The global economic storm predicted for 2012 may well have a silver lining for Vietnam, writes Dr Alan Phan.
China was the latest country with bad news on the excessive debt load afflicting global financial markets. The bad debts caused by local government borrowings could exceed RMB14 trillion (US$2.2 trillion) and have created a worrisome uncertainty over the financial conditions at Chinese banks, as large as the effect of the European debt load on Western banks. The issue was identified by Professor Victor Shih of Northwestern University two years ago, but foreign investors and funds in China did not pay attention. They were too busy heaping praise on the quasi-socialist system of the country’s economy thanks to the huge amount of fees and nominal profits being generated.
The situation was not unlike the real estate debacle in the US and Europe back in 2007. Despite plenty of warnings from people like Nouriel Roubini, Marc Faber, and others, the global banking giants merrily sold and profited from billions worth of CODs until the collapse of Lehman Brothers.
The problems with China’s financial markets were not limited to huge local government borrowing. Due to a system of “quan xi” (connections) that was rooted in every layer of Chinese society, from government to business, ordinary entrepreneurs had a difficult time borrowing directly from local banks. A layer of middle-men made a lot of money by borrowing from banks and lending to end-users at exorbitant interest rates. This “black” financial market presently occupies over 40 percent of lending activities in Chinese commerce. Its lack of transparency and regulatory control exacerbated the bad debt ratio of Chinese banks to an unknown extent.
Vietnam’s financial system is afflicted with similar problems, albeit on a smaller scale. Given unreliable statistics and the habit of hiding bad numbers, nobody (even the government officials in charge) has a clue as to the nature and extent of or the solutions to the problems.
While the Chinese might be able to take out a major portion of their foreign currency reserve to throw at the credit problem, the Vietnamese government is running out of both the funds and the time to offer any relief.
Needless to say, the worsening condition of the financial systems in the US and Europe won’t help either. Vietnamese entrepreneurs have already paid a heavy price for the current macro conditions of run-away inflation, skyrocketing interest rates and a depreciating Vietnam dong. An estimated one-third of private companies have applied for dissolution or have simply disappeared into the night. (One side note: it is much more expensive and messy to declare bankruptcy in Vietnam). Predictions from local economists recently started to sound like a weather report: the tropical storm of “2012” is bringing a lot of heavy rain, strong winds, high waves and major flooding.
From my perspective, however, the fortunes for Vietnamese private entrepreneurs are about to turn.
First of all, the helplessness of government power to intervene means a laisser-faire policy to allow private entrepreneurs to swim with the flood. Those who survive will be stronger with bigger market shares, stronger financial resources and a more experienced management team. Those who die will be re-born with a better sense of business acumen, no outrageous leverage on financial schemes and some real competitive advantages on products or services. State-owned enterprises will continue to be a drag on the economy, but their hold on power will be much weaker after the financial storm.
This laisser-faire policy will last for at least a few years until the public debt load is pared down to normal. As a result, the government will not be able to turn back the clock and return to the tight control they are used to. In fact, the expected thriving of the private sector will also attract a lot of talent from the public sector to venture into the new market economy. Whether it is called by the same or a different name, “Doi Moi Part II” will actually arrive earlier than predicted.
By 2017 the developed world should also get back to normal. Global capital will roam to emerging markets again, looking for profit. Vietnam should be an attractive destination with little government control and a better business environment.
The other benefit of the storm will be the change in strategy of money-making by the masses. One major psychological trend in Vietnam was that ordinary investors became “lazy” after years of the easy-money phenomenon. They were conditioned by the spectacular rise of real estate prices, stock market indices, and, especially, the “co” and “phong bi” (middle-men) mentality. Few would invest in a real business with years of hardship and challenges to earn a paltry 5 percent return per annum. The coming storm will force them to reevaluate their options as the easy money ways begin to disappear. The employ of capital in efficient enterprises and innovative technology will set new examples in wealth creation.
On the same token, entrepreneurs will have to find new products and services to compete in a difficult environment. Creative management and new markets will be keys to survival. A push to expand regionally and internationally will provide experience for Vietnamese enterprises and sharpen their competitive spirit.
Best of all, the burst of the real estate bubble and the diminishing prices of other assets will allow a new middle class to emerge. Housing will be affordable again and inflationary prices on foods and commodities will return to normal. Social inequities will be lessened after the crisis.
It was Karl Marx who implied that capitalism destroys and reconfigures economic orders by devaluing existing wealth to create new wealth. He used the term “creative destruction” to describe the process. Joseph Schumpeter later popularized it in the theory of economic innovation and progress. He believed economies and companies must downsize frequently to increase the efficiency and dynamism of the entities. While Marx thought that these frequent destructions would cause distress and insecurity to the workers, the innovative process has in fact lifted billions of people out of poverty since globalization arrived.
Another Russian communist, Mikhail Bakunin, commented, “Establishment has every reason to fear the unknown, for authority can rarely survive in the face of doubt.” For Vietnam, however, the arrival of the big financial storm of 2012 may well be a blessing after all.
(This article was published by Vietnam Financial Review Issue No. 10, Volume LIII, 2 December 2011)
Dr. Alan V Phan is the author of seven books on the economics and management of emerging markets, most recently “Hedge Funds and China’s Stock Market” and “42 Years of Doing Business in the US and China”. He is Chairman of Viasa Fund, a family office located in Hong Kong. Dr. Phan obtained his Ph.D, DBA, MBA and BS in the US and Australia.