Vietnam: Steady as She Goes

Normally, the eviction of a member from the Politburo of a ruling Communist Party would be a sign of internal friction and potential political instability. In the case of Vietnam, with its unparalleled history of collective leadership such an event was barely thinkable, especially just a year after the reshuffle of top posts at the once-in-five-years party congress. Yet the recent ouster of Dinh La Thang, Minister of Transport and Ho Chi Minh party boss has thus far sent few ripples of discord.

Indeed, there are hopes that it reflects a search for steadier if slightly slower economic growth, at least in the short term, after a decade when high growth was characterized by credit excesses which caused bouts of banking crises, currency instability and high inflation. Most specifically it has only gradually recovered from a sustained period of retrenchment following a credit boom and bust focused on large state enterprises such as that previously headed by Thang. The national shipping and shipbuilding companies in particular saw massive corruption and even bigger debts.

Although several banks still face loan write-offs, the currency has been very stable against the US dollar and hence risen against many Asian currencies, notably the yuan. Inflation is down below 3 percent, the current account is in surplus and GDP growth is still a little over 6 percent.

The political demise of Thang can be seen as a delayed follow-up to last year’s leadership changes and in particular the removal of two-term prime minister Nguyen Tan Dung. Many senior party people were worried that the party was losing its mandate due both to corruption, acknowledged or not, and the massive losses and debts of various state enterprises which weighed heavily on the banking system and economy.

The allegations against Thang date back to his time (2006-2011) as head of PetroVietnam, the giant state oil company. He was seen as a representative of the failures of the Dung era, but because of the still-collective nature of the leadership, unlike China, the party could only move very cautiously to discipline individuals. The choice of a politburo member was to show that the party was serious and that others need to watch out.

It also reflects the increased confidence of party General Secretary Nguyen Phu Trong, number one in the hierarchy. Although viewed as a conservative, reality is making Trong an advocate of reform and a greater role for the private sector, or at least the opening of the state enterprises to scrutiny. The SOE borrowing binge cannot be allowed to be repeated, the government itself has limited funds for development. Hence the need for much more efficient use of investment and revenue-raising through share sales.

For now at least this seems to be working. Official listings on the stock exchanges are still proceeding more slowly than many hope. But there has been a surge in listings on UpCoM, the Hanoi unlisted securities market which provides a halfway house to full listing of equitized companies and exposes them to a degree of public scrutiny.

Amalgamation of the stock exchanges is in prospect as is Vietnam’s entry to MSCI indices, which should bring in a flood of foreign money and help encourage further listings. Yet there is a danger too of a repeat of excessive foreign enthusiasm, which has contributed to past booms in busts in stock and bond markets.

Meanwhile Vietnam continues to attract large amounts of foreign direct investment in export manufacturing led by South Korea, and is expanding its global trade links. Assuming there is not another global financial meltdown or surge of protectionism, the fundamental economic strengths should continue to keep growth at around a 6 percent clip. The workforce is growing by 1 percent a year. Urbanization is still only 34 percent so it and accompanying productivity growth still have huge potential while wages remain low and infrastructure is improving. However, there remain question marks over whether the country has reached an era of low inflation and stable currency. Credit growth is down to 18 percent a year and credit to GDP only 120 percent. Real interest rates however are high which reflect doubts on the sustainability of low inflation but also should spur more efficient use of capital.

The temptation of larger deficits or another SOE borrowing binge may recur if GDP growth slows and a falloff in foreign investment or a sharp downturn in terms of trade could pressure the currency. A cap on government debt does exist but the broader state sector with its close links to party officials can yet cause major problems. Bigger officially-guided wage increases could also be disruptive. Yet there is now a reasonable chance that Vietnam can keep inflation at under 6 percent and see currency depreciation, whether against the US dollar or a currency basket, very gradual.

For a leadership now in the hands of relatively old men, economic turbulence is a greater political threat than the pressure for political change that will inevitably come from urbanization and a rising middle class. Trong is already 73, President Tran Dai Quang is 60. and Prime Minister Nguyen Xuan Phuc is 62 and so the demise of Thang also focuses increased attention on who may be the rising stars in the looking to gain promotion in 2021. Thang is only 56 and hence of a generation of senior officials who played no part in the Vietnam war but later enjoyed the power and perks of being a top party boss and in charge of SOEs and economic ministries.