Bank debts dent confidence in Vietnam<\/p>\n
By John Chalmers<\/p>\n
HANOI (Reuter): Confidence in Vietnam's ability to honor its
\nfinancial commitments has slumped following a string of defaults
\nby the country's cash-strapped commercial banks on millions of
\ndollars of loan guarantees.<\/p>\n
Foreign bankers suspect that the authorities, perhaps
\nreluctant to bail out banks because of downward pressure on hard
\ncurrency reserves, are turning a blind eye to many of the delays
\nin paying up on letters of credit.<\/p>\n
That is hardly likely to reassure Vietnam's commercial bank
\ncreditors, who are on the verge of sealing a Brady-style bond
\ndeal to restructure some $700 million of debt.<\/p>\n
\"I think the Brady deal will go ahead,\" said one foreign
\nbanker in Hanoi. \"But it's really not a good time for all this
\nnonsense to be going on.\"<\/p>\n
Faith in Vietnam's primitive financial sector sagged earlier
\nthis year amid reports of defaults by some small, privately held
\nbanks on money owed to foreign banks and companies. A spate of
\ncorruption and fraud scandals involving banks and high-profile
\ncompanies added to the growing mood of distrust.<\/p>\n
But confidence has sunk even lower in recent weeks because
\nseveral banks -- big and small, private and public -- have
\nrefused to pay money owed in respect of letters of credit opened
\nfor two scandal-hit and debt-torn companies, Minh Phung and EPCO.<\/p>\n
\"When a bank fails to meet its obligations you have to
\nquestion its credibility,\" said the foreign banker. \"When it's
\nstate-owned, you have to question the credibility of the state.\"<\/p>\n
A senior central bank official denied talk that banks had been
\ninstructed to withhold payments to foreign banks and companies on
\nletters of credit opened for Minh Phung and EPCO.<\/p>\n
But he made no apologies for the banks' repeated failure to
\ncomply with international banking standards.<\/p>\n
\"Some banks are using emergency measures...just asking foreign
\nbanks to reschedule or wait,\" he told Reuters. \"If the banks
\ndon't pay on time they will spoil their reputation, I know that.
\nBut you have to understand the situation in emerging markets.\"<\/p>\n
An official at Vietcombank, the country's flagship state-owned
\nbank, said recently that the Ministry of Finance had ordered it
\nto delay a payment on a letter of credit opened for a $5.6-
\nmillion patrol boat deal with an Australian shipbuilder.<\/p>\n
That instruction would appear to be a one-off. But a senior
\nbanker said Vietcombank had also failed to meet the deadline on
\nabout $40 million of letters of credit opened for Minh Phung.<\/p>\n
Minh Phung -- a garments-to-property empire whose top
\nexecutives have been arrested for suspected fraud -- owes some
\n$340 million to state-owned Incombank alone. Vietcombank,
\nindustry sources say, is probably owed at least $100 million.<\/p>\n
\"No commercial bank will pay the foreign banks because the
\ninvestigation into Minh Phung is still going on,\" said the
\nVietcombank official.<\/p>\n
With that attitude, many of the foreign banks which once
\nrushed with high hopes into the fast-growing Vietnamese economy
\nare starting to reel in their credit lines.<\/p>\n
\"This is going to do a lot of damage to the banks in Vietnam,
\nand it's already having an impact,\" said David Hutcheson, chief
\nexecutive of Hongkong Bank in Vietnam.<\/p>\n
More than $1.0 billion in deferred letters of credit fall due
\nthis year -- many around now -- following a surge in short-term
\ntrade financing from abroad in 1996.<\/p>\n
If credit dries up, the cash crunch which many local banks are
\nalready facing will get worse and their ability to honor payments
\nwill deteriorate even further.<\/p>\n
A drop in overseas financing would also slam a brake on
\nimports for investment, and in turn hamper economic growth.<\/p>\n
Indeed, imports have already slowed dramatically, with
\nyear-on-year growth in the first five months just 1.5 percent.
\nConsumer prices have fallen for three months in a row, stocks of
\nkey commodities such as steel and cement are growing and
\nindustrial production growth is coming off the boil.<\/p>\n
To what extent the state bank is capable of supporting
\ntroubled banks remains unknown, especially given the culture of
\nsecrecy which surrounds Vietnam's public finances and
\nmacroeconomic management.<\/p>\n
\"At the moment we are letting the banks swim,\" said the senior
\ncentral bank official. \"But we are standing there as the
\ncoastguard of last resort.\"<\/p>\n
One senior local banker said foreign reserves stand at around
\n$1.6 billion, equivalent to about seven weeks of imports.<\/p>\n
But analysts point to a recent ban on foreign investors buying
\nhard currency in Vietnam to meet their offshore payments as an
\nindication that central bank reserves could be much tighter.<\/p>\n
\"I'm suggesting that it hasn't got the reserves or that
\nthey're perilously low,\" said Hutcheson. \"I think there's been a
\nhigh outflow of foreign reserves.\"<\/p>\n
Jonathon Haughton, a development economist at Wellesley
\nCollege, wrote in the Vietnam Business Journal this month that a
\nserious depletion of reserves could lead to a slide in the value
\nof the national currency, the dong.<\/p>\n
Haughton argued that a depreciation of the dong was needed to
\nbring down Vietnam's trade deficit, which last year stood at
\naround 17 percent of gross domestic product.<\/p>\n
But he said a big devaluation would create problems for those
\nindustries, mainly state-owned, which have borrowed in dollars
\nand used the proceeds to buy goods they then sold in dong.<\/p>\n
\"If those dong were to buy fewer dollars, then some of these
\nenterprises will be unable to honor their foreign debts,\" he
\nsaid.<\/p>",
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