Bad debts hold key to economic growth

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This rate, lower than the government’s target of 5.5 per cent, is forecast in the Vietnam annual economic report 2013 named “On the bumpy road to future”, released last week by Vietnam Centre for Economic and Policy Research (VEPR), under Hanoi National University’s University of Economics and Business.

“But, it will be hard for the economy to reach this target [5.04-5.35 per cent] and smoothly recover without strong commitments and implementation of policies on economic restructuring and growth model changing,” said VEPR director Nguyen Duc Thanh.

“To reach this target, the government would urgently need to solve non-performing loans (NPLs) and revitalise struggling enterprises,” he said.

On March 31, 2012 the NPL rate was reported at 3.57 per cent. According to the State Bank, it was actually 8.6 per cent. If this difference was maintained until September, 2012, the NPL rate would be 9.53 per cent, which is equivalent to VND241 trillion ($11.59 billion), the report said.

However, by February 2013, the NPL rate was reported at 6 per cent. “With these differences, NPLs were estimated to be from VND180 trillion to VND300 trillion ($865.3-14.42 billion). If NPLs doubled from the current level, bank capital would be severely affected. Capital adequacy could be reduced by 50 per cent from the current level,” said the report.

“Thus in the context of stagnation in Vietnam, it is urgent to deal with NPLs in

Vietnamese banking system,” Thanh said. “It would need seven to 10 years to solve NPLs, not two or three years as expected by the government.”

The Ministry of Planning and Investment reported that since early 2010, the number of enterprises with suspended operations and bankruptcy has hit nearly 120,000.

Central Institute for Economic Management vice head Vo Tri Thanh said such enterprises meant the government had to “pay a very expensive price” for its “over-tightened policy” over the past three years.

“Low demand has been a cause behind the report forecasting inflation for this year to be 4.95 per cent,” he said.

“The government will need to harmonise the policies to tame inflation and boost growth. It should re-consider such policies,” said Vu Viet Ngoan, chairman of the National Financial Supervisory Committee.

Standard Chartered last week said it saw a possibility of another rate cut of 50 basis points in this year’s third quarter if the authorities remained comfortable with the inflation outlook and credit growth stayed anaemic.

“The State Bank is also likely to reduce the cap on the deposit rate further if it judges that the recovery in business activity is too slow,” said a Standard Chartered report on Vietnam’s economy.

“Some people regard high interest rates as the key hurdle to Vietnam’s economic recovery. However, accelerating the pace of structural reforms, including in the banking and state-owned enterprise sectors, and reviving the property market are more important than monetary easing to boost business activity and boost growth momentum,” the report said.

Standard Chartered also revised down its 2013 inflation forecast to 7.2 from 8 per cent, but raised its 2014 forecast from 6.0 to 8.2 per cent.