In Vietnam, a new round of credit loosening by the central bank – made possible by a sharp plunge in inflation – has stirred hopes that the good times aren’t too far away. But restarting growth will not be that easy.
Consumer price inflation fell in May to less than 7 per cent year-on-year from a peak of 23 per cent last August. In response, the State Bank of Vietnam, the central bank, last week announced its fifth rate cut of the year, lowering its refinancing rate to 10 per cent. Earlier in June SBV cut the deposit rate ceiling from 12 to 9 per cent.
The government succeeded in controlling inflation through a combination credit targeting and fiscal tightening. Rates on commercial loans peaked in excess of 20 per cent, public investment projects were delayed and tough penalties were imposed for trading the dong on the black market. These actions stabilised prices and the currency, but also slowed down economic growth from 6.8 per cent in 2010 to 4.4 per cent in the first half of this year.
Local businesses hope that easier credit will enable them to roll over old loans and will restart the property market, which was a main casualty of tight credit.
But this optimistic view ignores the massive liabilities that the corporate sector has built up over a period of five years. Vietnamese companies are now so deeply in debt now that deleveraging will take more than one or even two years.
Bank credit as a share of GDP more than doubled between 2005 and 2010 from 62 to 136 percent. The first round of borrowing was largely the unintended consequence of surging capital inflows in 2007 and 2008. The SBV was caught unaware and failed to sterilise enough of the inflow, which was recycled as dong loans.
The second round of credit growth was intentional, designed as part of a government stimulus package as the global financial crisis took hold in 2009. Another mini-stimulus arrived in 2010, timed to boost spirits ahead of the five-yearly Communist Party Congress in January 2011.
The subsequent credit tightening revealed how dependent Vietnam’s companies had become on easy credit. As Warren Buffett famously joked, when the tide goes out you get to see who’s been swimming without a bathing suit. In Vietnam, that was just about everyone.
According to the ministry of finance, 12 state companies have a combined debt of 219tn dong, or about $10.5bn. Ten companies have debt-equity ratios in excess of 10. In the most spectacular case, a government report in June revealed that the state shipping company and port operator Vinalines had accumulated $2.1bn in debt, a fleet of worthless vessels and a stack of financial irregularities at its port development projects. Two senior executives have been arrested and the company’s former chair is on the run.
If reckless borrowing had been confined to the public sector, the situation would be serious, but containable. But non-state (it is unwise to use the term private in Vietnam) companies are also deeply in the red. The heaviest debtors are the property developers but here have been spectacular defaults in other sectors, notably that of the seafood exporter Bianfishco. The Vietnam Association of Seafood Exporters and Processors (VASEP) says that half its members are facing bankruptcy, and has called for government intervention to set minimum prices and a $200m support package. The newspapers are filled with similar requests for help from other sectors.
The banks, having over-extended themselves during the long boom, are now undercapitalised and weighed down in bad debt. SBV Governor Nguyen Van Binh recently told the National Assembly that bad debts at Vietnamese banks are equal to 10 per cent of GDP. Most international observers consider even this alarming figure to be an underestimate.
The banks are not in a position to underwrite another lending boom even if the government relaxes its credit targets. The troubled joint stock banks are trying to pare down their balance sheets, and they will find it increasingly difficult to fund new lending as the deposit rate cap is reduced. Healthier banks have cash on hand, but confront a market in which there are few willing borrowers who are not already overextended. Many banks will be content to earn fat spreads on government bonds while gradually reducing their NPLs.
The government is preparing a fund to restructure the banking system. The speed of the deleveraging process will depend largely on how these plans are carried out and financed.
But however it is done, it will take time. There will be more spectacular defaults, and more pain. Although Vietnam has a track record of nimble adjustment, attempting to jump-start the economy under current conditions would only mean a return to inflation and currency instability.
Streamlining bankruptcy procedures would help more than government bail-outs. A weak judiciary and political interference are likely to slow down the deleveraging process. According to the World Bank’s most recent Doing Business report, Vietnam ranks 142 out of 183 countries in resolving insolvencies. If the government wants to help, this would be a good place to start.
Jonathan Pincus is a resident academic advisor at the Vietnam Programme, Harvard Kennedy School