Vietnam thaws after credit freeze

Vietnam's economy has begun "to heat up again after a long and often painful thaw", says James Hookway in The Wall Street Journal. Investors have noticed: the VN Index has gained 16% this year.

Annual growth has averaged 7% for the past two decades. But after 2009, a Chinese-style, state-mandated lending spree to compensate for weak exports began to take its toll. Careless lending damaged banks and prompted a credit squeeze. GDP is now expanding at an annual pace of just over 5%.

But things are looking up. The government is setting up a bad bank' to buy nonperforming loans and clear space for more lending on banks' books. This is helping to restore confidence, notes Hookway, and helps explain why bank lending expanded by 6.5% over the first eight months of the year, compared to just 0.3% in the first quarter.

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As Capital Economics points out, however, there is still quite a way to go and more government resources will be required to clean up the banks properly and thus give credit growth a hefty, sustainable fillip. But other areas of the economy look increasingly healthy.

"The export sector remains a bright spot." Vietnam has gained market share not only in low-end goods, such as textiles, but also in more sophisticated sectors, such as consumer electronics. New business registrations jumped to record levels in the first six months of this year.

The government, led by Prime Minister Nguyen Tan Dung, also seems to be making more of an effort to court investment. It plans to part-privatise firms, ranging from Vietnam Airlines to Vietnam Oil & Gas Group, while foreigners will also be allowed to own up to 49% of local banks. We've heard noises about privatisation before, but it's encouraging that the prime minister said so in public on a tour of America, reckons Alain Cany of the Vietnam Business Forum Consortium.

The long-term outlook remains compelling. Vietnam boasts a wide range of commodities and a young, well-educated and large population. With 17 million people aged between ten and 19, there will be an average of 1.7 million new consumers every year for the next decade, says Louis Taylor of Standard Chartered. One play on Vietnam is the London-listed Vietnam Opportunity Fund (VOF), available at a 29% discount to its net asset value.