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Asia-PacificMay 4 2010

Is Vietnam cultivating another asset bubble?

Index on the up: Ho Chi Minh Stock Exchange, VietnamBank lending is being used as a direct and often blunt lever by which to manage Vietnam's economy, proving a critical first defence against the global economic slump. But the medium-term consequences of over-interference may be another bubble, warn analysts. Writer Michelle Price
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Is Vietnam cultivating another asset bubble?

The Vietnamese economy has endured a fast-paced if jerky ride in recent years. Boasting gross domestic product (GDP) growth rates in excess of 8% for both 2006 and 2007, driven in large part by thumping credit growth, which reached a whopping 54% in 2007, Vietnam's recent economic history has been characterised by both extraordinary exuberance and nerve-wracking volatility.

Indeed, a year before the turmoil of September 2008 descended upon the global financial markets, Vietnam's government was wrestling with its own expanding bubble: fuelled by rampaging food and commodity prices, inflows of foreign direct investment dollars and a surge in dong liquidity supply, headline inflation rose rapidly towards the end of 2007, reaching a 17-year high of 28.3% in August 2008. Urged on by the International Monetary Fund (IMF), the Communist Party government in conjunction with the State Bank of Vietnam (SBV) slammed on the breaks, hiking rates and capping lending. By mid-2008, property prices had slumped, while the Ho Chi Minh Stock Exchange (HOSE) Index tumbled some 56% during the first half of the year.

As a result, in the second half of 2008 Vietnam was moving into a long-overdue period of tightened monetary policy: then the financial crisis exploded and the global economic slump swept eastwards. On a relative basis, Vietnam has fared enviably well during the past year, posting 5.32% GDP growth for 2009 and being on target to achieve at least 6% growth for 2010, according to the IMF. Nevertheless, as the momentum of tightened monetary policy rippled through the Vietnamese economy in late 2008 and demand for exports, the mainstay of the country's economic base, slackened - reaching a nadir in February and March 2009 - the government panicked.

Anxious to sustain Vietnam's hefty GDP growth, the government undertook a remarkable hand-break turn and accelerated at high speed towards loose monetary policy, cutting the base rate and rolling out a $6bn stimulus package in the first quarter of 2009 - which was later boosted to $8bn. By the final quarter of 2009, however, it had become clear that the government had raced ahead too fast, say bankers. "The government went from very tight to very loose monetary policy within months: the lag of tight monetary policy hadn't yet got through the economy when the government started putting through the stimulus in early 2009," says Tom Tobin, CEO of HSBC Vietnam.

Inflationary pressure has returned with a vengeance, fuelled in no small part by the resurgent construction sector: in March 2010, consumer prices posted the biggest gain in a year, jumping one percentage point month-on-month to hit 9.46%. Bankers are concerned: it looks like a case of déjà vu. "With liquidity comes asset bubbles," says Ashok Sud, CEO of Standard Chartered Bank, Vietnam. "We've seen a very smart turnaround in the stock market and property prices and there is a fear that these are the beginnings of another longer-term bubble. The central bank will have to keep a very close watch to make sure that the bubble doesn't get out of control."

A heavy hand

For Vietnam's bankers, the heavily managed Vietnamese economy is proving a challenge to navigate, particularly as bank lending has proved one of the government's favoured levers. Among the SBV's aggressive stimulus measures, an interest subsidiary scheme, introduced in March 2009, has proved a major source of excess liquidity and, in the view of many, inflationary pressure.

Under the programme, local currency loans issued in 2009 to certain sectors with maturities of up to 24 months were made eligible for a four-percentage-point interest rate subsidy: at an average lending rate of 12%, for example, the bank would charge the borrower 8% and reclaim the additional 4% from the central bank. A third tranche of the scheme, providing a two-percentage-point subsidy on loans issued in 2010 with maximum maturities of 24 months, was also introduced.

Not all banks participated in the scheme and the majority of loans, some 61%, have been issued by the state-owned commercial banks (SOCBs), according to analyst Fitch Ratings. Nevertheless, the programme had the desired effect, at least in the first instance: some 89% of net new loans issued in 2009 carried subsidised interest rates, according to Fitch. At their peak in July and August 2009, subsidised loans accounted for some 24% of sector lending, levelling out at 22% by the end of 2009. Spurred by the subsidy scheme, total loan growth for 2009 was a stunning 38%. "The scheme was successful in stimulating the economy when the government really needed it, yet it was maybe a little too much in hindsight - but nobody knew how much was necessary," says Mr Tobin.

