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"Mergers and acquisition (M&A) deals in Vietnam have been on a sharp rise in the last few years. Deals involving M&A have proved an effective investment channel for enterprises in Vietnam both foreign and domestic", says a highly regarded partner....

"Mergers and acquisition (M&A) deals in Vietnam have been on a sharp rise in the last few years. Deals involving M&A have proved an effective investment channel for enterprises in Vietnam both foreign and domestic", says a highly regarded partner.

The past year has seen a number of strategic acquisitions of stakes in Vietnamese companies in the sectors of financial services, natural resources, energy, telecommunications, food and beverage and real estate as well as the establishment of joint ventures. This is as a result of Vietnam's "commitments under the WTO where we need to provide that, subject to certain conditions, foreign companies and individuals are now allowed to fully acquire a local unlisted company".

An increasing amount of M&A and outbound investment by Vietnamese companies has led to increasing activities within the financial sector with the need for acquisition financing.

The State Bank of Vietnam requires that at least D3 trillion ($145 million) in capital is held by Vietnamese banks, which has led to a need for expansion by domestic banks as they look to new activities and markets to raise capital. "Big capital puts extreme pressure on the banks because more capital requires bigger profit and dividends for investors," says one observer.

Furthermore, the banking and finance sector has anticipated the big difficulties they will meet in 2011 with exchange rate fluctuations, high interest rates and policies on credit restriction. All of these will place further pressure on the capital costs and the capital demand of banks.

"With growing bank credit we are seeing increased risks to the system", says a partner. It is believed Vietnam's government is likely to lower the target for bank credit growth to almost 20% in 2011.

"Although the target is feasible, it is still too high with bank credit approaching GDP levels of 110% towards the end of last year", comments a partner. Bank credit already grew about 25% in 2010, exceeding the government's target of 23%. In addition, Vietnam had several years of high credit growth, especially in 2007 and 2009, including loans to large state-owned borrowers.

Borrowing costs in Vietnam have also risen sharply. "Vietnamese dong (D) lending rates have increased to 18% for a 12-month loan, from 12% one year ago", says a leading law firm partner. "In contrast, the US dollar lending rates are notably lower at 6%", the partner adds. The wide differential has prompted many businesses to borrow in dollars instead of the dong. Those who generate revenues predominantly in dong, increase their exposure to foreign exchange risks and high inflation in Vietnam in the past few years has also weakened confidence in the currency.

Adding to the system's credit vulnerabilities, inflation in the country rose to above 12% year on year in January 2011 from just 7.1% in 2009. This was down in part to the government's loosening monetary policy in the second half of 2010 to support economic growth, and rising global commodity prices were responsible for the soaring inflation.

"If inflation continues to rise, the costs for businesses domestically or internationally will hinder borrowers' debt servicing ability. At the same time it's a catch-22 situation if the government is overzealous in tackling inflation it could have a destabilising effect which undermines the confidence in the banking system", comments a special foreign counsel.