The central bank’s recent credit relaxation amid plummeting inflation has fuelled hopes for economic rally soon to come. Yet, stirring up growth would not that simple.
May CPI went down to below 7pct year-on-year from 23pct in August last year. Interest rates have been lowered for the fifth time since the early year on easing inflation. Refinancing rate has fallen to 10pct and mobilisation ceiling rate has dropped to 9pct from 12pct.
Such relaxation is expected to enable businesses to roll over existing loans, thus breathing new life into the flat property market. However, huge debts that have accumulated over the past five years may take one to two years to be settled.
Bank credit-to-GDP ratio more than doubled over the period 2005-2010 from 62pct to 136pct.
Presently, some 12 state-owned enterprises have been facing 219 trillion dong in debt, or USD 10.5 billion, 10 of which have seen debt-to-equity ratio jumping more than 10xs.
Remarkably, the government in last June revealed Vinalines’ staggeringly enormous debts of US 2.1 billion and this corporation’s poor financial management of seaport development projects.
What are worse are non-state enterprises particularly real estate firms have also been drowning in a mountain of debts. Vietnam Association of Seafood Exporters and Producers (VASEP) said half its members were facing up to likely bankruptcy urging for the government’s assistance and a bailout of USD 200 million. Also, the similar appeal has been come from other sectors.
Commercial banks have now been burdened with capital shortage and mounting bad debts after relaxing lending in the previous period of rapid economic growth. Governor of the State bank of Vietnam said at the National Assembly meeting session that banking sector’s bad debts accounted for some 10pct of GDP. The figure may be alarming yet fails to reflect the real picture, according to foreign observers.
Lenders could hardly stir up the market for the time being despite loosening credit policies. Troubled commercial joint stock banks have been struggling for capital attraction amid the recently lowered mobilisation ceiling rate whereas larger ones of abundant capital could barely seek any potential customers who have yet been deeply indebted. Many credit institutions would be satisfied with trading government bonds during the process of bad debt settlement.
For the present time, financial preparation for banking restructuring is underway. The progress of tackling bad debts would very much depend on how this scheme will be carried out and funding will be allocated.
The process would surely take time, during which a range of massive credit defaults are likely to come.
Despite the government’s frequent efforts to make flexible adjustments on erratic market movements, the economy could hardly gather pace at this moment as inflation and unstable foreign exchange rates would then returns.
Appropriate compulsory bankruptcy could be more effective than any bailout packages. Legal and political intervention is likely to slow the progress of bad debt settlement process. Vietnam ranks the 142th place out of 183 nations in terms of debt recovery capacity, according to the World Bank.