Follow Kazakhstan, Vietnam

Sacha Baron-Cohen’s Borat may well have reduced Kazakhstan to an international joke, but there is nothing to laugh at this week in the news from this frontier market. The government there has announced that it will sell 25%+ stakes in up to 60 of its biggest state owned enterprises, that in some cases it will give foreigners a majority stake and invest alongside them, and will be setting up an international financial centre operating under UK law and modelled on Dubai. The businesses to be privatised include oil and gas, telecom, railway, and nuclear power. The timetable looks serious and tight.

Necessity is the mother of strong action and Kazakhstan indeed is facing great difficulties: its currency has fallen by a third since August’s renminbi shock, major export customers Russia and China are both on their backs, and its GDP growth this year is plummeting to about 1.5% after the 4-8% range of the past five years.

In this sense, Vietnam suffers from a lack of necessity, since it still rollicks along at 6+% GDP growth even with its large and inefficient state owned sector that continues to account for nearly a third of GDP. To date, this has meant that Vietnam can be cautious about radical economic restructuring, or even avoid it altogether.

Of course, we have had good policymaking news in Vietnam just recently, and this is to be warmly applauded. However, the essence lies in the timetable: if ten leading SOEs are indeed going to be sold, there is a big difference between “vision for 2030” (as one of the government announcements mentioned) and “by 1H2016, applications to be global book runner due this month please” (as MM suggests the press release should read). When the biggest of these ten companies, Vinamilk, says “we would like to interview potential investors to assess what they would bring to Vinamilk”, there needs to be a top politician immediately responding “with respect, Vinamilk, these are our shares, not yours, you carry on milking the cows while we crack on with the share sale”.
(And then when the placement is done, the new investors will be asking what you are bringing to them, not vice-versa.)

One can plausibly hope that the next ten years in Vietnam will achieve more in terms of SOE diminished importance (in the last ten years, the reduction in SOEs’ share of GDP has only been 3 percentage points, from 35.5% to 32.5%, according to CEIC), for the following three reasons:-

1) A fresh “mandate” (heavy on the quotation marks !) for the faction of Prime Minister Dung in the upcoming Communist Party Congress in 1Q2016. This is likely, we think, to favour modernists and economic reformers.

2) The discomfort of rising government debt ratios during a coming phase of rising global interest rates, reduced overseas development assistance for Vietnam, and the reaching of a level (public debt including guarantees nearing 65% of GDP, plus a large swathe of other SOE debt) beyond which Vietnamese bond and equity markets would get justifiably jittery.

3) The recent slew of free trade agreements, especially the TPP, which will add to pressure on SOEs from the gradual removal of their advantages of favoured treatment from Vietnamese government and bankers.

Yak Shay Mash !

Mekong Man

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