Growth mania behind firm’s default

HANOI. Dec 25, 2010. State-owned shipbuilder Vinashin’s default on a $ 600 million loan is just the latest crisis challenging Vietnam’s ability to get its economy under control after years of pell-mell growth and spiraling inflation.

The company, officially named Vietnam Shipbuilding Industry Group, failed to make a $60 million initial repayment on the syndicated loan to international lenders, saying it will make only interest payments, says a person familiar with the matter. The company has agreed to meet with creditors in mid-January to discuss repaying the loan, although some lenders privately have said they are uncertain whether Vinashin has sufficient resources to do so.

In defaulting on the debt, Vinashin has added to a catalog of problems afflicting Vietnam, once one of the world’s hottest emerging markets.

Over the past decade, the country’s economy has expanded from crater-pocked rice paddies to erect gleaming new factories and towering skyscrapers, prompting development economists to extol the country as a model for other frontier markets. On the narrow streets of Hanoi, Rolls-Royce and Bentley cars now compete for space with rickshaws and motor-scooters.

In the past few weeks, the cost of Vietnam’s poorly policed transformation has become alarmingly clear, offering food for thought for investors seeking rising returns elsewhere on the frontier-markets map. Economists say the country’s worsening problems, and the impact they could have on its dwindling currency, might also worry textile and agricultural producers in countries like Thailand and Indonesia which compete with Vietnam in those sectors.

Inflation is soaring, reaching 11.75% year-to-year in December, while Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have all downgraded Vietnam’s credit ratings because of its relentless focus on pumping up growth in the past six months. The government, meanwhile, appears set to continue its rolling devaluations of Vietnam’s dong currency while ordinary people scramble to stock up on U.S. dollars or gold. Since mid-2008, the dong has lost around a fifth of its value as Vietnam floods the banking system with money.

Read more …, Wall Street Journal, Dec 25, 2010