Vietnam’s leaders are set to tighten their grip on the economy, affirming the central role of the ruling Communist Party and the dominance of state companies in a revised constitution to be approved this week.
After indicating in January they could use the charter revamp to edge toward a more market-oriented system and lift growth from its slowest rate in 13 years last year, leaders have opted to retain state-owned enterprises as the economy’s anchor. State firms have contributed to Southeast Asia’s highest bad debt ratio.
Further entrenching the regime raises the risk of stalling needed reforms such as more transparency, said investors including Mark Mobius, at a time when social unrest over issues such as land rights has mounted. Dissatisfaction with economic progress led parliament this year to subject leaders to an unprecedented confidence vote and some party members to suggest an alternative charter allowing “political competition.”
“It’s battening down the hatches to ride out the storm,” said Carlyle Thayer, an emeritus professor at the Australian Defense Force Academy in Canberra. “The economy is not getting the 7 percent growth they wanted. Anytime there is turbulence, the default is to maintain control.”
Government officials forecast the economy will grow 5.4 percent this year and 5.8 percent in 2014, which would mean 7 straight years below 7 percent growth. Vietnam’s bad debt, estimated by economists and ratings firms to be higher than the 4.62 percent of outstanding loans reported at the end of September, has crimped credit growth and hurt businesses.
Stalling reforms could cause unease among foreign investors frustrated with Vietnam’s opaque system, said Mobius, who oversees $53 billion in assets as executive chairman of Templeton Emerging Markets Group.
“If you are doing business in Vietnam, the role of the government is very, very big,” he said by phone. “We have to read the tea leaves to see what is happening. You have a one-party state and decisions are made behind closed doors. We need to see more transparency.”
Vietnam exports increased 13 percent in October from a year earlier, more than twice China’s pace, and pledged foreign direct investment surged 54 percent to $20.8 billion in the first 11 months of the year. The government will want to sustain that, Mobius said.
“I am sure there is a group within the party that wants to see more reform,” he said.
Mobius and other stock investors have helped fuel the benchmark VN Index’s 24 percent rise this year on expectations the government will increase foreign ownership limits of listed companies. The VN gauge dropped 0.1 percent to 508.43 today in Ho Chi Minh City trading.
The latest draft of the constitution calls for a “socialist-oriented market economy with many forms of ownership and economic sectors,” in which “the state economic sector assumes the leading role.” It preserves language that all economic sectors will operate equally under the law.
Foreign companies and investors “will see that the constitution doesn’t have significant changes and they may take it that we don’t really want to change and that will be a wrong signal,” said Le Dang Doanh, an independent economist who has advised two prime ministers, including Nguyen Tan Dung. “Some investors may call this stability but others may see it as stagnation.”
Chinese leaders have rolled out economic changes in response to slowing growth, and shown greater willingness to reform state companies, he added.
“We are missing a great chance to really make some changes,” said Doanh, who was among 72 main signatories to the alternative charter proposed to parliament. “We may suffer costs from this new constitution. It won’t boost economic growth when you have the inefficient state sector leading the economy.”
The latest draft of revisions to the current constitution, which was adopted in 1992, also extends the influence of the party by placing the police and military under its control and giving the government broader powers to curtail freedom of speech.
Once Southeast Asia’s fastest-rising destination for foreign investment, Vietnam’s expansion has eased since the early boom from the 1986 economic reforms called “Doi Moi,” which allowed private businesses to officially operate in the country for the first time since the end of the war with the U.S.
State owned-companies are a key source of economic vulnerability, the International Monetary Fund said in August.
The sector is a backbone of the economy that provided stability during the recent global downturn, said National Assembly delegate Tran Minh Dieu, the VietnamNet news website reported Nov. 6.
“Although shortcomings remain in management, operation, business and production, it is still necessary to strengthen the role of this sector,” he said.
Vietnam’s leaders have been under pressure to make changes. During the June confidence vote, Prime Minister Dung was rated poorly by almost a third of lawmakers. Central bank Governor Nguyen Van Binh received a “low-confidence” vote from 42 percent of lawmakers, who cast secret ballots.
Vietnam Shipbuilding Industry Group, the state-run company known as Vinashin, almost collapsed in 2010 because it failed to manage its debt, according to the transport ministry. The company is changing its name to Shipbuilding Industry Corp.
There has been a “back and forth” among government leaders about whether the revamped constitution should contain language that revises the role of the state, said Asian Development Bank country economist Dominic Mellor.
“There are vested interests and certain groups that would not want change,” he said by phone. “But the level of instability of the last few years and poor performance of SOEs that have been mismanaged has created a debate.”
The charter wording probably won’t lead to a short-term drop in investment, said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, who previously worked for the World Bank. Vietnam’s growing middle class and low labor costs are luring companies away from China, he said.
“If this announcement has any effect, it will be perceived in the long haul: a slower rate of growth than would have happened,” Condon said. “We may look back at this decision in 20 years and see it as a fateful decision.”