Vietnam Getting Firmer, More Resilient

10:54:12 AM | 4/21/2020

The recent report released by Bao Viet Securities Company (BVSC) said that despite the numerous difficulties and challenges facing the economy today due to the impact of the Covid-19 pandemic, compared to the previous major economic downturn in 2008, everything is now much better. 2020 will also be far different from 2008.

According to BVSC, comparing macroeconomic indicators in 2008 and 2020, Vietnam's economy is now more stable and firmer than in 2008. The stock market is still stable and more attractive than bank deposit and bond channels. Deposit interest rates and bond yields are currently not attractive, not significantly advantageous to securities investment channels. This is a big difference over 2008, which helps cash flows stay in the stock market.

The difference between 2007, 2008 and 2020 can be seen in various macro indicators, economic and market operations. Credit growth soared over 50% in 2007 but it slumped to 12.63% as a result of monetary tightening policy to curb inflation in the first half of 2008. Inflation climbed 12.63% in 2007. In 2008, inflation growth exceeded 20% in some months. In 2008, the regulatory rates, e.g. refinancing rate, jumped to 15% per annum. The basic interest rate (used as a reference for commercial lending rates) was 14%. The actual deposit rate was over 20% higher than 2-year and 5-year bond yields.

In recent years, credit growth was always controlled at around 14%, other macro indicators such as inflation, exchange rates and interest rates are under control and at low levels. Liquidity in the banking system is also ample. In addition, compared with 2008, the Government's support solutions in 2020, for example interest reduction and debt rescheduling packages for businesses, tax breaks, land rent cuts, social security, petroleum and power price reduction, are also being implemented in a timely and appropriate manner. Even, if the epidemic is still complicated, we believe that the Government still has room, more or less, to launch more policies to support the economy when necessary.

Based upon a comparison of economic and stock indicators in 2008 to those in 2020, the stock market can be expected to remain much more stable this year. Strong slumps are caused by epidemic news and margin calls just short-term cases.

The stability of the banking system and macro indices, the health of businesses, and the appeal of stock valuations are grounded for the belief that the stock market will be stable and no price shocks will happen again.

Short-term market movements are still affected by the epidemic control scenarios and time. However, it should be noted that although the macro landscape in 2020 is basically more stable and positive than in 2008, the debt size is much larger, reflected by the total outstanding credit loans to GDP reaching 130% or the size of the corporate bond market has continuously expanded in the last three years. Therefore, if the epidemic lasts long, this could be one of the biggest risks for the economy as well as the stock market in 2020.

One of the biggest risks faced by the economy is the increasing bad debt. According to a preliminary assessment by the State Bank of Vietnam (SBV), the outstanding loans expected to be affected are about VND2,000 trillion (US$85.3 billion), accounting for 23% of the system's total outstanding loans, potentially posing risks to banking activity.

In case the epidemic is controlled in the second quarter, this rate will be close to 4% in the second quarter and 3.7% or even higher in 2020, resulting in the impact on the progress of carrying out restructuring plans aimed to deal with bad debts at credit institutions and build up resilience of weak credit institutions.

According to BVSC, from 2012 to 2019, Vietnam's GDP per capita rose 2.5 times from US$1,150 to US$2,760, but the ratio of personal loans to credit outstanding balance increased quite fast, by 6.2 times. The personal loan outstanding at 20 banks surveyed is quite large, accounting for over 40% of credit outstanding.

The difference between 2007-2008 and 2020 is reflected in many macro indicators, economic and market performance. Credit growth soared over 50% in 2007 but it slumped in the first half of 2008 as a result of government-backed monetary tightening policy to curb inflation. In recent years, credit growth has been always controlled at around 14%, other macro indicators such as inflation, exchange rates and interest rates are under control and at low levels.

It can be seen that the rapid increase in personal loans has helped improve banking performance but it will pose more risks if the epidemic lasts long. However, at the current scale, this risk may not be high, partly because the share of personal loans is low and savings, accumulated by saving habits, remain ample in households.

Besides, there are risks from corporate bonds. In 2017, the corporate bond value was VND115 trillion, VND224 trillion in 2018 and VND296.71 trillion in 2019. Bank bonds still account for the largest share, accounting for 41% in 2019 while real estate, consumer services, industry and other sectors accounted for the remaining 59%.

In the year to early April, the value of corporate bonds issued was VND37.2 trillion, of which real estate and construction firms accounted for over 35% of the total issued value. Given a strong growth of corporate bond value in the last three years, the risk of corporate bonds will also appear in the current context. If the epidemic lasts too long, corporate bond yields will increase, thus placing more pressure on issuers.

Source: Vietnam Business Forum