Socialist Republic of Vietnam

1. INTRODUCTION

General
Capital: Population: Official Languages: Currency: Exchange rate: Hanoi 84 million Vietnamese Dong, abbreviated as VND. A USD = 18470 Dong (January 1st, 2010) A EUR = 24,817 Dong (January 1st, 2010) A GBP = 28,012 Dong (January 1st, 2010) Area: Per Capita Income: Inflation Rate: GDP in 2008: Exports: Foreign Direct Investment: 329 560 Km $1052 (2009) 7.0%(2009) $90.7 billion $56.584 billion (2009) $60 billion

Vietnam's principal export destinations, 2008: 1. United States 18.9% 2. Japan 13.6% 3. China 7.2% 4. Australia 6.7% Vietnam's principal import sources, 2008: 1. China 19.4% 2. Singapore 11.6% 3. Taiwan 10.4%

13. Australia 1.7%

GDP in Vietnam
Year GDP-real growth rate 2003 6.00% 2004 7.20% 2005 7.70% 2006 8.50% 2007 8.20% 2008 6.20%

COUNTRY CREDIT RATING

Standard & Poors rates Israels issuer credit as:Term Local Local Currency Rating Foreign Currency Rating

BB/B BB+/B

Geography
Vietnam shares borders to the north with the Peoples Republic of China and to the west with Laos and Cambodia. The South China Sea lies to the east and south. The land is principally agricultural with a central tropical rainforest.

Politics
There are no legal opposition parties in Vietnam, although a number of opposition groups do exist scattered overseas among exile communities within countries such as France and the United States. These communities have supported demonstrations and civil disobedience against the government. The most prominent

are the Vietnamese Constitutional Monarchist League, and the Government of Free Vietnam.

2. Specialized Banks

Investment Banks:  Bank for Investment and development of Vietnam Agriculture Banks:
 Vietnam Bank for Agriculture and Rural Development (VBARD) or AGRIBANK

Industrial Bank:
 Vietnam Joint Stock Bank for Industry and Trade

Development Bank
 Mekong Delta Housing Development Bank  Vietnam Bank for Social Policies

Foreign Trade bank  The Bank for Foreign Trade Of Vietnam Insurance Companies
         

Prudential Insurance AIA Insurance Bao Viet Insurance Bao Minh CMG Insurance PJICO Insurance PTI Insurance UIC Insurance Bao Long Insurance VIA Insurance Vien Dong Insurance

Some other Banks in Vietnam

Central bank
y

State Bank of Vietnam

State-owned credit institutions

y y y y y y y

Bank for Foreign Trade of Vietnam (Vietcombank) Bank for Investment and Development of Vietnam (BIDV) Industrial and Commercial Bank of Vietnam (Incombank)Vietinbank Mekong Delta Housing Development Bank (MHB) Vietnam Bank for Agriculture and Rural Development (Agribank) Vietnam Development Bank (VDB) Vietnam Bank for Social Policy (VBSP)

Joint stock banks

Big banks y y y y y y y y y y y y

ACB (Asia Commercial Bank) EAB (Eastern Asia Commercial Bank) Eximbank (Vietnam Export-Import Commercial Bank) Habubank Sacombank (Saigon Thuong Tin Bank) Saigon Bank (Saigon Cong Thuong Ngan Hang) Techcombank (Vietnam Technological and Commercial Bank) VID Public Bank VP Bank MP (Military Bank) TP Bank (Tien Phong Bank) LV Bank (Lien Viet Bank)

Small banks y

Vietnam Russia Joint Venture Bank

3. Financial System in Vietnam

Economy

The Vietnamese economy centers on exports of crude oil, marine products, rice and coffee and exports mainly to the US, Japan, Australia and China. Structural reforms and prudent macroeconomic policies have made Vietnam an increasingly attractive destination for foreign direct investment. Government control of the economy and a nonconvertible currency have protected Vietnam from what could have been a more severe impact resulting from the East Asian financial crisis.

Industry Sectors
As a result of several land reform measures, Vietnam is now the largest producer of cashew nuts with a one-third global share and the second-largest rice exporter in the world. Besides rice, key exports are coffee, tea, rubber and fishery products. Mining (especially coal mining) is also a key industry in Vietnam.

