BUMPS IN THE ROAD FOR VIETNAM'S "EQUITISATION" PROCESS

UNCLAS SECTION 01 OF 03 HANOI 001561 SIPDIS DEPT FOR EAP/MLS, EB/IFD, USAID/ANE, USAID EGAT/EG BANGKOK PASS TO RDM/A DEPT PASS USTR FOR D BISBEE SINGAPORE FOR TREASURY S BAKER DEPT PLEASE PASS FED RESERVE SAN FRANCISCO FOR A MAYEDA SENSITIVE BUT UNCLASSIFIED SIPDIS E.O. 12958: N/A TAGS: EFIN EAID ECON PREL VM SUBJECT: BUMPS IN THE ROAD FOR VIETNAM'S "EQUITISATION" PROCESS ¶1. (U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET ¶2. (SBU) SUMMARY: The auction of shares in insurance company BaoViet, Vietnam's largest public offering to date, revealed the problems and strategic shortfalls of Vietnam's new method of "equitising" State Owned Enterprises (SOEs) (equitisation is the Vietnamese term for partial ownership offers of SOEs). The new method, instituted in the spring of 2007, requires charging strategic investors a share sale price no less than the average price earned at the equitisation auction, even if shares are available more cheaply in the market or are subject to other, more stringent conditions. The BaoViet deal was to serve as a flagship example of Vietnam's equitisation program, so its failure is being carefully reviewed as upcoming equitisations will involve even larger SOEs, including important state-owned commercial banks (SOCBs). All eyes are now on the upcoming equitisation of Vietcombank as an indication of how Vietnam will move forward with the equitisation program. END SUMMARY. WHAT WENT WRONG WITH BAOVIET? -------------- ¶3. (U) According to a high level official at a local multi-lateral development organization who was involved in the BaoViet process, the initial auction of BaoViet shares saw retail investors drive up share prices to an average of VND 74,000 per share. The new equitisation rules, codified in Decree #109, require strategic investors (both foreign and domestic) to pay a share price no less than the average initial auction price. In BaoViet's case, however, strategic investors refused to buy their agreed-upon shares because the average auction price was twice the level they had been prepared to pay. Vietnamese banks, under pressure from new regulations to restrict their lending for stock market purchases to just 3 percent of total loans, also balked at lending retail investors money to pay for shares at such a high price. By the deadline to settle and claim shares two to three weeks later, the BaoViet stock price was down 13.5 per cent in the informal gray market. Both foreign and local bidders opted to forfeit their ten per cent deposits and walked away without purchasing their shares. Government officials are still negotiating with strategic investors as to the final price they are to pay. GOVERNMENT WARY OF STRATEGIC INVESTORS -------------- ¶4. (SBU) Government officials acknowledge the value strategic investors could bring to bear on SOEs, including the ability to catalyze managerial reform, improve corporate governance and discipline enterprises to function with a commercial orientation. However, government of Vietnam (GVN) officials expressed during meetings that their overriding concern was to prevent the sale of state assets too cheaply to strategic investors so that Vietnam became "Russia with its oligarchs." ¶5. (SBU) To address this concern, the Prime Minister issued Decree #109 prior to the BaoViet IPO, stating that strategic investors are to pay the average IPO auction price. Decree #109 replaced Decree # 187, which had allowed strategic investors to receive a twenty percent discount from the initial average auction price. According to the Division Head of the Financial Department for Enterprises in the Ministry of Finance, the twenty percent discount had attracted investors who were not "strategic" in intent but merely seeking to take advantage of the discount for a quick turn-around in sale and profit-taking, such as was seen during IPOs of Chinese SOEs. According to International Finance Corporation (IFC) Country Manager Sin Foong Wong, Decree #109 was also motivated by a desire to take advantage of the rising stock market and to maximize equitisation proceeds. According to World Bank Chief Economist Martin Rama, equitisation auctions were expected to serve as a price discovery mechanism and thus guide the price charged to strategic investors. ¶6. (SBU) The GVN itself seems engaged in an internal debate on whether to embrace strategic investors. For instance, the Ministry of Finance (MOF) official in charge of the equitisation process told us that they were thinking about floating a few trial IPOs where strategic investors would be welcome. However, the Office of the Government (akin to the Prime Minister's Chief of Staff) categorically ruled out this option for the foreseeable future. ¶7. (SBU) It is unclear what would be the share price if strategic investors end up