Vietnam: still a rewarding play

Vietnam is an "on-again, off-again emerging-market darling", says William Mallard in The Wall Street Journal. At the moment, it's off again. Last month, stocks slid to a near-three-year low when the founder of one of the country's biggest banks was detained on vague charges of "illegal business".

The episode reminded investors that "after years of sloppy management and exuberant lending, Vietnam's banks are in dire shape", says The Economist, while "corruption and waste pervade the economy". As in China, the Communist government encouraged a lending spree to ride out the global financial crisis. The central bank has now admitted that bad debts amount to up to 10% of all bank loans. "The real figure could be two or three times that."

The rise in non-performing loans has made banks reluctant to lend, crimping investment and overall economic activity. This is a key reason Vietnam's annual GDP growth, which averaged 8.1% in 2003-2007, has moved down a gear since the financial crisis. A rise in interest rates in the past two years, which has brought high inflation under control, also hampered growth. Attempts to clean up the banking sector have made only minimal progress.

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A few months ago a plan to prod banks into consolidating and recapitalising was announced, but so far just five small banks have merged. The most likely scenario now, reckons Capital Economics, is that the government keeps "making a stab at reform". But because it appears to lack the technical expertise and political will, it is unlikely to complete the job properly. That would imply annual growth staying at around 5% over the next few years.

Even though a lack of reforming zeal, often a problem in emerging markets, is clouding the outlook for now, Vietnam remains a potentially rewarding play. It has a young and well-educated population, plenty of commodities and lower labour costs than China. Reform efforts would make it even more enticing.

Renowned investor Marc Faber described the market slide as "a buying opportunity" for long-term investors. Low valuations certainly suggest that the problems are largely in the price. The London-listed Vietnam Opportunity Fund (VOF), which dabbles in debt and unlisted firms as well as equities, is on a discount of 35% to its net asset value. It looks worth tucking away.