Investment
The country ranked in foreign direct investment worth more than 8.5% of GDP in 2008: even more, proportionally, than China. After China, Vietnam also boasts Asia's best-performing economy. It has grown by an average of 7.7% a year over the past decade and is likely to achieve a similar figure this year. The boom has lifted many Vietnamese out of poverty.

Trade
Vietnams main exports products include crude oil, marine products, rice, coffee, rubber, tea, garments and shoes. The majority of these are exported to the US, Japan, Australia, China, Singapore and Germany. The agricultural sectors share of economic output has declined, falling as a share of GDP from 42% in 1989 to 26% in 1999, as production in other sectors of the economy has risen. Vietnam has achieved some success in increasing exports of some labor-intensive manufactured goods in recent years. Vietnam has made significant progress in reducing the use of non-tariff barriers, but continues to prohibit numerous goods and apply quantitative restrictions and licensing requirements to others.

History of Banking in Vietnam

The development of the Vietnam banking system has closely linked with the national cause of revolution and construction. Before the August Revolution in 1945, Vietnam was a feudal-colonial country under the French colonialists rule. The banking and credit system was founded and protected by the French colonialists through the Indo China bank. Its functioned as both the central bank of the whole Indo-Chinese region (Vietnam, Laos and Cambodia) and a commercial bank. The bank was an effective tool for the colonial policy of the French government and enriched the French capitalists. Thus, one of the key tasks of the August Revolution then, was to build an independent and autonomous monetary and banking system. The task was fulfilled by 1950, when the anti-French resistance war grew stronger, obtaining many triumphs in the battled field, and expanding the liberalized region. In this context, the development required economic and financial activities to be improved and promoted to meet new demands. On the basis of the new economic and financial policy set out in the 2nd Congress of the Vietnam Workers Party (February,1951), President Ho Chi Minh signed Decision 15/SL on the establishment of the Vietnam National Bank Bank of the first peoples democratic state in Southeast Asia in order to carry out five urgent missions: issuing banknotes, managing treasury, carrying out credit policy in order to facilitate production and coordinating with the trade authorities for monetary management and struggling against the enemy.

State Bank Of Vietnam

The foundation of the Vietnam National Bank was the result of the struggle process to develop an independent, and autonomous monetary and credit system, marking a new development step, i.e., changing the quality of the national monetary and credit sector. Pursuant to Circular 20/VP TH issued by the General Director of Vietnam National Bank under authorization of the Prime Minister on January 21st ,1960, the Vietnam National Bank was renamed as the State Bank of Vietnam, in accordance with the 1946 Constitution of the Democratic Republic of Vietnam. Following the liberation of the South in 1975, the takeover of the Republic of Vietnam National Bank and private capitalist banks was a starting point of banking activities all over the country. State bank of Vietnam has done many activities to develop the economy and banking sector of the country. For this purpose many commercial banks, specialized

credit banks, finance institutions were opened. Credit institutes were State owned banks. Detailed description of these banks is as follows:

1. BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM

Bank for Investment and Development of Vietnam (BIDV) was established under Decision No. 177/TTg dated 26th April, 1957 by the Prime Minister. Forty eighth years of development have witnessed a profound transformation of BIDV with several name changes as follows:
y y y

Bank for Construction of Vietnam (26/04/1957-24/06/1981) Bank for Investment and Construction of Vietnam (24/06/1981-14/11/1990) Bank for Investment and Development of Vietnam (from 14/11/1990)

1. From 1957 to 1980

On April 26th 1957, Bank for Construction of Vietnam the forerunner of Bank for Investment & Development of Vietnam was founded as an agency of the Ministry of Finance. Back then, the banks scale was modest with eight branches and two hundred staff. The main duty of Bank for Construction of Vietnam was to allocate and manage basic construction fund from the State budget to all economic and social areas.

2. From 1981 to 1989

On April 26th 1981, Bank for Construction of Vietnam was renamed as Bank for Investment and Construction of Vietnam, an agency of the State Bank of Vietnam. The main duty of Bank for Investment and Construction of Vietnam was to allocate, lend and manage basic construction investment fund of all areas of the economy which fell within the scope of the States planning.

