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NEWS UPDATES Asean Affairs     30  December 2010

Vinashin default may benefit Vietnam

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There may be a silver lining to the Vietnamese government's refusal to support troubled Vietnam Shipbuilding Industry Group (Vinashin), which has amassed debt of US$4.4 billion and defaulted on an initial payment of US$60 million to a consortium of foreign creditors that funded the state-owned enterprise's US$600 million eight-year funding facility three years ago.

Hanoi-based Mekong Securities Corp research head David Kadarauch told StarBiz that the government's refusal to support the troubled shipbuilder in its negotiation with foreign lenders could win over the confidence of investors in the long term, as (with the benefit of hindsight), this could be seen as allowing government-linked business entities to "stand on their own two feet".

Among the major creditors of the US$600mil facility, which was oversubscribed by more than US$200mil three years ago, were Credit Suisse, Standard Chartered Bank, Depfa Bank, Elliot VIN and National Bank of Kuwait.

It was earlier reported that Malayan Banking Bhd were among the 25 banks which participated in the deal, which offered a margin of 150 basis points (bp) over the London Interbank Offered Rate with an average life of 5.75 years and a grace period of 11 years and three months.

"Even if the cost of debt rises in the short term, in the long term this may reverse as investors then say that this was a good move by the government not to mollycoddle state-owned enterprises," Kadarauch said.

Already the cost to insure the country's debt against default has risen and was at a 17-month high on December 20 when the company failed to meet the US$60mil payment and again failed to meet payment when given an extension to Dec 23.

Kadarauch said the government's fiscal position was also not very strong as the projected current account deficit stood at around 7 percent of gross domestic product for 2010 and foreign reserves were very low at between US$10 billion to US$12 billion.

"The government is not in a very strong position to fritter away the cash by bailing out Vinashin," he said.

Kadarauch's was not an isolated view as analysts who spoke to the Wall Street Journal see Vinashin's default as potentially a make-or-break moment for Vietnam.

Moody's Investors Service downgraded Vietnam's credit rating on December 15 and observers have roundly criticised the country's government for refusing to support the company after planning and investment minister Vo Hong Phuc said Vinashin was responsible for repaying its own debt. The government of Prime Minister Nguyen Tan Dung relented a little on Tuesday when it decided to provide no-interest loans to Vinashin to pay workers' salaries, insurance and severance payments.

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