Massively indebted Vietnamese shipbuilder misses payment

Prime minister left vulnerable before party congress as Vinashin’s debts reach almost 5% of GNP.

International investors are growing concerned about Vietnam‘s state-owned shipbuilding conglomerate Vinashin, which is on the verge of bankruptcy. Its failure would have dire consequences for one of the most dynamic south-east Asian economies. Vinashin is the flagship for the development model advocated by the current leadership of the Vietnamese Communist party.

But it has run up debts of about $4.4bn, equivalent to almost 5% of gross national product in 2009. The firm is begging its creditors, especially Crédit Suisse, which put together a $600m loan in 2007, to delay repayments. At the end of last month Vinashin failed to pay its first $60m instalment to Crédit Suisse, and the Vietnamese government announced an interest-free loan to enable the company to pay wages to its workforce.

Vinashin is in such deep trouble that it threatens the country’s economy. Moody’s, and Standard & Poor’s, have already downgraded Vietnam’s overall credit rating.

This could be a serious setback for the Vietnamese economy, which is otherwise doing well. During the 1990s the country enjoyed spectacular growth, over 7%, but then seemed to be losing pace. However last year GDP once more increased by 6.8%, according to the national office of statistics.

If Vinashin fails it is bound to have a political impact. The 11th Communist party congress is due to convene this month and will probably renew part of the national leadership.

Last November the prime minister, Nguyen Tan Dung, came under serious pressure in parliament after an MP dared to table a motion of no-confidence, a direct challenge to his authority.

The one-party system still prevails, but this does not prevent lively debate. The press picked up the story, calling the government to account, and many observers think that Vinashin’s problems may undermine the position of Dung and his clan.

Dung, 60, is a southerner and a war veteran. His appointment in 2006 was a new departure for the party executive, with a change of style. In a system traditionally based on consensus-building, which tends to wipe out individual differences in favour of collective action, Dung stands out as a more charismatic figure than his predecessors.

According to the Asia Times online, Dung “is deliberately taking centre stage to signal global leaders and investors that he is in total control of his government, which wasn’t always apparent with previous post-revolution Vietnamese administrations, which were run more by committee”.

Various factors seem to have contributed to Vinashin’s frail condition: poor management of public funds, lack of supervision and transparency, incompetent senior management, plus nepotism and corruption. Two CEOs have been appointed, then dismissed, in recent months, both sacked for bad management. One of them, Pham Thanh Binh, was close to Dung.

The shipbuilder’s failure casts doubt on a business model inspired by South Korea. Hanoi set out to build something similar to the Korean chaebols, which were large conglomerates designed to drive economic growth, but in Vietnam’s case they are publicly owned and under state supervision. “What has happened is very serious,” said an overseas investor, “and the repercussions could well be disastrous.”

Vietnam’s Doi Moi policy of change and renovation, launched in the 1990s, gradually deregulated the economy while maintaining strict political control, much as has happened in China. The number of publicly owned companies has dropped from 12,000 in 1989 to 4,000.

But although these conglomerates only account for a third of Vietnam’s total output, they have recently expanded a great deal in a drive to diversify their interests. With 35% to 40% annual growth, Vinashin invested in catering, distilling and insurance, among other businesses.

Other companies have taken a similar route: VietNam Electricity (EVN) has invested in mobile phones; PetroVietnam has moved into the travel business.

According to Pham Chi Lan, a former head of the chamber of commerce and an adviser to the previous prime minister, Vinashin made the mistake of “developing too many different activities too fast. The South Korean model was certainly attractive, but the management at Vinashin did not understand how it worked.”

Lan thinks the next government, appointed after the party congress, will have to rethink its overall approach. She is critical of “the extreme ease with which state-owned companies can obtain bank loans … These businesses corner two-thirds of all loans, leaving only thin pickings for the private sector.”

A Vietnamese entrepreneur, working on infrastructure projects, endorses this view: “Private businesses have to pay 18% interest on any money they borrow. How on earth can we be expected to make a profit under these conditions?”

With a clan system reaching all the way up the power structure, the Vinashin affair is certain to have repercussions, though it is still not clear what form they will take. According to party officials and journalists, all of whom prefer to remain anonymous, Dung will probably stay.

In November Dung publicly accepted responsibility for Vinashin’s current woes and yet he stands a good chance of staying in office. He might take over as the secretary general of the party, which is a politically powerful position but one that has a less direct involvement in economic affairs.