3. From 1990 to date

-1990 to 1994
On Nov 14th, 1990, Bank for Investment and Construction of Vietnam was renamed as Bank for Investment & Development of Vietnam. This period marked the transition of the centralized, State-subsidized mechanism toward market mechanism under State management in implementation of

the States reform policy. BIDVs duties therefore were changed radically: Continuing to receive State budget fund to lend State policy projects; mobilizing medium and long term capital to make development loans; dealing in money market and credit operations. Most of the banks offered services then fell in the area of construction.

- From 1995 to date

This is a milestone for the radical transformation of BIDV; Getting licence to operate as a diversified andcomprehensive commercial bank, catering mainly for the development investment of the country.

Contribution to Financial System

For 37 years (1957-1994), BIDV was the only bank authorized with the allocation and management of basic construction fund from the States budget to implement projects with the revenue of 137,278 billion VND. Through operations of project appraisal, cost estimate, final cost clearance, final inspection of project performance etc the bank actively contributed to lowering investment cost and improving investment efficiency. Various projects serving national defence, social economic recovery and development purposes were accomplished in economic recovery period(19581960), the First five year plan (1960-1964) and within the period of building Socialism and fighting American invaders (1965-1975), the post- national unification economic development period (1975-1986) and especially in the Reform period (1986-1994).

Financial Highlights
Assets in VND Billion 2004 99660 2005 2006 2007 2008 117976 158165 201382 242316 Loans and advances Year (net)in VND Billions 2004 67244 2005 2006 2007 2008 79833 93453 126616 157176

Year

S ASSET QUALITY As at December 31, 2008, total assets reached VND 242,316 billion, or USD 14.3 billion. BIDV thus held the second position in the domestic banking system in terms of total assets, behind the Vietnam Bank for Agriculture and Rural Development. Total assets increased by 20.3% against those of 2007, a slight decrease as compared with the average growth rate of 26% during the 2004 2007 period, due to a larger scale of total assets. Loans and advances continued to be the largest proportion (64%) of total assets and generated a main source of income for the Bank.

2. VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (VBARD) OR AGRIBANK

The Vietnam Bank for Agriculture and Rural Development (VBARD) was established in 1988 with the reform of the financial system in Vietnam. VBARD is a state 'policy' bank, responsible for 'directed' lending to agricultural and rural sector. It enjoys government subsidies and access to central bank credits. By the end of 2001, VBARD had become the leading commercial bank in Vietnam, with the most extensive network of branches in rural areas. It has banking relationships with 702 correspondent banks in more than 90 countries throughout the world. VBARD is member of APRACA and the Confederation International du Credit Agricole (CICA).

Services
VBARD utilizes three different credit methodologies. First, it provides individual loans to rural farmers and entrepreneurs, with collateral requirement. A land use certificate is commonly used as collateral. Second, VBARD lends to individuals through joint liability groups. The group lending methodology is used by VBARD to increase its coverage of rural households, as well as to reduce transaction costs associated with making and collecting many small loans. Although there are no savings requirements in groups formed by the VBARD, the savings component remains important to the bank. Group lending requires full repayment of all group loans before a new round of loans can be initiated. Loan repayment is the responsibility of all group members. Third, VBARD uses brokerage services of mass organizations, which targets borrowers unable to provide collateral. Under this system, loans are channeled

through 'guarantee groups' composed by members of mass organizations, which are responsible for their organization. Collaterals are not required as the sponsoring mass organization provides guarantees to VBARD for loan repayment. Moreover, group members are jointly liable for repayments.

Contribution to Financial System

VBARD has played an initiative role in stabilizing the monetary market and has supported the Government and the State Bank of Vietnam in implementing the financial and monetary policies, actively contributed to the efforts to curb the inflation in the early months of the year 2008 and stimulate demand and prevent the economic slowdown in the year. It also reduced its interest rate.

Objectives:
y y y Hold and affirm the position as a state owned bank playing a leading and dominant role in the financial and monetary markets in rural areas. Actively implement measures and the state bank of Vietnam, contributing to prevent economic downturn and promote sustainable growth. Provide capital for changing structure of agriculture, rural areas and farmers following the policy Agriculture Rural Areas and Farmers of the communist party and the Government. Continue to maintain a reasonable growth rate, ensure balance, safety and profitability.

