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Heavy traffic in Hanoi: Vietnam's infrastructure development plans hinge on public offerings of state-owned enterprises. (Photo by Takaki Kashiwabara)
Asia Insight

Vietnam's most powerful man strives to put stamp on economy

Party chief Trong is vanquishing political foes; can he tackle vested interests?

HANOI -- Nguyen Phu Trong, the head of Vietnam's ruling Communist Party, appears to be borrowing from Chinese President Xi Jinping's playbook. Like Xi, Trong is using an aggressive anti-corruption campaign to attack political foes and push his policy agenda.

One high-profile target is Dinh La Thang, once a member of the all-powerful Politburo and a former chairman of PetroVietnam, one of the biggest state-owned enterprises. Thang, who was sentenced to 13 years in prison for "economic mismanagement" in January, is now facing additional criminal charges over alleged mismanagement of the oil giant in a trial that began on March 19.

"Defendant Dinh La Thang as head of PetroVietnam bears the highest responsibility in managing and safeguarding the investment of PetroVietnam," the indictment said, as quoted by the official Vietnam News Agency and reported by The Associated Press. The prosecution alleges Thang deliberately violated economic management regulations by investing $35 million of PetroVietnam's money to buy 20% of OceanBank without board approval.

Thang's conviction in January made him the first ex-Politburo member to be jailed in decades. This carries huge political significance, since he was a close aide to former Prime Minister Nguyen Tan Dung, who lost a bitter power struggle with Trong.

Prior to the party's convention in 2016, Dung had been widely expected to replace Trong as general secretary. Instead, the prime minister was dismissed from the Politburo and forced to retire from politics, while Trong was re-elected. After strengthening his grip, Trong stepped up the anti-graft campaign, mainly targeting Dung allies -- many of them current and former executives of PetroVietnam and its affiliates.

Former PetroVietnam Chairman Dinh La Thang, second from right, stands trial in Hanoi on March 19.   © Vietnam News Agency/AP

At the heart of the Trong-Dung clash was the question of how to handle state-owned enterprises. It is a question that continues to loom large.

In the 1980s, Vietnam launched an economic overhaul modeled on China's "reform and opening up" policy. The liberalization drive -- known as Doi Moi, or renovation -- included turning inefficient state enterprises into shareholder-owned enterprises. The government sold shares in these businesses through public offerings, aiming to tap domestic and foreign private-sector capital and management expertise.

After becoming prime minister in 2006, Dung championed policies designed to attract more foreign investment and develop infrastructure. As for state enterprises, he sought to enhance their competitiveness by diversifying their operations, and creating subsidiaries and affiliates in sectors such as financial services and real estate.

The global financial crisis of 2008, however, rocked those and other industries in Vietnam.

Vinashin Group, a troubled shipbuilder Dung was trying to save, went belly up in 2010. By 2012, criticism of Dung's economic approach was building within the party.

It did not help that Dung hails from the south. Southerners are a minority in the party, and this likely contributed to his downfall, according to experts like Yuta Tsukada, an economist at the Japan Research Institute.

Trong, who prefers consensus-building and never saw eye to eye with Dung, is now taking down one Dung crony after another.

Other targets include Nguyen Xuan Son, a former PetroVietnam chairman who also served as chief executive of OceanBank, and Ha Van Tham, a former chairman of the bank. The People's Court of Hanoi last September sentenced Son to death and Tham, one of the country's best-known tycoons, to life imprisonment.

Trong seems to be tightening the screws in other ways.

On March 13, Vietnamese media reported that state wireless carrier MobiFone was calling off a 9 trillion dong ($395 million) acquisition of Audio Visual Global, a pay-TV company. The government had deemed the price excessive; MobiFone's management includes Dung associates.

Trong continues to cement his power base. The Politburo on March 2 appointed Tran Quoc Vuong, head of the party's Central Inspection Commission, to replace Dinh The Huynh, who is on medical leave, as executive secretary of the Central Committee's Secretariat. This makes Vuong -- said to be a close Trong ally -- the No. 5 official in the party hierarchy.

But even with Trong firmly in the driver's seat, vested interests stand in the way of state enterprise reform.

On March 9, the government sold its entire 29.51% stake in Binh Minh Plastics through a bidding process. Nawaplastic Industries, a Thai materials manufacturer that already held a major slice of Binh Minh, bought almost all of the shares, raising its interest to around 49%.

Only Nawaplastic and an individual investor took part in the auction. The dearth of bidders was blamed on the high minimum bid set by the government. This was not a first.

For Saigon Beer Alcohol Beverage Corp., or Sabeco, a brokerage advised the government to set the minimum at 184,000 dong per share. But the Ministry of Industry and Trade, which supervises the brewer, set the price at 320,000 dong, close to the peak level.

Vietnam Beverage, an affiliate of Thai Beverage, in December won the auction for a 53.59% stake. It was the sole major bidder. Belgian and Japanese beverage companies had expressed interest in the brewer, which controls 40% of the Vietnamese market, but balked at the minimum.

