Bank debts dent confidence in Vietnam

Bank debts dent confidence in Vietnam

By John Chalmers

HANOI (Reuter): Confidence in Vietnam's ability to honor its financial commitments has slumped following a string of defaults by the country's cash-strapped commercial banks on millions of dollars of loan guarantees.

Foreign bankers suspect that the authorities, perhaps reluctant to bail out banks because of downward pressure on hard currency reserves, are turning a blind eye to many of the delays in paying up on letters of credit.

That is hardly likely to reassure Vietnam's commercial bank creditors, who are on the verge of sealing a Brady-style bond deal to restructure some $700 million of debt.

"I think the Brady deal will go ahead," said one foreign banker in Hanoi. "But it's really not a good time for all this nonsense to be going on."

Faith in Vietnam's primitive financial sector sagged earlier this year amid reports of defaults by some small, privately held banks on money owed to foreign banks and companies. A spate of corruption and fraud scandals involving banks and high-profile companies added to the growing mood of distrust.

But confidence has sunk even lower in recent weeks because several banks -- big and small, private and public -- have refused to pay money owed in respect of letters of credit opened for two scandal-hit and debt-torn companies, Minh Phung and EPCO.

"When a bank fails to meet its obligations you have to question its credibility," said the foreign banker. "When it's state-owned, you have to question the credibility of the state."

A senior central bank official denied talk that banks had been instructed to withhold payments to foreign banks and companies on letters of credit opened for Minh Phung and EPCO.

But he made no apologies for the banks' repeated failure to comply with international banking standards.

"Some banks are using emergency measures...just asking foreign banks to reschedule or wait," he told Reuters. "If the banks don't pay on time they will spoil their reputation, I know that. But you have to understand the situation in emerging markets."

An official at Vietcombank, the country's flagship state-owned bank, said recently that the Ministry of Finance had ordered it to delay a payment on a letter of credit opened for a $5.6- million patrol boat deal with an Australian shipbuilder.

That instruction would appear to be a one-off. But a senior banker said Vietcombank had also failed to meet the deadline on about $40 million of letters of credit opened for Minh Phung.

Minh Phung -- a garments-to-property empire whose top executives have been arrested for suspected fraud -- owes some $340 million to state-owned Incombank alone. Vietcombank, industry sources say, is probably owed at least $100 million.

"No commercial bank will pay the foreign banks because the investigation into Minh Phung is still going on," said the Vietcombank official.

With that attitude, many of the foreign banks which once rushed with high hopes into the fast-growing Vietnamese economy are starting to reel in their credit lines.

"This is going to do a lot of damage to the banks in Vietnam, and it's already having an impact," said David Hutcheson, chief executive of Hongkong Bank in Vietnam.

More than $1.0 billion in deferred letters of credit fall due this year -- many around now -- following a surge in short-term trade financing from abroad in 1996.

If credit dries up, the cash crunch which many local banks are already facing will get worse and their ability to honor payments will deteriorate even further.

A drop in overseas financing would also slam a brake on imports for investment, and in turn hamper economic growth.

Indeed, imports have already slowed dramatically, with year-on-year growth in the first five months just 1.5 percent. Consumer prices have fallen for three months in a row, stocks of key commodities such as steel and cement are growing and industrial production growth is coming off the boil.

To what extent the state bank is capable of supporting troubled banks remains unknown, especially given the culture of secrecy which surrounds Vietnam's public finances and macroeconomic management.

"At the moment we are letting the banks swim," said the senior central bank official. "But we are standing there as the coastguard of last resort."

One senior local banker said foreign reserves stand at around $1.6 billion, equivalent to about seven weeks of imports.

But analysts point to a recent ban on foreign investors buying hard currency in Vietnam to meet their offshore payments as an indication that central bank reserves could be much tighter.

"I'm suggesting that it hasn't got the reserves or that they're perilously low," said Hutcheson. "I think there's been a high outflow of foreign reserves."

Jonathon Haughton, a development economist at Wellesley College, wrote in the Vietnam Business Journal this month that a serious depletion of reserves could lead to a slide in the value of the national currency, the dong.

Haughton argued that a depreciation of the dong was needed to bring down Vietnam's trade deficit, which last year stood at around 17 percent of gross domestic product.

But he said a big devaluation would create problems for those industries, mainly state-owned, which have borrowed in dollars and used the proceeds to buy goods they then sold in dong.

"If those dong were to buy fewer dollars, then some of these enterprises will be unable to honor their foreign debts," he said.