Challenges and Development Plans

Between 2000 and 2002, ADB provided funding support to strengthen VBARD corporate governance, including strategic planning and training, systems development, and credit appraisal, which lead to an action plan for reforms in these areas. In 2001, VBARD also benefited from an ABD loan of US$45 million under the "Rural Enterprise Finance Project" to finance micro and small rural enterprises, and to strengthen its services to rural clients. VBARD has entered into a restructuring phase. The plan includes debt restructuring, strengthening the bank financial capacity, improving asset quality, and complying with international accounting international standards.

3. Vietnam Joint Stock Bank for Industry and Trade (VietinBank)

IEstablishment date of Vietnam Bank for Industry and Trade *March 26 1988 Establishment of the specialized banks under Decision No. 53/H BT issued by the Ministerial Committee. *November14 1990 Renamed Vietnam Commercial and Specialized Bank into the Industrial and Commercial Bank of Vietnam under the Decision No. 402/CT issued by the Ministerial Committee. * March27 1993 Establishment of the State-owned Enterprise named Bank for Industry and Commerce of Vietnam under the Decision No. 67/Q -NH5 issued by the Governor of the State Bank of Vietnam. * September 21 1996 Re-establishment of Industrial and Commercial Bank of Vietnam under the Decision No. 285/Q -NH5 of the State Bank of Vietnam Being one of the four largest State-owned Bank of Vietnam, VietinBanks total assets account for over 20 percent of the market share of the whole Vietnamese banking system. VietinBanks capital resources keep on increasing over the years and have been substantially rising since 1996 with the annual average growth of 20 percent, especially up 35 percent a year against that of last year. Being the founder of the following Financial Credit Institutions: - Saigon Bank for Commerce and Industry - Indovina Bank (the first joint-venture bank in Vietnam)

- Vietinbank Insurance Company Ltd.

Loans to Economy
Agriculture, Forestry and Aquaculture Mining and quarrying Electricity, Petroleum and Water Construction 4.24% 28.24% 9.54% 11.23%

Loans to the economy as at 31st December 2008 were VND 120,752 billion, rose by VND 18,561 billion representing an increase of 18.2%. Medium and long-term loans accounted for 41.9%; loans to state owned enterprises accounted for 19.9% of total loans. The proportion of non-collateralized loans have been reduced in recent years, getting to the lowest level of 22.7% of total loans in 2008, a 3% decrease against that

- Vietnam International Leasing Company company in Vietnam)

VILC (the first financial leasing

of the beginning of the year. Thanks to the strict controlling policy from the beginning of the year, VietinBank has eliminated risks arising from lending for real estate and securities investment. Loans to corporate, SMEs and individuals were 45.4%, 36% and 18.6% respectively.

4.Mekong Delta Housing Development Bank

MHBs core business include the granting of loans to Small & Medium-size Enterprises (SMEs), as well as loans to individuals & households, especially asset-secured loans for construction companies to develop infrastructure for residential areas, particularly in the Mekong Delta region. Loans and investments has grown from 1,206 billion (2001), to 16,100 in 2008, representing a thirteen-fold increase. In 2008, MHBs equity grew to VND 1,182 billion, reaching a capital adequacy ratio of 9.04%. -Has secured funding from World Bank for The Rural Development Finance Project. In addition Agency Francaise de Development has provided a credit line of EUR25 million over the next 20 years. Vision To become one of the most favorite bank in Vietnam on Retail and SMEs banking.