taking part in future IPOs. Director Le Xuan Nghia (Banking Development Strategy Department of the State Bank of HANOI 00001561 002 OF 003 Vietnam) gave the most direct answer, stating that the government will have strategic investors bid against each other to determine their share price. ¶8. (SBU) Finally, a former SBV employee, now at HSBC, noted that the GVN is also considering a completely different model for equitisation. Instead of selling shares to strategic investors at a discounted price or using an average of auction prices, all investors (except employees) would be charged the same price. The cost savings from not granting a discount would be used to pay for technical assistance that would have otherwise been sought from the strategic investor. EQUITISATION REMAINS A PRIORITY -------------- ¶9. (SBU) Officials at the MOF outlined the government's goals and concerns for equitisation: - equitisation should not be carried out merely for the sake of equitising to avoid the risk of state asset sales enriching only a few with little benefit to the larger population; - equitisation proceeds should be sufficient to address the SOEs legacy problems, such as bad debt and redundant workers, as well as fund necessary investment activities. They emphasized that share sales to employees at discounted prices (currently 40 percent) will be an integral component of equitisation as a form of worker protection. Also, they noted that while initial offerings of SOEs have thus far taken place only in Vietnam, authorities are seeking to list SOEs internationally. ¶10. (SBU) IFI representatives and private sector participants are confident that equitisation remains a top government priority, but many acknowledged that the offerings may need to proceed more slowly due to fear that (1) an oversupply of shares will drive down prices, and (2) SOEs are unprepared. World Bank Economist Taka Akamatsu noted that many SOEs managers are pushing for equitisation even though SOEs are not ready, as managers are seeking to profit from their 40 percent discounted share price. ¶11. (U) Government officials were consistent in conveying that equitisation remains a top priority. They recounted the numerical goal for the equitisation program: to equitise 71 large SOEs in every sector by 2010. (Comment: Government targets on equitisation are widely viewed as unrealistic, but do serve as signaling devices to convey the government's prioritization for equitisation.) Nonetheless, analysis of the equitisation process continues. During a meeting between the ExIm Bank President and the new SBV Governor on August 22, the Governor admitted that the equitisation of Vietcombank was being delayed until the end of 2007. ¶12. (U) As to whether the government decides to move forward with the technical assistance model remains to be seen. Technical assistance, whether provided by aid agencies or private sector management consultants, is unlikely to have the same long-term effect as engaged, strategic shareholders in terms of creating permanent improvements in managerial habits and culture. All eyes are now on the upcoming equitisation of Vietcombank, the second largest SOCB by assets and what will be the government's largest equitisation to date, as an indication of how authorities will proceed forward with their equitisation program. COMMENT: GROUNDS FOR IMPROVEMENT? -------------- ¶13. (SBU) BaoViet's equitisation was to serve as a flagship example of Vietnam's ability to carry out its equitisation program with large SOEs. Its failure embarrassed the GVN and prompted a review of Vietnam's equitisation process. The intent of Decree #109, to avoid a "Russia oligarch" situation, could be considered a positive testament to Vietnam's desire to avoid the mistakes made by other countries moving towards a market economy. ¶14. (SBU) Intent notwithstanding, the decree requiring strategic investors to pay the average auction price is problematic for several reasons. First, the thinness of Vietnam's stock market, lack of proper financial information disclosure, and short-term perspective of most bidders (seeking to immediately sell the purchased shares) makes the auction a poor price discovery mechanism. Second, strategic investors are not likely to agree to any "market price" as they would seek a risk premium for bearing HANOI 00001561 003 OF 003 greater risks than the average investor (for example, agreeing to hold shares a minimum of 3-5 years.) Lastly, by bringing in strategic investors only after an auction, the investors' ability to make managerial reforms at the equitised company may be limited, making the auction less lucrative for the government sellers. END COMMENT. ¶15. (U) Susan Chun, Treasury Desk Officer for Vietnam, collaborated in the drafting of this cable based on her meetings in Hanoi during the week of August 6 to 12. MICHALAK