Watch out for NPLs in Vietnam

Vietnam has been battling an economic downturn longer than any other country in the region. All the major credit rating agencies downgraded the nation’s outlook to negative back in the second quarter of last year. And Vietnam is still very much stuck in the middle of trouble.

As Credit Suisse analysts say: Keep an eye on foreign direct investment (FDI) and non-performing loans (NPLs).

In the third quarter of last year, Vietnam’s economy seemed to reel from bad to worse in lockstep with the global turmoil. The trouble for Vietnam is that its solution to domestic economic wobbles in recent years has been to export its way out of the problems. Indeed, exports make up 70% of GDP. But that is not an option now that consumers in the US and Europe aren’t opening their wallets.

As a result, you can now expect domestic demand to take a breather, largely on account of lower investment, warn analysts at HSBC. Part of this is a spillover from export weakness, but at the same time FDI, which comprises 20% to 25% of total investment, is expected to halve, writes Prakriti Sofat in HSBC’s January research report on Vietnam. Overall, HSBC expects GDP growth to average 5.4% in 2009 – a 10-year low – compared with an estimated 6.2% in 2008. Credit Suisse has revised down its 2009 GDP growth estimate to 5% from 7.3%, but hopes for signs of a reacceleration in the second half of this year, allowing growth to pick up towards 7.5% in 2010.

A second cause for concern is the likelihood of increasing bank delinquencies. From 2005 to 2007, bank credit surged from 60% of GDP to 98% of GDP, much of it related to the fixed investment boom, especially in real estate, points out Credit Suisse in its most recent emerging markets outlook report. Indeed, the State Bank of Vietnam reports that local banks have about Vnd115 trillion ($6.7 billion) in loan book exposure to real estate (including project finance), equivalent to about 9.2% of bank assets or 7.8% of GDP. The problem is that since 2007, property and land values have collapsed by between 30% and 80% in some areas, which means that a major proportion of this debt should be seen as doubtful.

For some time now, this has been a point of anecdotal discussion in Vietnam, but of course, non-performing loans (NPLs) are hard to pin down in an economy still dominated by state-owned businesses and banks. Some analysts say NPLs are as much as three times higher than the official estimate of 2.9% of total assets, and if the property market keeps spiralling downward, that number could rise to as much as 15% in the next two years. That would likely prompt the government to have to step in with some sort of recapitalisation programme. Credit Suisse writes that the smaller joint-stock banks look the most exposed at the moment, while the heavy corporate focus works in the favour of Vietnam’s big state commercial banks.

In an effort to stimulate the domestic economy, the central bank has taken aggressive easing action – slashing interest rates by 550bp to 8.5% and cutting the cash reserve ratio by 600bp to 5% over an eight-week period starting on October 20. It has also undertaken a number of measures to boost bank liquidity and improve the credit availability to firms. And as HSBC points out, the government is not holding back either, as it is planning to boost spending by $6 billion, or roughly 6% of GDP, in infrastructure and export-oriented sectors.

“This is a smart move, as exports may be down now, but they’re not out. They will come back when the global economy improves, and we need a government that is willing to continue to spend and build for that export economy, just as China has done,” says a banker at a multinational bank in Ho Chi Minh City.

Aside from the fact that the government is clearly keeping its eye on the prize and is investing for the long-haul, there are some other bright spots. The government has approximately $22 billion in foreign exchange reserves, which should provide a sufficient buffer to cover any external funding gaps. And, it has negligible short-term FX debt, and modest debt amortisation obligations, point out Credit Suisse analysts.