Contribution to Financial System

The world economy in 2008 has suffered a significant downturn and Vietnam is no exception. In the financial sector, to reign-in inflation, in Quarter II 2008, the State Bank of Vietnam had to deploy tightening monetary policy. As a result, successive increase of prime interest rate has caused challenging situation for banks lending and investment activities. However in the wake of the global worsening economic condition and the reversal of the Vietnam inflation rate, towards the end of the year, the State Bank has loosened its grips on the monetary policy. Successive fall of prime interest rate and deflation even put commercial banks in a tougher position. Being a State owned bank with a nationwide branch network, a broad client basecorporate, commercial and retail- and a credit exposure to almost all economic sectors, MHB was also affected by the global crisis. However, through prudent risk management MHB was able to increase lending while still maintaining asset quality, MHBs lending and investment activities still manage to obtain a sound growth. Up to 31 December 2008 its total investment amounted to VND 23,640 billion, an increase of 14.5% against the beginning period of the year. Outstanding loans were VND 16,112 billion, which were 18.43% higher than that of the beginning year. MHB loan portfolio is mostly concentrated on small and medium enterprises (SME), individual and household enterprises.

Assets
As of 31st December 2008, MHBs total assets has reached over VND 35.000billion, an increase of 30% over 2007.This impressive growth far exceeded the objective set by the Banks Board of Directors. In a very unstable and difficult economic environment, MHB continues to be ranked amongst top ten Vietnamese banks by total assets and by network coverage.

5. THE BANK FOR FOREIGN TRADE OF VIETNAM

Established on April 1st, 1963 as a State-owned Bank. - Paid-up capital: 3,955 billion Vietnamese Dongs. - Being a special state-owned corporations, organized under 90, 91 Corporation structure. - Being the first bank in Vietnam having centralized capital management structure. The Bank for Foreign Trade of Vietnam enables corporations, financial institutions and institutional investors to keep pace with a changing marketplace. Our innovative, technology-driven solutions help clients seize opportunities, manage risk, and increase productivity, thus freeing them to focus on increasing their competitive advantage and delivering value to their clients.

Being full member of:

y y y y

Vietnam Bankers Association Asia Bankers Association SWIFT Visa, MasterCard.

-Being the largest payment agent in Vietnam for Money Gram - the global express money transfer company. -Taking largest potion in export-import payment and guarantee in Vietnam. -Being the only bank in Vietnam to handle automatically 95% of swift messages meeting the American standards. -Being recognized for 8 consecutive years (1996, 1997, 1998, 1999, 2000, 2001, 2002 and 2003) as the bank having the best service quality in terms of internationally standardized Swift payment. -Being selected as a major bank to manage and serving the Governments loans and aids and many ODA projects in Vietnam. -Being the leading commercial bank in trade finance, international payment, forex dealings, advanced Banking - IT implementation in Vietnam.

-Being awarded by the Asian Money the famous magazine in Asia as the first bank in Vietnam in 1995. -Being the first bank to issue and pay international credit card Visa and MasterCard and being the largest agent for card payment in Vietnam: Visa, American Express, MasterCard, JCB...

Financial Highlights
Assets: Consolidated total assets as at 31/12/2008 reached VND 221,950 billion, or 12.5% increase against 31/12/2007 and 111% of business plan. Total assets of the bank itself as at 31/12/2008 reached VND 220,524 billion, increasing 12.9% compared to that of 31/12/2007. Dividend payout was 12%. Liquidity Performance: The Bank maintain high liquidity ratio of 4.21 times in 2008 against that of 2.4 times in 2007. The ratio of short-term funding for long term loans was controlled at 9.7% in 2008 (2007: 1.5%), far below the 40% required by the SBV Return on equity was 18%.

Import and export

The national import and export in 2008 experienced complicated development due to strong fluctuations in prices of some main import and export products such as crude oil, steel and food as well as the unexpected changes in the demand and supply of the world market amid the global economic depression. Despite that fact, Vietcom bank did a good job as a coordinator of import payment and foreign currency reconciliation. Import and export payment volume through Vietcom bank in 2008 rose by 23.5% to reach USD 32,501 million. Vietcom banks market share of import and export payment reached 22.7%.Export payment volume was USD 16,831 million, a 18.3% increase from previous year, which took up 26.8% of national market share. Import payment volume was USD 15,670 million, an increase of 28.9%.

