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Vietnam’s Biggest Obstacle to Post-TPP Success: Bad Loans

The biggest obstacle Vietnam faces, according to some experts, to capitalizing on the new opportunities the settlement of the Trans-Pacific Partnership (TPP) will introduce, is a daunting pile of bad loans saddling its central bank. In efforts to reassure foreign investors, Vietnam plans to revamp its banking sector and auction off bad-debt assets.

The heart of Vietnam’s strategy is the creation of an asset-management company known as VAMC, which permits foreign investors to assume bigger stakes in the country’s premier lenders. Speaking to Bloomberg News, Governor Nguyen Van Binh said, “The government and the central bank encourage and want to create favorable conditions for foreign investors to participate in the sale and purchase of bad debt.” Vietnam’s overall growth has been hampered by its freight of soured loans and suffers more from its toxic loans than any other major economy in Southeast Asia.

Moody’s Investor Service estimated that bad debt accounts for at least 15 percent of Vietnamese banks’ total assets, making the entire system vulnerable to major financial disruption. Prime Minister Nguyen Tan Dung asked the central bank to progressively lower its lending rates; lending has dropped approximately 1.05% since March 2013. Generally, the government tries to hit a credit growth rate between 12 percent and 14 percent.

The VAMC is designed to gather and sell the loans and collateral from borrowers incapable of paying off their debts, sometimes buying  the assets directly. Deputy Governor Dao Minh Tu, said, “Banks have become more willing to sell bad debt to VAMC now, including those who previously had doubts about VAMC’s debt purchasing ability. We’re closely watching the performance of banks, especially those who have difficulties.”  The government is also asking major lenders to overhaul their operations, and even consider mergers with better-heeled foreign companies that can more effectively resolve the bad loans.

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There are reassuring signs of progress in Vietnam’s financial sector.On January 23, Fitch Ratings revised Vietnam’s sovereign outlook from “stable” to “positive,” a powerful indicator of the country’s rising fortunes. The ratings agency attributed the improved classification to progress regarding Vietnam’s macroeconomic stability and external finances.

According to Fitch Ratings, Vietnam has demonstrated strong signs that it is recovering from the effects of austerity measures implemented in 2011 in response to mounting public debt and a potentially overheating economy. “Real GDP grew 5.4 percent in 2013 (5.2 percent in 2012) as both domestic and external demand picked up. Meanwhile, consumer price inflation has moderated, coming in at 6.6 percent in 2013, compared with 9.1 per cent in 2012 and 18.7 per cent in 2011,” a Fitch report explained. Fitch anticipates that Vietnam’s GDP will expand 5.7% in 2014 and 5.9% in 2015, robust but sustainable rates of growth.

Fitch also estimates that Vietnam ran an account surplus in 2013 that was 5 percent of the GDP. The country currently enjoys strong inflows of foreign direct investment, which amounted to 6.8% of the GDP in 2013. Government statistics show that 40,000 new accounts were opened in Vietnam in 2013, a 56 percent increase over the previous year. As of the conclusion of December 2013, foreign investors hold 1.3 million accounts, and  are currently net buyers in the stock market, possessing a total of $323 million in shares, a 53.1% improvement over last year. This is the the third consecutive year foreign investments have increased.

Vietnam’s foreign exchange reserves topped $28.6 billion at the end of 2013, which is the equivalent of almost two and a half months of external payments, according to Fitch.

Fitch acknowledge the challenge posed by the bad loans to Vietnam’s success, but noted the creation of the VAMC positively. Fitch said, “However, the authorities have begun to address the issue by creating a national asset management company to help resolve NPLs. Meanwhile, funding pressures in the banking sector have eased due to divergent trends in loans and deposits, which resulted in the system-wide loan-to-deposit ratio falling to 91.6 per cent at end-Q2 2013, down from 94.8 per cent at end-2012.”

Vietnam’s improving macroeconomic conditions have drawn the attention of candidate foreign investors. Tony Diep, managing director at Indochina Capital, said, “There is more appetite now than before, given the stability of the currency. Investors are more comfortable with the macro picture. If the government uses the money to invest in infrastructure growth, investors would like that.”

Also, Vietnam’s garment export business has been surging, especially given all the industry anticipation regarding the advantages it will gain from the conclusion of the TPP. Vietnam’s exports jumped an impressive 15.4% in 2013, defying the global trend toward slackening demand. According to the HSBC study, the garment and textile sectors are disproportionately responsible for that growth. Vietnam’s exports are expected to leap another 20 percent in 2014 on the strength of surging demand from both the U.S. and the E.U., which account for 18 percent and 14 percent of its exports, respectively. As Western demand continues to balloon, especially with respect to the garment industry, orders will increase while inventories shrivel, making it likely that output will be forced to rise to meet the new levels of demand. The HSBC Purchasing Managers’ Index, an important bellwether of future growth, demonstrated a considerable increase in Vietnam’s manufacturing output for the month of December, achieving the highest level since April of 2011.