Vietnam's Record-Breaking Bank Rot Reeks Of 1997-98

The timing is rather unwelcome, as
“Vietnam is one of the big winners of global derisking, perfectly positioned to gain from US-China rivalry,” Miller adds.

As supply chains continue to diversify away from China, Vietnam's global share of goods exports is growing. It is moving up the value chain, with sales of phones, electronics and machinery having overtaken those of rice, coffee and T-shirts. Now, the US is wooing it with the promise of investment in semiconductors.

Foreign direct investment is soaring, buoyed by greenfield investment from China and Hong Kong.“Behind the FDI statistics, however, the picture is less bright,”
Miller says.“Paralysis induced by the anti-corruption crackdown threatens to prevent Vietnam from fulfilling its economic potential.”

GDP growth“limped” to 5% last year, below the 7% average of the past three decades, Miller notes.

With growth in the first quarter coming in at 5.7%, slowing from 6.7% in the fourth quarter of 2023, Prime Minister Pham Minh Chinh says“drastic action” is needed to hit this year's target of 6.5%.

Yet, Miller adds,“the bigger worry is that growth disappoints for several more years, as political infighting causes capital projects to be delayed. While Vietnam's structural outlook remains solid, its leaders are not currently taking the actions needed to hit their long-term targets and avoid the dreaded middle-income trap.”

The question now, of course, is how Vietnamese officials implement badly needed reforms going forward.

“In the long run, if they can clean up the market, removing toxic and illegal business practices, that will be good for the economy as a whole and something that investors should welcome,” says Le Hong Hiep, a senior fellow at the ISEAS-Yusof Ishak Institute.

That's a big“if,” though.
Vietnam's smokestack economy, communist politics, dense population, low labor and land costs, near-7% annual growth rates over the last 10 years and physical proximity explain the“mini-China” label.

The dynamic gave Vietnam a big leg up in Southeast Asia as US tariffs on China and sanctions on companies drove factories out of Asia's biggest economy.

Yet Vietnam also brings some complicated baggage to the table. Few doubt Vietnam is destined for middle-to-upper-income status. Investors fully get how Hanoi will get there – by emulating China's export-led model and its heavy reliance on big state-owned enterprises.

In its haste to move upmarket, though, Vietnam is still too prone to“pendulum economics.” Investors oscillate between irrationally bullish to wildly negative on the country's prospects.

As a result, the $408 billion economy tends to crash every five years as foreign capital flees even faster than it arrived. Reducing the prevalence of these swings must be a key focus for policy shifts heading toward 2025.

One reason is an unhealthy preoccupation with exchange rates. The SBV's obsessive management of the dong often earns Hanoi a place on the US Treasury Department's“currency manipulator” watchlist. Its trade-reliant economy also finds itself on the frontlines of a surging US dollar that has traders buzzing about 1997-like vibes in the Asian air.

Look no further than Asian central banks, which are scaling back easing cycles for fear that their currencies might plunge. The longer the US Federal Reserve avoids easing aggressively, as investors expected, the more Asian policymakers will have to recalibrate monetary strategies.

“With higher US interest rates likely to translate into a stronger US dollar for longer too, Asian central banks will be cautious in adding onto currency depreciation pressures,” says economist Priyanka Kishore at consultancy Asia Decoded.“While they will still lean on intervention and other market measures to manage foreign exchange weakness, they are likely to continue paying more
attention to the Fed
as they begin their easing cycle.”

Vietnam also risks getting caught in the middle of US-China trade tensions.

“In Vietnam's case, 13% of all imports are electronics from China, including robots, consumer electronics, home appliances, electronic components and telecommunications equipment,” says Dave Chia, economist at Moody's Analytics.

“Decoupling risks loom large for these sectors, as illustrated by bans in some of the region's countries, as well as further afield, on telecommunications equipment made by China's Huawei Technologies Co out of national security concerns,” Chia says

The key is for Chinh's government to reinvigorate the economic reform process. The US-China trade war did wonders for Vietnam's increasing global presence since 1986, when Hanoi launched its“Doi Moi” market reform process that tilted away from a Marxist command economy.

The market reorientation transformed Vietnam from one of the world's poorest countries into today's lower-middle-income status. The momentum it generated, according to the World Bank, increased per capita income sixfold in less than 40 years, from less than $600 in 1986 to roughly $3,700 now. The poverty rate plunged to 4.2% at the end of 2022 from 14% in 2010.

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As Andy Ho, chief investment officer of VinaCapital Group, points out, Vietnam's“rapidly” developing economy means“most of the population is benefitting.”

Andrew Amoils, analyst at advisory New World Wealth, tells CNBC that Vietnam could see a 125% increase in wealth over the next 10 years. That would mark the biggest expansion of GDP per capita and the number of millionaires in any comparable country.

Yet such progress will only be possible if Hanoi stops the economic pendulum from swinging wildly every few years. And if Communist Party officials accelerate efforts to grow better, not just faster. That means reducing red tape, increasing innovation and productivity, strengthening human capital and attacking the kind of entrenched corruption that the SCB mess exemplifies .

It's possible that a broader crackdown on corruption could cause additional uncertainty. In the long run, the anti-corruption drive to weed out illegal practices should improve economic efficiency and enhance Vietnam's attractiveness as a foreign investment and manufacturing hub.

Vietnam's pendulum economics attract and repel foreign investors. Image: Asia Times Files / AFP / Liu Jin

“However,” says S&P's Tan,“these efforts may also generate pain points. The initiative may slow administration and approval procedures, as the bureaucratic process adjusts to the new norms of enhanced scrutiny and accountability.”

Gavekal's Miller adds that“the campaign has had an unfortunate side effect, throwing sand into the machinery of government. Public procurement has stalled, as officials are too scared to make decisions for fear of inciting scandal and possible punishment.”

Before 2017, Miller notes, Vietnam had done a decent job of developing its infrastructure but the buildout has slowed in recent years.“As in so many emerging economies,” he says,“Vietnam has discovered that a little corruption had helped to grease the wheels of commerce.”

Yet at least one thing is clear: the fact Vietnam just produced a scandal topping 1MDB by many multiples suggests all's not well under the hood, no matter how fast the economy appears to be moving.

Follow William Pesek on X at @WilliamPesek

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