Settling Bad Debts Requires Coordinated Inter-Agency Efforts

According to the latest report, the ADO has appreciated the positive steps of the State Bank of Vietnam in dealing with the bad debts of the banking sector, in particular the establishment of the Vietnam Asset Management Company (VAMC). However, the report also noted that the VAMC's success depends on laws and policies, which are not a direct function of the State Bank of Vietnam. The report also expressed concerns about delays in implementing the new standards for the classification and provisions of the loans.

 

"The establishment of the VAMC is a very positive step, but the VAMC's success depends on improving the legal framework to deal with the collaterals, and this requires a strong interdisciplinary collaboration,” said Mr Tomoyuki Kimura, ADB Country Director in Vietnam. "If the government could follow up the new standards for the classification and provision of the loans, this would reduce the risks to the banking system and improve the confidence of investors."

 

Although the policy rate has decreased, the credit growth has been constrained by the weak balance sheets of the commercial banks, concerns about the financial situation of borrowers, weak real estate market and low credit demand. The ADO report updates that the progress in settling the non-performing loans will allow further lowering interest rates and increasing the funding for the business sector of the economy.

 

According to Mr Tomoyuki Kimura, the gradual progress in dealing with bad debts will improve the confidence of the businesses. As such, the policy stimulus measures, including interest rate cuts this year, will motivate the improvement of the credit performance and the GDP growth rate.

 

If the structural reforms for commercial banks and state-owned enterprises are not accelerated, the economy may face a period of prolonged weak growth below the 7 percent-8 percent achieved in the 2002-2007 period. The ADO 2013 report forecasts that Vietnam's GDP growth will be kept at 5.2 percent for 2013, and that the gradual settling of bad debt will help to achieve the growth rate at 5.5 percent next year.

 

The analysis of the report shows that progress in addressing bad debts will also improve business confidence. As such, the policy stimulus measures, including lowering the interest rates this year, will create growth momentum. Some fiscal stimulus measures are also likely to be applied. The Ministry of Finance is expected to increase the budget deficit criteria above 5 percent of the GDP next year, in the context of reduced revenues. Finally, the situation of global trade is expected to improve somewhat in 2014.

 

However, private consumption will continue to be at low levels for a bit longer because fewer jobs are created and consumer confidence continues to decline. The measures to stimulate housing construction are expected to make fewer impacts on construction activities. In the service sector, the growth in financial services will depend on the results of bank restructuring, and whether the related services to consumers are developed or not depend on the health of the labour market. The number of tourists will continue to increase to support growth in the service sector, and the manufacturing industries will benefit from international trade, which is forecast to increase. The agriculture sector will recover in 2014, following the worst results caused by bad weather this year.

 

The progress in strengthening the banking system is expected to be unstable. The current level of funding for the VAMC will surely not be enough to handle a huge amount of bad debts. Currently, it is unclear whether the government will continue funding for the VAMC or recapitalize for the state-owned commercial bank or not. The success of the bad loans treatment program depends on the strengthening of the legal framework for bankruptcy, establishment of the pricing mechanisms and auctions for bad debts.

 

In a move that could prolong the process and increase the risks to the banking system, the SBV has decided to postpone the implementation of the policies forcing banks to raise standards of loan classification and provision to June 2014. The new rule, originally scheduled to take effect in June 2013, will force the banks to classify the loans into more bad loans and increase the provisioning rates. This rule also prevents businesses, which are slow to pay loans, from getting access to new loans.

The inflation rate is expected to decline to 6.0 percent by the end of 2013, and therefore, the inflation rate will reach 6.5 percent on average this year. This forecast was revised down from the ADO report in May 2013 because the food price inflation fell faster than expected. The monetary policy has been eased and the increased money supply makes the inflation expectations increased in 2014, with the inflation rate forecast to be 7.2 percent on average.

 

The ADO 2013 also forecasts that the current account balance will be in surplus this year and next year. The rapid increase of the exports from manufacturing firms with foreign direct investment begins to reduce. This trend may continue because the share of the capital disbursed by foreign direct investment, compared to the GDP, has halved in the period 2008-2012. The exports from the enterprises with the foreign direct investment has contributed greatly to the total exports of Vietnam for recent two years while exports from the local businesses have not made any remarkable increase.