Investment in Economy Insurance, Finance Real estates & Infrastructure Banks Others 13.03% 13.08% 63.22% 10.67%

6. Vietnam Bank for Social Policies

Vietnam Bank for Social Policies, abbreviated as VBSP was established under Decision No.131/2002/Q - TTg dated October 4, 2002 by the Prime Minister on the basis of reorganization from Vietnam Bank for the Poor. The establishment of VBSP creates favorable conditions to expand credit outreach to poor households, disadvantaged students and policy beneficiaries who need loans for job creation or/and working abroad in a certain duration as well as economic organizations and business households in special difficult communes in mountainous, remote and isolated regions (program 135). This is really good news for policy beneficiaries since they keep having chances to access the formal preferential funding source of the State, which is especially on the ground of the seven-year achievements of Vietnam Bank for the Poor. Vietnam Bank for Social Policies has the uniform management and administration apparatus throughout the country with chartered capital of VND 5,000,000,000,000 and shall be supplemented accordingly from time to time upon its operational requirements. The life of Vietnam Bank for Social Policies is 99 years. In the Decision on establishment of Vietnam Bank for Social Policies, the Prime Minister defines that: VBSP will act as a non-profit organization to serve the poor and other policy beneficiaries. This is an important but extremely difficult task. VBSP staff have been bringing ready bases into full play as well as fulfilling extensive functions so as to develop a new credit channel to effectively serve policy beneficiaries nationwide. VBSP officially started its operation since March 11th, 2003 and rapidly expanded its operation network ever since. Up to now, administrative/ governing apparatus of VBSP includes Board of Directors (BOD) at central level, 64 BOD Representative Units at provincial level and more than 600 BOD Representative Units at district level. Management apparatus of VBSP established at 3 levels is focusing on steering and implementing funds mobilization and providing loans for the poor and other policy beneficiaries. So far, VBSP system includes the Head Office, one transaction center, 64 provincial-level branches, 597 district-level transaction offices and 8076 transaction points at commune level. . Presently, Vietnam Bank for Social Policies is conducting a great number of solutions, which has brought about initial achievements and tackled some difficulties and obstacles with high commitment to better fulfill the assigned tasks in order to become an actually effective economic force on the poverty reduction front, contributing to socio-political stability of the country.

Ownership of Financial Institutions & Role Of State Bank of Vietnam

State Bank of Vietnam owns the credit institutions therefore they are termed as State-owned Credit Institutions. State bank of Vietnam has certain roles with regard to the credit institutions. a) SBV submits the plan on establishing, restructuring and divesting the state-owned enterprises under the management of the State Bank to the Prime Minister for approval and guides the implementation of the approved plan; b) To approve under its authority or submit to the Prime Minister for approval the charters of the enterprises operating in the banking field. c) To submit to the Prime Minister for appointment, or to appoint under its authority the members of the Board of Directors, General Directors and Deputy General Directors of the State-owned Credit Institutions and other State-owned enterprises under its management; d) To carry out refinancing in order to provide short-term credit and payment instruments for the economy.

Risk Management
In the context of unforeseeable developments of the domestic and overseas financial markets, besides the expansion and promotion of business, the Credit Institutions continued to focus on risk management. With the establishment of Risk Management Committee and the restructuring of Risk Management Department in, the Credit Institutions have-been gradually restructuring its risk management system following international best practices. Derivative risk At present, risk on derivative products specifically the forward contracts, are managed by the Bank on the basis of compliance with regulations imposed by the SBV on foreign exchange management (Ordinance on Foreign Exchange in 2006) and other applicable regulations of the SBV relating to foreign exchange position and transactions of credit institutions who are allowed to engage into foreign exchange transactions as specified in Decision 1081/2002/QD-NHNN of 7/10/2002. According to this Decision, credit institutions who are entitled to engage into foreign

exchange deals as approved by the SBV, are allowed to maintain a daily open position which is not more than 30% of the Banks capital. Credit risk The Bank takes on exposure to credit risk, which is the risk that a counter party will cause a financial loss for the Bank by failing to discharge an obligation. Credit exposures arise principally in lending activities that lead to loans and advances and investment activities that bring debt securities. There is also credit risk in off balance sheet financial instruments, such as loan commitments. The credit risk management and control are performed through issuance of related policies and procedures, including credit risk management policies, establishment of Credit Risk Settlement Committee and Credit Committee. In measuring credit risk of loan and advances to customers and to banks, the Bank adopts guidance provided in Decision No. 493/2005/Q -NHNN dated 22 April 2005 and Decision No. 18/2007/Q -NHNN dated 25April 2007 of the Governor of the SBV as described in Note 2.7 and 2.8 to the financial statements. Liquidity Risk Management Liquidity risk management is currently functioned by Department of Planning of the particular credit institution which is mainly responsible to make plans for assets and liability management, liquidity maintenance, and allocation of reserve funds. The Department reports directly to the Board of Directors and Board of Management on a monthly basis to update banks current liquidity situation and project next months liquidity.

