It'll be business as usual: muddling through, with no firm action on SOEs."