Rising banking risks Source: 09-MAY-2008 Intellasia | Saigon Times Daily page 4
May 9, 2008 - 7:10:00 AM
Vietnam's economy continues to exhibit signs of overheating. Growth drivers, such as loan extension and consumer demand, remain in high gear. Strains on the banking system are raising risks of large-scale dysfunction that could test the government's limits to contain systemic risks. This has prompted Standard & Poor's to place Vietnam sovereign debt on negative watch. A potential downgrade would further erode investor confidence and complicate the outlook.
To be frank, cumulative tightening efforts are having some effect. Domestic credit growth had slowed from 6.3% per month in January to 1.7% in April At this rate, the government's target credit growth of 30% for 2008 is not so far fetched even though half of the quota had already been reached in four months.
But with inflation above 20%, is 30% credit growth sufficiently subdued? The pace of demand growth seems to have so far ignored inflation and external imbalances. Consumer demand is still very robust, as retail sales grew 34.8% over a year ago in the first four months. Even considering inflation, real sales grew an impressive 14.4%, only a hair shy of the 15.3% rate in 2007. Investment also remains on its hot streak. Hanoi's expansion proposal was announced, as FDI inflows more than doubled to US$7.2 billion in January-April.
If the 30% target is realised, domestic credit could represent 95% of estimated 2008 GDP, a sharp rise from the 71% in 2006 or 20% in 1998. This lays unprecedented burden onto Vietnam's young banking system, at a time when business conditions and loan quality could deteriorate further.
This might still not have been extremely worrying if government resources aren't also at risk. So far this year, the US$11 billion trade deficit is being offset by the US$7 billion PDI inflows and the growing remittances from overseas. Given continued import demand and weakening external demand, net current account and FDI contributions to FX reserves this year might be negligible, if not negative.
Since the late March correction, one-year dong forwards had gone from implying a mild 1% depreciation to 8%. Meanwhile, spot rates barely moved at all. With such quickly deteriorating investor outlook for the currency, stable spot rates are probably associated with substantial central bank involvement.
