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Cablegate: Bumps in the Road for Vietnam's "Equitisation" Process

VZCZCXRO4238
PP RUEHHM
DE RUEHHI #1561/01 2421724
ZNR UUUUU ZZH
P 301724Z AUG 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 6226
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2431
INFO RUEHHM/AMCONSUL HO CHI MINH 3607
RUEHBK/AMEMBASSY BANGKOK 5939
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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

© Scoop Media

 
 
 
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