Sept. 30 (Bloomberg) -- Vietnam’s premier pledged to subject state-owned companies to competition and allow greater foreign ownership of banks as the government seeks to revive growth and join a key trade agreement.
Over the next five years, Vietnam’s state companies will focus on areas such as infrastructure that “the private sector cannot or does not want to invest in,” Prime Minister Nguyen Tan Dung said in an interview in New York on Sept. 27. The government plans to devalue the dong as much as 2 percent by the end of the year and let foreign companies own up to 49 percent of local banks in the “near future,” Dung said.
Vietnam’s economy faces its most severe slump in at least a decade, hurt by slower lending as banks strain under the weight of bad debt incurred largely by the state sector. Removing protections for state companies would help Vietnam in seeking greater access to the U.S. market to strengthen its economy, and underpin efforts to boost political ties.
State enterprises will need “to operate in the market economy,” Dung said in the almost hour-long interview. “We will treat them as equal to other enterprises.”
There are plans to sell shares in companies such as Vietnam Airlines Corp., Vietnam Posts & Telecommunications Group, and Vietnam Oil & Gas Group, he said, without giving a specific time frame for divestment.
Dung said he is considering increasing the foreign ownership limit in banks and telecommunication companies. Total foreign ownership in any lender is currently limited to 30 percent and the holding of any single foreign investor at 20 percent. Those limits curb offshore interest in Vietnamese banks, Standard & Poor’s said last month in a research note.
The government plans to devalue the dong because it considers it overvalued against the dollar, Dung said. The timing of a devaluation is “dependent on the market,” he added.
Vietnam devalued its currency by 1 percent in June, the first move since 2011, and the central bank has said any adjustments to the dong’s value this year would be within a 3 percent range. It has weakened 1.3 percent against the dollar this year, while currencies elsewhere in Asia such as the Philippines and Malaysia have dropped at least 5 percent.
Vietnam has reduced the number of companies that are wholly-owned by the government to 1,300 from 12,000, Dung said. “We will narrow down the areas of operations for these SOEs,” he said. “That focus is mainly into infrastructure.”
State-owned companies in Vietnam are a key source of economic vulnerability, the International Monetary Fund said in August. Government policies dictate that the state sector play the leading role in the economy, with preferential access to land and capital, while non-state businesses face restrictions on market access, Jonathan Pincus wrote in a paper last year while a Ho Chi Minh City-based economist with the Vietnam Program at the Harvard Kennedy School.
Vietnam is considering measures such as tax breaks to help foreign companies, said Vice Minister of Planning and Investment Dao Quang Thu. Vietnam’s macro economic situation is improving even as the risk remains of higher inflation, he said today at a conference in Hanoi.
“We have been raising this question of level playing field every six months at the highest level of the government,” said Alain Cany, co-chairman of the Vietnam Business Forum Consortium.
“If the prime minister is declaring this in the U.S. in public, it’s probably the most encouraging statement I’ve heard for the last few years,” Cany said. “The country needs this kind of action to be able to go back to the 7 percent growth rates of the past.”
Vietnam’s Ministry of Planning and Investment forecasts the economy to grow 5.4 percent this year and 5.8 percent next year, which would mark three consecutive years of growth that’s slower than 6 percent. Its banks have the highest level of bad debt among the six Southeast Asian countries covered by Fitch Ratings.
The nation’s economy and exports may be boosted if it signs the Trans-Pacific Partnership, a proposed trade agreement with 12 nations. The U.S. will give Vietnam “differential” treatment in negotiating the accord, Dung said.
“We have urged all the members of the TPP to be flexible, taking into account the low level of development of Vietnam,” said Dung. “The United States is willing to be flexible with Vietnam.”
The nation stands to be the biggest beneficiary if it signs the trade agreement, according to an October 2011 study by the Honolulu-based think tank the East-West Center.
The government is under pressure to accelerate reform of its state sector, with a major American stipulation in talks on the pact that private and state-owned companies compete equally.
“It would be very smart for the government of Vietnam to take what it plans to do anyway, i.e., reforming its SOEs, and build that into its TPP obligations,” said Susan Schwab, a former U.S. trade representative from 2006 to 2009.
“You are self-imposing reforms you want to do anyway, and the sweetener you are getting with that medicine is market access and all the benefits you get from a trade agreement,” she said.
General Electric Co. won a $1 billion order to supply engines for Vietnam Airlines Corp.’s fleet of 787 Dreamliners, Dung also said.
Closer business ties with the U.S. may come as military relations strengthen among the former wartime adversaries, with then-U.S. Defense Secretary Leon Panetta the highest-ranking American official to visit Cam Ranh Bay since the Vietnam War, making the trip in June 2012.
“The United States is a global power and also an Asia-Pacific power,” said Dung. “An appropriate presence by the United States in Asia Pacific will contribute to peace, stability, maritime safety and security.”
At the same time, the U.S. should lift an “unreasonable” and “discriminatory” ban on the sale of lethal weapons to Vietnam, said Dung.
“That shows a lack of trust,” he said. “To be honest with you, even if the U.S. lifts this embargo it is not certain that we will buy the weapons from the U.S., but it is about trust.”
U.S. Secretary of Defense Chuck Hagel accepted an invitation to visit Vietnam next year. He expressed a commitment to boosting defense ties and cited the importance of the peaceful resolution of territorial disputes in the South China Sea, according to a U.S. Defense Department statement. Vietnam is one of a number of claimants, alongside China, to waters in an area rich in fish, gas and oil.
Obama administration officials identify Vietnam as one of the new partners they are cultivating as part of a strategic and economic rebalance toward Asia, wrote Mark Manyin, a specialist in Asian affairs, in a July Congressional Research Service note.
“We were foes before, but we are now friends,” Dung said of the two countries. “We are ready to shelve the past and work together toward the future for our common goal of peace, friendship and cooperation on an equal footing for mutual benefit and development.”
To contact the editor responsible for this story: Rosalind Mathieson at email@example.com