As Vietnam struggles with falling GDP growth, rising bad debt, and a weak banking system, the government has introduced measures to restructure banking and boost private enterprise growth.
The Vietnamese economy continues to face headwinds, as a struggling banking system impedes GDP growth. Poor exports and budget balance are also significant concerns. In an effort to turn the economy around, Vietnam is beginning to take a series of measures to improve the banking sector and encourage private sector participation in the economy.
In Q1 2013, Vietnam’s GDP growth slowed to 4.9 percent from 5.4 percent in Q4 2012. While retail sales growth averaged 10.2 percent year on year in Q1 2013, compared to 16.5 percent in Q4 2012, the Index of Industrial Production expanded only 4.9 percent—the slowest in three years. Growth has decelerated as banks, wary of bad debt, have reduced lending, limiting consumer spending and business expansion—lending contracted in the first two months of the year, compared to a 9 percent growth in 2012. Bad debts have almost doubled since 2011, and are currently at 6 percent, with inefficient state-owned enterprises (SOEs) accounting for 53 percent of bad debts. Exposure to a now-struggling real estate sector has also driven up bad debts, with house prices continuing to decline.
The current account situation is expected to worsen, as the global economic slowdown impacts exports, likely resulting in a deficit of approximately 1 percent of GDP this year, compared to a 1 percent surplus in 2012. Exports are projected to grow only 5.2 percent in 2013—the slowest rate since 1999—even as imports are likely to grow faster, driven by demand for capital and consumer goods. Vietnam’s budget deficit is also forecast to persist at 5 percent of GDP, as higher spending on infrastructure and social welfare, which began last year, may continue.
Amid several economic challenges, Vietnam has become an attractive destination for low-wage manufacturing jobs. This is the result of the country’s low-cost advantage and close proximity to China, even as the Chinese are focusing on moving up the value chain in manufacturing. The average wage rate in Vietnam is nearly a third of that in China, as Vietnamese real wage growth has stagnated at 2 percent since 2005. In 2011, average factory worker wages in Vietnam were $123 per month, compared to $306 per month in China. Geopolitical tensions between China and Japan have also worked to the advantage of Vietnam, with more Japanese businesses turning to Vietnam as an alternative to China. In 2011, foreign direct investment (FDI) in manufacturing accounted for half of the total FDI in the country. Investments are being made in various manufacturing sectors, including garments, footwear, mobile phones, computers, and electronic appliances. However, high rates of inflation pose a risk to investment returns as well as to the cost advantage. Nominal wage inflation is growing at a rapid pace, averaging 14.9 percent from 2010 to 2012, and real wages are expected to grow in the years ahead.
Amid several economic challenges, Vietnam has become an attractive destination for low-wage manufacturing jobs.
In order to revive the economy in the short term, Vietnam is trying to boost bank lending by lowering interest rates. In March 2013, the refinance and discount rates were each cut by one percentage point, to 8 percent and 6 percent respectively. The deposit rate was also reduced to 7.5 percent from 8 percent. The aim is to drive up credit growth to 12 percent this year, compared to 7 percent in 2012. Whether or not the economy actually benefits remains to be seen, given this is the seventh time in a row that the central bank has cut rates since 2012, to stimulate credit growth and help boost production and business.
As a long-term solution, the central bank and the government of Vietnam are working to restructure the banking system, with plans to lower the bad debt ratio to below 3 percent by 2015. In this direction, the state-owned Vietnam Asset Management Company (VAMC) is to be established this year, to take over bad debts from banks and issue bonds in return. Banks can then raise loans from the central bank against the bonds. However, the bonds offer no interest and are valid only for five years, which means the seller banks will only temporarily park their bad debts with VAMC and remain responsible for resolving them. This mechanism prevents the VAMC from incurring losses. The government mandates all banks with bad debts exceeding 3 percent to sell to the VAMC, make a 20 percent provision against every debt sold, and make 100 percent provision against any bad debt that remains unresolved after five years. All these measures can adversely affect bank profitability, putting the success of the effort under doubt. In addition, the establishment of the VAMC has already been delayed, at least until the end of April this year.
In other efforts to improve the economic conditions, the government is attempting to limit SOEs’ dominance over the Vietnamese economy and give more opportunities to the private sector. Currently, SOEs account for 37 percent of Vietnam’s GDP. As a first step to promote this objective, statements in the constitution that stipulate SOEs will “assume the leading role” will likely be removed. The government plans to eventually restrict SOEs to military-related businesses, high technology, and the provision of primary goods and services, while the remaining sectors are opened up for private enterprises. Approximately 367 SOEs are planned for privatization by 2015. Vietnam is also considering raising the cap on foreign ownership in local companies to more than 49 percent, and up to 49 percent in publicly owned banks.
Overall, Vietnam, once noted as a rising star among emerging markets because of its growth, has hit a rough patch—the GDP growth last year fell to its lowest since 1999. Also, the country may find it difficult to negotiate out of its troubles in the near term, as the government and the central bank have only just begun initiating fundamental reforms in the economy. Already delays are expected in certain major areas, including establishing the VAMC and launching the initial public offering of select SOEs as part of the privatization process.