World Bank Warns Vietnam of Rapid Credit Growth

Tuan Minh

16:25 14/07/2017

BizLIVE - The rising credit intensity of growth, and sustained acceleration of credit may raise concerns over asset quality in Vietnam, particularly given the past unsolved bad debts, the World Bank (WB) has said in its biannual “Taking Stock” report.

World Bank Warns Vietnam of Rapid Credit Growth

Sebastian Eckardt (M), lead economist and acting country director for the World Bank in Vietnam. Photo: Minh Tuan/BizLIVE

Heated Credit Growth
Credit growth has accelerated at about 20% on an annualized basis while the central bank has set a growth target at 18% this year.
“While some steps have been taken to resolve non-performing loans (NPLs), asset quality problems remain a concern,” says the report.
According to government data, total bad debts reported by commercial banks, bad debts of banks sold to the Vietnam Asset Management Company (VAMC) and potential bad loans held in commercial banks accounts were estimated at 10.1% of total outstanding loans of the banking sector in 2016, compared to 8.85% in 2015. The bad debt ratio was identified at 17% back in 2012.
At the end of 2016, loans classified by commercial banks as non-performing accounted for a quarter of total accumulated bad assets sold to VAMC and those loans identified as potentially bad account for the remaining three quarters.
“The [credit growth] of 18% is too high in our assessment,” said Sebastian Eckardt, lead economist and acting country director for the World Bank in Vietnam, arguing that it is not cost efficient.
He suggested at this point for demand side, stimulus is not needed as investment in the economy is quite resilient and robust.
Despite BizLIVE’s request, Eckardt declined to give out a reasonable figure for credit growth, but said that he supported the International Monetary Fund (IMF)’s call for Vietnam to restrain from easing monetary policy.
It its latest report, the IMF said Vietnam’s monetary conditions remain accommodative and supportive of growth.
“With core inflation low but headline inflation rising because of administered price hikes, monetary policy should remain on hold but be alert for early signs of pass-through to higher core inflation. A rate hike would be appropriate if the inflation outlook deteriorates,” says the IMF report.
The fund recommended reducing credit growth targets to below 15%.
Positive Medium-term Outlook
The WB reckoned in the report that Vietnam’s medium-term outlook remains positive. The banks retained its forecast for Vietnam’s economic growth at 6.3% in 2017, underpinned by buoyant domestic demand, rebounding agricultural production, and strong export-oriented manufacturing, aided by a recovery in external demand.
Inflation pressures will remain moderate, reflecting stable core inflation and tapering of administrative price hikes.
The current account is expected to remain in surplus, albeit at a lower level as strong import growth resumes.
The bank projected the country’s growth at around 6.4% in 2018-2019, accompanied by broad macroeconomic stability.
“Related to the case for macroeconomics, Vietnam should focus on the quality rather than the levels of growth. In our assessment, the economy is in very good conditions. We think that the 6.3% growth is a strong outcome if we compare globally,” Eckardt noted.
“So we don’t see a very strong case to provide additional stimulus on the demand side through monetary or fiscal extension at this point,” he stressed.
Some Domestic and External Risks Cloud the Outlook
On the external front, these include surges in global financial market volatility, higher global interest rates, and a slowdown in global integration and trade liberalization.
A high degree of openness and reliance on FDI make the economy vulnerable to slower growth in major trading partners. A weakening of the still fragile recovery in the United States and the European Union, and a sharper slowdown in China, could dampen growth due to Vietnam’s high export orientation.
“Waning support for trade liberalization and global integration also pose risks to Vietnam’s FDI and export-oriented growth model,” says the report.
Meanwhile, on the domestic front, slower growth may intensify demand for further loosening monetary and fiscal policies, which risk reversing the recent gains in macroeconomic stability and heightening unsolved macroeconomic imbalances.
Medium-term growth prospects may be clouded by slower than expected progress in addressing state-owned legacy weaknesses and banking sector vulnerabilities, especially bad debt resolution.
In addition, delays in and/or poor quality of fiscal consolidation could not only raise the risk of debt stress but also affect long-term growth prospect, if deficit reduction is achieved at the expense of growth-enhancing investment in infrastructure and human capital.
Meanwhile, steady upward pressure on the real exchange rate may intensify existing competitiveness challenges, especially of the domestic private sector, the report point out.
Despite large foreign exchange inflows, the dong depreciated slightly by 1.23% in 2016 and around 1.3% so far this year. Thanks to the country’s significant external surplus, the real effective exchange rate continues to appreciate by about 5% since 2016 and 24% since 2010.

TUAN MINH