On the mend

Vietnam is back in the game for buyout firms

As one of the world's few remaining communist states, Vietnam's relationship with foreign capitalists is complex. That hasn't stopped private equity group Warburg Pincus closing the first tranche of a $200 million investment in the country's largest mall owner. It's early days, but for global investors Vietnam may be back in the game.

Warburg and its associates are buying about a fifth of Vincom Retail, their first foray in the country. The investment will help parent Vingroup pare its debt load, and follows rival KKR's decision earlier this year to double its stake in a Vietnamese fish-sauce maker. It isn't obvious Vietnam's retail industry will deliver much juice in the short run. Retail sales grew 12 per cent in the first six months, their slowest since 2003. Strip out 6.7 per cent inflation, and real growth of retail spending barely beat last year's five per cent GDP growth.

Besides, the safety of assets remains a worry. Foreign creditors to shipmaker Vinashin found out that a "letter of comfort" from the government didn't live up to its billing when the state-owned shipbuilder welshed on a $600-million loan in 2010. After much bickering and a lawsuit - later dropped - from pugnacious US hedge fund Elliott Advisers, the government offered lenders a settlement this year.

Poor contract enforcement and endemic corruption won't go away soon but Warburg and KKR could be right in betting that the economy is on the mend. Inflation, which peaked at 23 per cent in August 2011, is under control. That's giving the authorities wiggle room to revive growth: large companies will see their tax rates fall to 22 per cent next year, from 25 per cent at present.

Developers like Vingroup can now improve their cash flows by paying land costs to the government in instalments. Credit is also reviving as the government starts to tackle bad debt, at almost a fifth of total bank loans. Vingroup's cost of local borrowing has fallen from above 20 per cent early last year to around 13 percent, while the stock market is up 42 per cent from January 2012. The worst might be over for Vietnam; investors should pay attention.