State enterprises generate considerable dividend revenue for the ministries that oversee them, noted a senior executive of a Japanese beverage maker that considered bidding for Sabeco. The executive said the ministries are determined to set the highest possible prices.

Conservative factions [in the party leadership] have always been uncomfortable with this agenda, especially reforms that would reduce the state's role in any way

Phuong Nguyen, adjunct fellow at the Center for Strategic and International Studies

Consider Vietnam Dairy Products, or Vinamilk. The company is controlled by the State Capital Investment Corporation, which is managed by the Finance Ministry, and supplies more than $100 million in annual dividends to the government.

Basically, the dividends are controlled by the Finance Ministry. The more money the ministry controls, the more politically powerful it becomes.

The government still owns 36% of both Sabeco and Vinamilk -- just above the 35% threshold for veto power. The two companies are among 11 state enterprises still to be completely sold off by 2019, but the outlook for the plan is murky.

Vinamilk supplies the government with more than $100 million in annual dividends. (Photo by Yumi Kotani)

"Conservative factions [in the party leadership] have always been uncomfortable with this agenda, especially reforms that would reduce the state's role in any way, even if they also saw the need to reform state-owned enterprises sooner or later," said Phuong Nguyen, adjunct fellow at the Center for Strategic and International Studies in Washington.

The reform drive is crucial for the government's short-term finances, as well as the economy's long-term health.

Vietnam is plagued by a chronic fiscal deficit. One Vietnamese politician likened the state to a cash-strapped household on the verge of bankruptcy.

The country has never posted a fiscal surplus since it started announcing economic data in the 2000s. It has been financing infrastructure and other public projects mainly by issuing bonds and borrowing from international financial institutions. As a result, government borrowing has swelled close to the legal limit of 65% of gross domestic product.

The crunch has forced Vietnam to scrap a plan for a nuclear power plant. But there are still large projects in the pipeline, including a highway between Hanoi and Ho Chi Minh City and the new Long Thanh International Airport. With little room for more debt, the government hopes to fund projects by selling its shareholdings.

Vietnam still had more than 2,700 state enterprises as of Jan. 1, 2017, according to the General Statistics Office. The number was down nearly 20% from 2012, but these entities still account for around 30% of GDP.

The economy grew 6.81% in real terms in 2017, the fastest rate among six major Southeast Asian nations. But the expansion was largely powered by foreign companies like Samsung Electronics, which runs a large smartphone assembly operation. To maintain its brisk clip, Vietnam needs to nurture private, productive homegrown businesses, the Japan Research Institute's Tsukada said.

The shadow of China is also a motivator.

While hosting Xi Jinping last November, Vietnamese President Tran Dai Quang said his country is willing to expand economic cooperation with China, according to the Chinese Foreign Ministry. The leaders likely discussed Vietnam's role in Beijing's Belt and Road Initiative across Eurasia.

Chinese investment would be a boon, but Vietnam is wary of relying on its neighbor to the point of undermining its own sovereignty.

During the Vietnam War, China supplied weapons to the North, which also took lessons from the Chinese Communist Party's monopolization of power. Yet the countries are locked in a territorial dispute in the South China Sea.

The U.S. Navy aircraft carrier Carl Vinson docks at Danang, Vietnam, on March 5.   © AP

Vietnam is spreading its diplomatic eggs to various baskets. On March 5, a U.S. Navy aircraft carrier made a port call in Vietnam for the first time since the war ended in 1975. On March 15, Vietnamese Prime Minister Nguyen Xuan Phuc, who succeeded Dung with Trong's endorsement, signed a strategic partnership with Australia.

A stronger economy would help Vietnam determine its own destiny. The immediate goal is to be an upper-middle-income country by 2035, the 60th anniversary of North-South reunification. A 2016 report by the Vietnamese government and the World Bank set a target of raising average income to over $7,000 by 2035, up from $2,052 in 2014. This would require average annual growth of at least 7% for 20 years.

A key piece of the puzzle may be the rejiggered Trans-Pacific Partnership. Phuc on March 8 signed the trade pact with 10 other countries, after the original TPP was thrown into limbo by U.S. President Donald Trump's withdrawal.

The so-called TPP 11, signed in Chile on March 8, is expected to help spur economic reform in Vietnam.   © AP

Mai Fujita, a director at the Institute of Developing Economies of Japan, stressed the importance of the so-called TPP 11 for Vietnam and its nearly 100 million consumers. "When the TPP 11 comes into force, even more foreign companies will seek to expand into the Vietnamese market," Fujita said.

In her view, Vietnam's leaders are well-aware of the need to open their market further. "In order for Vietnam's economy to achieve growth on a sustainable basis," she said, "it will be important for Trong and Phuc to make use of outside pressure from the TPP 11 to effectively exclude [vested] interest groups, which could distort the country's policies."

Phuc knows this better than anyone. In an interview with Nikkei on Monday, he stressed the benefits of the TPP 11. Vietnam's participation in the trade deal "will provide opportunities for positive domestic changes."

Nikkei senior staff writer Kazuki Kagaya contributed to this report.

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