Fitch Ratings has recently affirmed Vietnam’s long-term foreign and local currency issuer default ratings (IDR) at ‘BB-’ with a stable outlook. “The big question is whether Vietnam is underrated, against the backdrop of overwhelmingly positive news flows,” said Natixis.
“We argue that the slow pace of financial reforms will dampen domestic sectors’ long-term growth prospects. While GDP may be picking up in the next several years, thanks to rapid inflows of FDI, the economy is built on a shaky foundation,” the bank stressed.
The State Bank of Vietnam, the country’s central bank, has pulled down asset prices and eased the overheating of the economy thanks to tough measures. Natixis cited data showing that Vietnam managed to climb down from a high mountain of debt from 2011 to 2013.
However, the level of leverage is still worryingly high and has risen in the past two years. In addition, Vietnam’s credit intensity, a measure of how much credit is required to generate an equivalent output, is not efficient, it said.
Natixis pointed out two problems: (i) weakening domestic demand and (ii) a deterioration of domestic firms’ competitiveness.
“These two problems are symptomatic of the snail pace of banking sector reforms,” it said.
“Vietnam is adding more debt to its profile while not improving its ability to generate income,” it noted.
With goal is to house the debt and grow the real estate market, the Vietnamese government formed the Vietnam Asset Management Company (VAMC) in 2013 and tried to improve demand for the real estate sector by opening it up to foreign investors and facilitating low-income housing development.
“However, we believe measures are still not tackling the underlying issues of how and who gets the credit allocation in the economy,” said Natixis.
In the short-term, it looks like it is on the upward trend. But in the medium term, Vietnam may find a difficult road ahead if it does reform the banking sector.
Natixis concluded that the government already took an important step to liberalize the economy for trade. The time is ripe for further reform of the entire banking sector. It seems that the TPP is the only hope that this will happen, as it encompasses not just tariff reduction but also the liberalization of investment and services, and curbing the support of the government for SOEs.
“Perhaps Vietnam is under-rated, but only if it chooses to create a more sustainable growth-model that does not champion inefficient firms.”