4. Crisis in Vietnam

Vietnam may be heading towards financial crisis Inflation, trade deficit, banking blow-up threaten what was recently hailed the darling of investors

By Bryan Lee, Economics Correspondent & Roger Mitton, Vietnam Correspondent

Fears are rising that Vietnam may be headed for a financial meltdown after a rapid reversal of its economic fortunes. A heady mix of runaway inflation, a ballooning trade deficit and a possible banking sector blow-up is sparking a growing cacophony of warnings by economists.

They say Vietnam, recently the darling of international investors as an emerging 'tiger' economy, is at risk of a severe crisis, as overheating symptoms emerge similar to those seen before Thailand's 1997 crash. Many predict a steep fall in the country's currency - the dong - is all but inevitable. Some say external help, possibly from the International Monetary Fund (IMF), may be needed to restore economic confidence. Until recent gravely worrying economic data began to emerge, Vietnam had enjoyed a dream run of a decade of sizzling economic growth of about 8 per cent a year. As the ostensibly communist state turned well and truly capitalist, Vietnam's young consumers embraced a 'spend now, pay later' philosophy and clambered for the latest Piaggio motorbike, Nokia cell phone and designer clothes. It was hard to blame them, since the government set an example by spending as if there were no tomorrow. Naturally, inflation started to rise, and last November it moved into double digits. At the time, the government insisted that everything was under control, and that it would soon tame inflation while still achieving a high growth rate of around 8 per cent to 9 per cent. But recent data has confirmed the worst. Sentiment over Vietnam soured dramatically last week when official data showed inflation last month hit 25 per cent. Data also showed the trade deficit for the first five months of this year hit US$11.1 billion (S$15.14 billion), close to the US$12.4 billion for all of last year. This triggered worries that the country could run out of foreign reserves to defend its own currency's value. 'The situation is desperate and not sustainable. It will break, and we are warning investors to be cautious,' said Dr Chua Hak Bin, the chief Asian strategist for Deutsche Bank's private banking arm. 'A sharp devaluation in the Vietnamese dong looks imminent in the coming months, possibly in the magnitude of 20 per cent to 30 per cent,' he said. Critics blame government failures. Dr Nguyen Quang A, the director of Hanoi's Institute of Development Studies said last month: 'The main reason for the economic downturn is the government's poor and uncoordinated economic policies.' Other experts say, however, the economy can avert a hard landing if the authorities make the right decisions soon.

The good news is Vietnam's woes are likely to have limited spillover to the region as its problems are unique, economists say. Singapore companies with big investments in Vietnam are stoical. A spokesman for Sembcorp Industries, which has invested in a power plant and several industrial parks, said its businesses were 'underpinned by long-term contracts, which give us sustainable earnings in US dollars'. Still, confidence has largely evaporated from the domestic business sector. No one wants to buy shares in the nation's blue-chip companies, even at giveaway prices. Credit rating agencies have cut their credit outlook for Vietnam to negative. And foreign investors are now taking their money elsewhere, depriving Vietnam of a key support for its growth and import appetite. All of this points to a dong depreciation, say experts, which will correct the currency's overvaluation and help rebuild investor confidence in the country. Fortis Bank economist Joseph Tan believes the banking sector, which faces a potential onslaught of bad loans made during exuberant times. needs attention. 'To fix this, the state bank needs to borrow money, maybe from the IMF, to back up the local banks and instill confidence in the sector.'

References
        www.sbv.gov.vn/ www.bidv.com.vn www.agribank.com www.vietinbank.vn www.mhb.com.vn/ www.vbsp.org.vn/en/ www.vietcombank.com.vn www.wikipedia.org