Vietnam Downgrade Adds Momentum to Clean Up State Loans: Economy

By Bloomberg News
Oct 5, 2012

Hoang Dinh Nam/AFP/Getty Images

Nguyen Phu Trong, Vietnam's Communist party secretary general.

As Vietnam wins a yearlong battle to tame inflation and stabilize its currency, the spotlight is moving to the drag on growth from undercapitalized banks that have channeled credit to the nation’s state-owned companies.

Failure to clean up the banking system -- a “weakness” Moody’s Investors Service cited last week when it cut Vietnam’s debt rating -- could result in slower growth for the next five to 10 years, said Matt Hildebrandt, a JPMorgan Chase & Co. economist in Singapore. The economy already faces its smallest expansion since 1999 after years of unbridled lending saddled banks with the highest levels of bad debt in Southeast Asia.

“The broad macroeconomic environment is much more stable than it was 18 months ago, but part of that reflects the weakness of the economy,” said Hildebrandt, who met business and government officials in the country last month. “Phase two, which will take several years, is restructuring the banks and reforming the state-owned enterprises.”

Communist Party General Secretary Nguyen Phu Trong pledged in October 2011 to focus on restructuring public investments, financial services and state-owned enterprises. After a year of little progress, Moody’s on Sept. 28 cut the rating on Vietnam’s debt for the first time since 2010 to B2, leaving it on a par with Cambodia and five levels below Indonesia.

‘Wakeup Call’

“This should be a wakeup call,” said Gene Davis, a Bangkok-based director at Finansa Pcl (FNS), which manages a $5 million Vietnam fund and has invested in the country since 1991. “They need to get their banking system together.”

Hoang Hai, deputy head of the Ministry of Finance’s debt management and external finance department, said the government would try to improve transparency and communication with ratings agencies. “We respect Moody’s assessment and we will try to improve it by trying to achieve our goals of macroeconomic stability and controlled inflation,” he said.

Economic growth moderated to 4.7 percent in the first nine months of 2012 after the government tightened lending -- a move that helped rein in inflation to a year-on-year rate of 6.48 percent in September, from more than 23 percent in August 2011.

Weaker demand has eroded imports, leaving the nation with a $34 million trade surplus in the first nine months of the year, according to preliminary figures released Sept. 27 by the General Statistics Office. Vietnam’s currency has risen more than 0.6 percent this year, after falling more than 7 percent in 2011. Foreign exchange reserves have also risen, to a point where they would cover an estimated 2.4 months’ worth of imports, the Asian Development Bank said this week.

Doi Moi

The government is targeting growth of 5.2 percent in 2012, which would be the slowest since 1999. That would extend the longest streak of sub-7 percent growth since the doi moi, or renovation, initiative opened the country’s economy in 1986.

“Until there is credible implementation of the restructuring agenda and investors’ confidence is restored, Vietnam will find it difficult to return to 7 percent-plus growth,” said Deepak Mishra, the World Bank’s lead economist for Vietnam in Hanoi.

Vietnam isn’t alone in confronting weaker expansion prospects as the global economic rebound moderates. The Bank of Japan meets today to consider whether additional stimulus is needed to counter increasing risk of a contraction in gross domestic product.

Malaysia may report today that its exports declined 1.7 percent in August from a year ago, according to the median estimate in a Bloomberg News survey.

U.S. Unemployment

In the U.S., a government report may show the unemployment rate in the world’s largest economy increased to 8.2 percent in September from 8.1 percent the previous month. Nonfarm payrolls rose by 115,000 in the month, according to a Bloomberg survey, compared with an average 153,000 gain last year.

Vietnam’s central bank chief, Nguyen Van Binh, said in April that the level of bad debt at some lenders may be “much higher” than reported. The bank estimated non-performing loans were 8.6 percent at the end of March, while the lenders reported a level of 4.5 percent as of May 31. Mizuho Corporate Bank Ltd. said as much as 20 percent of debts may be bad in a Sept. 4 note.

The financial system needs an injection of 250 trillion dong to 300 trillion dong ($12 billion to $14.4 billion), according to a Sept. 4 report published by the National Assembly’s Economic Committee and compiled by an advisory group. The 298-page document outlined options such as selling government bonds, trimming state spending, tapping foreign companies, or seeking funds from the International Monetary Fund. The central bank said three days later that the country won’t borrow from the IMF to resolve lenders’ bad debts.

Stock Slump

The slide in growth contributed to a 21 percent drop in the benchmark VN-Index of stocks since its peak this year on May 8. The decline accelerated after the arrest of Asia Commercial Bank founder Nguyen Duc Kien, one of the country’s wealthiest men, on Aug. 20, which prompted a run on deposits at the nation’s largest non-government-owned bank.

The government plans to increase foreign ownership to bolster the market. It may raise the maximum share that overseas companies can hold in brokerages and some joint-stock companies to 100 percent, from 49 percent, according to a draft proposal on the State Securities Commission’s website on Oct. 2.

Bank liquidity has also improved. Deposits were up 11.2 percent this year on Aug. 31, the government said in a Sept. 27 release. That’s helped Vietnam’s overnight interbank deposit rate, which measures how much banks charge to lend to each other, fall to 2.41 percent from a high this year of 12.7 percent on Jan. 30, according to data compiled by Bloomberg.

Parking Cash

Rather than increase lending, the banks have put much of the surplus cash into bonds, said Nguyen Tan Thang, fixed-income investment director at Ho Chi Minh City Securities Joint-Stock Co.
“If banks have a lot of money, they buy bonds,” said Thang on Oct. 2. “Liquidity in the system overall is good.”
Government bond yields have stayed little changed since the Moody’s decision, with those on Vietnam’s five-year notes up 2 basis points, to 10.15 percent, according to a daily fixing rate from banks compiled by Bloomberg.

“If there is any weakness in the bonds as a result of Moody’s, we’ll take that as a buying opportunity,” said Edwin Gutierrez, a portfolio manager at Aberdeen Asset Management who helps oversee about $9 billion in emerging-market debt, including Vietnam’s. “The challenges facing the banking sector are significant. That’s always been the case. Arguably all of this will make them stronger when they do finally undertake reforms.”

Capital Needs

Progress in addressing bank lending has been slow and the capital requirements of the industry may not be known until 2013 or 2014, London-based Gutierrez said.

Government-run banks are often subject to political pressure to lend to favored state-owned enterprises, or SOEs, according to a January policy paper written by academics at the Harvard Kennedy School in Ho Chi Minh City.

“The government is serious about cleaning up the banking sector,” said Vishnu Varathan, Singapore-based Market Economist at Mizuho Corporate Bank. “But the linkages with the SOEs indirectly back to the government and the banking sector makes this very difficult. They will always lick the visible wounds first and hope it gets better.”

To contact Bloomberg News staff for this story: Nick Heath in Hanoi at nheath2@bloomberg.net; Jason Folkmanis in Ho Chi Minh City at folkmanis@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net