Banking Scandal Exposes Split in Vietnam Leadership

The future of market reforms could hinge on the outcome of a political divide.

Vietnam has been rightly recognized as one of the hottest markets by global investors since its đổi mới policy of market reforms was instituted in the late 1980s. It has taken great strides in transforming itself from a wartorn country thirty years ago to one of the Asian Tigers. Lately however, Vietnam has hit a speed bump from bad economic policies seemingly resulting in a split within the Communist Party. These differences, culminated last week in the arrest of a prominent businessman, have sent shock waves through the country with rumors rife of additional arrests.

The 2000s were heady times for Vietnam as its gross domestic product averaged 7 percent annual growth, foreign direct investment flowed into the country and it joined the World Trade Organization. The euphoria began to wilt after the government, in a bid to stimulate greater growth in the economy, clung to expansionary monetary policies too long which caused inflation to spiral out of control. Inflation peaked at 23 percent in August 2011 before falling to 8.3 percent in May of this year.

Since then, GDP growth has slowed from 6.8 percent in 2010 to 5.9 percent in 2011 to 4 percent in the first quarter of 2012. The World Bank warned in June that “inefficiencies in state-owned enterprises, banks and public investments [will] be a drag on long-term growth.”

The government’s economic policy, modeled on the growth of South Korea’s chaebol style conglomerates, called for assisting its domestic companies to expand in order to become more competitive globally.  But after years of cheap credit, state-owned companies have turned into inefficient behemoths saddled with ballooning debt levels.  They are so big that they currently produce 40 percent of Vietnam’s GDP.

The collapse of the state shipping companies Vinashin and Vinalines could be indicative of the trouble many public enterprises are in. In fact, the ruling party was so concerned about the state-owned enterprises that it convened in early 2011 to review the country’s economic growth model and its failure in building chaebol style companies.

Against the backdrop of a slowing economy and troubled state-owned enterprises, officials are increasingly concerned about the stability of the country. The arrest of business tycoon Nguyễn Đức Kiên two weeks ago, the cofounder of Asia Commercial Bank and owner of the Hanoi Football Club, for unspecified economic crimes is being interpreted as a way to deflect blame from the government.

A few days later, Asia Commercial Bank’s chief executive officer Lý Xuân Hả was also picked up for “violating state regulations on economic management,” according to the state run Vietnam News Service.

Since the arrests, the Ho Chi Minh Stock Index has sold off by 12 percent and ACB’s stock is down 22 percent. Moody’s Investors Service cut the bank’s credit rating with a warning that it was placing its credit on review for a possible future downgrade. Fitch Ratings wrote, the “arrest could trigger renewed investor concerns about corporate governance, transparency and liquidity issues in Vietnam’s banking sector.”

According to some press reports, the arrests at ACB, one of Vietnam’s biggest priate banks, are the result of a power struggle within the Communist Party. Specifically, between Prime Minister Nguyễn Tấn Dũng and President Trương Tấn Sang.

Dũng, viewed by many as Vietnam’s most powerful prime minister after being reelected to a five year term in 2011, was the force behind Vietnam’s drive to develop dominant state-owned enterprises.

Sang, on the other hand, is believed to be part of the old guard, worried about the increasing divide between rich and poor in the country. As such, cracking down on state-owned enterprises because of corruption is a way of discrediting the chaebol policy.

In a pointed opinion article last week, President Sang said that “Vietnam was now under pressure from broken state-owned enterprises.” He lamented the “degradation of political ideology and the morals and lifestyle” of public officials. A not so subtle shot at Dũng.

The prime minister, for his part, has come out supportive of the punishment of illegal activities in the banking sector “no matter who they are.”

The crackdown by the government is sparking rumors of other arrests. Yesterday, Nguyễn Đăng Quang, the chairman of the food conglomerate Masan Group, came forward to dispel rumors that he had been detained.

If the Communist Party seeks to insulate itself from the public’s ire over the struggling economy with a campaign targeting the wealthy, it risks starting another economic crisis by scaring away the foreign investment that drove much of the country’s growth in recent years. If that happens, its entire economic reform program could be threatened.