Rate Cut: Will Real Estate Market Rebound?

Vietnam’s slowing economic growth in the first quarter of 2012 caused huge impact on the Government’s macroeconomic regulation policies. The State Bank of Vietnam (SBV) launched a series of rate cut measures to lower regulatory interest rates within one month. This move is forecast to have a positive influence on different economic sectors.

Restructuring and rescheduling debts

The reduction of regulatory rates is a good sign when most businesses are thirsty for capital. Successful borrowing will enable enterprises to expand operations to pay debts, including bad debts. Also according to the latest report by the National Financial Oversight Committee has proposed rescheduling debts for corporate borrowers to help them to be clean for new loans.

According to Mr Tran Xuan Gia, former Minister of Planning and Investment, economic restructuring and debt rescheduling are like two people standing oppositely. “Debt rescheduling is a measure of debt restructuring. Who will pay interests for depositors during that time? Who will pay principals and interests if borrowers do not if debt rescheduling is primarily applied to State-owned enterprises?”

At present, with respect to foreign debts, Vietnam is restructuring debts to be most reasonable and to be most beneficial. According to Mr Gia, it is necessary to set up an agency responsible for debt rescheduling. Then, it will introduce policies. Then, we can start preference policies. This process is very complicated.

According to many economists, economic restructuring meant rescheduling and restructuring debts. In this regard, economist Vu Dinh Anh said that Vietnam needs to create debt trading market which is very common in the world. “It is not simply a story between companies with banks. We must have a complete mechanism for debt trading. We can also attract foreign investors to take part in debt trading market to help us resolve the debt,” said Dr Anh.

Debt trading process must be involved by the State, said Dr Anh. The State must have certain resources to support debt trading and debt restructuring in principle that the State budget pays least but the resolution is most satisfactory and suitable.

Distortion of real estate market

Real estate companies have not resolved their financial difficulties although banks lowered rates and eased borrowing conditions. Most real estate businesses have pessimistic outlook. According to surveys by Vietnam Business Forum’s reporters, to continue operations, many companies are resigned to paying VND2 billion of interests a day each to banks although they cannot sell their products. It is not difficult to calculate the amount such companies pay since the real estate market got frozen over one year ago.

When they were learned of the new rate cut and easing credit policy for property market, many companies said they would hardly borrow because they did not have security assets. Even, it is said that the rate cuts by the State Bank are facilitating banks to formalise papers and bad debts.

In 2011 when the central bank tightened credit policy, many real estate businesses had to clench their teeth to bear interest rates of 30 - 35 percent per annum, let alone unofficial fees.

Mr Anh frankly said: "In my opinion, monetary tightening exposed our current weakness more clearly. It is the distortion of Vietnamese property market. This market absorbs very much money but bank credits are primarily short-termed and limited. It is not suitable for long-term property investment which hardly sells products immediately.”

Remarking on the current property market, Mr Anh said, the freezing of the property market, especially in Ho Chi Minh City, shows unreasonable structures and prices. If the real estate market cannot resolve structure, debt and finance issues, our current fundamental problems will not be solved although we loosen credit policy.

We can only expect a better market in the future, Mr Anh said when he analysed future market opportunities. Previously, some segments still sold well. Easing credit policy will help buyers to access lower-rate capital sources. The market will rebound but it will not happen to all segments. And, of course, not all real estate companies are benefiting from loosened credit policies.