Vietnam Expected to Loosen State Controls, If Carefully

The Communist Party must liberalize the economy but doesn’t want to jeopardize its position either.

The international community is keeping a close watch on Vietnam’s National Assembly as it is convening a month-long session to decide the extent to which it will amend the Constitution. The session is expected to end next week with lawmakers believed ready to give the go ahead on loosening the communist country’s economy, finance and investment laws.

The big question is: will the government take on its vested interests and reform the heavily indebted state-owned enterprises?

Determined to participate in the Trans Pacific Partnership trade talks, Vietnam is likely to continue opening up its economy to outside investment, lifting limits on foreign ownership of companies and reforming the banking sector.

But the economy has been slowing over the last three years largely because its state-owned companies, which account for some 40 percent of gross domestic product, are increasingly burdened with bad debt. Mandated by the government to play a leading role in the economy, they have had access to easy credit and invested in areas outside their expertise, leading to heavy losses.

These losses also imperiled the state’s banks that lent them the money. The banks are carrying the largest amount of nonperforming loans among the six Southeast Asian nations covered by the Fitch rating agency. The government has dismantled almost one in ten state-owned enterprises, according to the Center for Strategic and International Studies in Washington DC, but there is more to be done as growth came in below the government’s own 7 percent target during the last three years. Last year’s 5.25 percent growth rate even was the lowest in thirteen years’ time.

The central bank has been able to get inflation under control somewhat. It was 9.1 percent in 2012, down from 18.7 percent in 2011.

The prospect of the economy stalling further has perhaps spurred the government to be more aggressive in confronting the debt problem.

In July, the central bank created the Vietnam Asset Management Company as a vehicle for buying nonperforming loans from its banks. This “bad debt bank” has so far purchased $709 million in assets. It is expected to buy up to $6.6 billion in total.

The central bank has also vowed to prosecute officials who are involved in corruption. This week, a former general director of Agribank Financial Leasing as well as the former chairman of a building firm were sentenced to death after they were convicted of embezzling more than $25 million from state companies. Nine other executives were put in prison for up to fourteen years each.

The impetus behind the crackdown is the growing realization that the current model has outgrown its usefulness. With the economy slowing, the public’s angst is growing. The Communist Party is intent on reforming the economy in order to keep growth intact and to attract foreign direct investment. Moreover, it wants to avoid a meltdown in the banking system and being blamed for driving the economy into the ground if that happens. Above all, the party intends to stay in power.

However, reforming the state-owned enterprises and embracing greater economic openness is a risky move. State companies are the party’s means to control the economy. The more control it relinquishes, the greater the loss of its influence politically.

It is commonly held that greater economic freedom ultimately leads to people demanding greater political freedom as well. Vietnam’s ruling party party no doubt realizes this and is surely balancing its decisions carefully.