Stimulating Capital Flows

Fears of economic stagnation worsened when the first quarter GDP growth slowed to 4 percent, the lowest quarterly growth in three years. In couple with this was the rapidly growing number of bankrupt, dissolved and temporarily suspended enterprises. More than 2,200 companies became bankrupt and some 9,700 businesses registered to stop operations with a given time or stop tax obligations in the first three months of the year. These figures showed hardships of enterprises at the face of domestic and international economic uncertainties.

 

Inflation which has stood at a high rate since 2007 was contained but the growth remained high. Consumer price index (CPI) in the first quarter of 2012 rose 15.95 percent over the same period last year. Slow economic growth and high inflation affect people's lives since incomes do not keep up with goods prices, leading to a sharp drop in consumer spending. Enterprises are trapped between the rise in input prices and the contraction in consumption market; thus, their incomes hardly offset input costs. Production contraction and layoff occur on a wide scale. Export and import data are also enough to see their predicaments. A series of key exports saw a sharp drop in earnings, ranging from agricultural products and minerals to seafood and apparels. Meanwhile, importation also tended to slow down as industrial production shrank. Currently, domestic production is heavily relying on foreign materials.

 

It is hard to wait for a strong interest rate support from the Government as it did with the economic stimulus package in 2009. The current situation is even more difficult as prices of basic commodities like crude oil, metals and grains are quite high. Prices of key input commodities like gasoline, electricity and coal are still lower than world rates and the rise in selling prices of these commodities is envisaged. CPI slowed down but it remained high and unstable; thus, a stimulus package may pose potential risks of inflation next year.

 

However, if Vietnam lacks measures to revive its GDP growth at the back of the disappointing result in the first quarter of 2012, it will face lower growths in the next quarters. Right now, the Government needs to introduce measures to address underlying causes of inflation and stagnation. It must resolve the congestion of capital turnovers in the economy but it cannot cause budget deficit.

 

Looking to the policies of the Government and the State Bank, we can see a policy signal: By restructuring bad debts and overdue loans in the banking system, authorities are unfreezing capital flows. Nonperforming loan is not only the problem of the banking sector but it actually affects the entire economy. Bad debts banks increased dramatically in the past year, overdue debts in many banks are at an alarming rate. This loan did not return to the banking system or circulate in the economy.

 

Bad debt restructuring is a task the State Bank must concentrate on in the process of bank restructuring. The key problem is where the money comes from to inject into the system to restructure debts. According to some proposals, the Government and the State Bank of Vietnam can allow some debt trading companies to purchase overdue debts at banks. They may pump capital for Debt and Asset Trading Company to do the task. Overdue debts which are highly likely unrecoverable and carry bad debt characters will be selected by commercial banks to sell to debt trading companies. The system is estimated to need VND250 - 300 trillion to clean bad debts and overdue debts, or 10 percent of outstanding loans. The money may come from foreign sources or the State Budget. What matters now is how to inject the money into the system without causing a rise in money supply and budget deficit, or not causing an increase in inflation. It means that the money must be real income accumulated from austerity policies, public spending reduction.

 

The matter is now how much the State Budget saves and the value of the savings is not enough to clean huge bad loans while money from businesses is limited. To add new funds, it necessary to create favourable conditions for foreign enterprises to establish debt trading companies. If government carries out austerity policies and applies attractive mechanisms for foreign capital to flow in to restructure bad debts. Although debts are not completely solved, a part may be returned to the banking system to get involved in economic development.

 

Lowering interest rates is very important at present but it is more important to unfreeze capital flows for capital-thirsty businesses. In addition to capital sources, businesses are still waiting for another aggregate demand stimulated by the State to clear inventories and increase capital turnover. Until now, we have not seen the signal of this policy.