If excessive lending has proved generally inflationary, the questionable quality of lending has exacerbated the problem. Although loans made only to the business and infrastructure sectors qualify for the subsidy scheme, several bankers claim that a proportion of the scheme's surplus liquidity has leaked in non-productive and inflationary areas: namely the stock market, real estate and gold. According to Sabine Bauer, an analyst at Fitch, this is a widely held belief, but data proving the case is hard to come by - although the 150% growth enjoyed by the HOSE Index between March 2009 and October 2009 seems to partially support this view.

Quality, not quantity

In a bid to rein-in the programme - part of which the SBV is committed to until the end of 2010 - and mitigate liquidity flowing into non-productive sectors, the central bank has imposed a 25% cap on lending growth for the year. Given that the industry exceeded the 27% cap imposed on lending for 2009 by 11 percentage points, this seems a futile gesture. "The real meaning of that measure is to send a message to the marketplace to slow down," says Nguyen Tuan Minh, deputy-CEO of Habubank, a private 'joint-stock' bank. But Habubank is not holding back. "I believe that Habubank will maintain 30% to 40% loan growth for 2010," says Mr Minh.

According to Dam Van Tuan, first executive vice-president at Asia Commercial Bank (ACB), Vietnam's largest private lender which posted a colossal 78% loan growth in the first nine months of 2009, the privately owned banks are not under pressure to constrain lending. "The central bank uses the state-owned commercial banks as an instrument to support monetary policy," he adds. But at Vietin Bank, one of the country's four SOCBs, the mood is not wholly supportive of the SBV's policy.

Pham Huy Hung, chairman of Vietin Bank, says that the rate of lending growth reflects the natural productive demand of the Vietnamese economy. "We don't necessarily have to constrain loan growth. The Vietnamese economy is developing very fast; a developing economy requires a lot of funding," he says. In his additional capacity as president of the Vietnam Bank Association, Mr Pham has been closely scrutinising the lending target, which he says does not address the key issue.

"I believe that a better policy is to focus on quality not quantity. Funding is for the funding of production, not to fund trading or speculation. Every loan needs a sustainable structure and quality control. The banking industry needs to strengthen supervision activities in order to correct wrong lending or any fraudulent activities. The central bank should focus on supervision and compliance checking," adds Mr Pham.

Standard Chartered's Mr Sud agrees that the quality issue must be addressed as a matter of priority: "One way the SBV can do that is by feeding productive projects and starving unproductive projects. The second option they have is to fast-track productive projects."

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Ashok Sud, CEO of Standard Chartered Bank, Vietnam

Making the trade-off

The accumulative, system-wide surge in loans also has worrying implications for asset quality and analysts are concerned that risk-management and underwriting standards at local banks have not kept apace with increasing loan turnover. According to the Karolyn Seet, an analyst at Moody's, the SBV is not forthcoming regarding asset quality data.

Most local banks report in Vietnam accounting standards (VAS) rather than International Financial Reporting Standards (IFRS), making it tricky to calculate non-performing loans (NPLs) to international standards. Where some banks are reporting using both standards, however, the signs are not good: "It is a bit worrying, because when we compare banks with both statements, VAS NPLs are a lot lower than what is reported under IFRS," says Ms Seet. In its March 2010 'Vietnam Special Report', Fitch warned of "pronounced risk of loan-quality deterioration in the medium-term", and went on to put ACB and the country's second largest private lender, Sacombank, on a negative ratings watch.

In the final quarter of 2009, Vietnam's government moved to tighten monetary policy, devaluing its currency and raising the base rate from 7% to 8% in December, which has since remained unchanged. But the Asian Development Bank remains concerned by runaway inflation, the brunt of which is borne by the poor. In April, the agency warned that the Communist Party government must raise rates in an "orderly" manner. A higher interest rate environment, however, will significantly increase the risk of delinquency, particularly on subsidised loans.

The government is very mindful of the dilemma, say bankers, not least for political reasons: next January marks the 11th National Party Congress during which the implementation of Vietnam's 10-year strategy for national socio-economic development will be reviewed and a new strategy devised, making 2010 a critical year for laying the political groundwork.

As such, the government will finally be forced to make a trade-off between its closely guarded GDP growth rate and price stability. But Vietnam's banking industry may bear the cost of this decision.

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