Bailout needed to keep essential businesses and projects above water

Tran Du Lich, member, Prime Minister’s Economic Advisory Group

After the pandemic, some economic activities will recover by themselves. However, it will be quite difficult for businesses to recover without help from the state and the government.

Suppose the lending rate for production and business activities is 4 per cent per year and the Ministry of Finance is planning to roll out an interest rate support package valued at VND40 trillion ($1.74 billion) for two years, it is estimated that some VND1 quadrillion ($43.5 billion) worth of loans would be pumped into the economy to help create jobs, facilitate production, increase revenue, and then reduce the state's overspending.

This bailout is rather suitable; however, we should take to heart the lessons learned in 2009-2010 and avoid massive lending to avoid a surge in bad debts. In fact, businesses with good performance and smooth operations may not need to access the support package. So the bailout should concentrate on businesses whose supply chains have been interrupted with careful filtering of industries and businesses to mitigate risks as much as possible. Beneficiaries could be identified based on criteria like economic contributions, spillover effects, and their ability to recover on their own.

At present, the room for fiscal and monetary policies is narrow, because fiscal policies are limited by the public debt ceiling, budget deficit, and the pressure of annual interest payments, which is much higher than what the state budget can afford. So in order to help enterprises, we need to combine both fiscal and monetary policies.

Moreover, both public investment and interest rate support packages should be spent on high-performance projects. This needs strict control and careful filtering of beneficiaries instead of delivery on a massive scale, which may cause inflation and bad debts. Besides this, if social restrictions have to be enforced again, the economy will be frozen even as cash is pouring into the economy, making the situation worse.

According to estimates from the State Bank of Vietnam, bad debts on the balance sheet of banks will increase to 7-8 per cent by the end of this year, which is acceptable. Banks also have to raise provisioning and increase the coverage of bad debts to hedge against risks. The coronavirus has hit the economy and enterprises, so the increase in bad debts is understandable. However, prudent crisis management has kept bad debts to a manageable level.

Resolution No.128/NQ-CP dated October 11 on provisioning for safe and effective control of the pandemic has helped unclog capital channels to recover the economy as quickly as possible, and the capital absorption rate will rise again.

If the bottlenecks in public investment in key projects can be overcome, the public investment disbursement rate could reach 90-95 per cent of the government target. Moreover, credit support policies such as interest rate support also need to be implemented to strengthen connections between businesses and banks, in addition to improving the investment environment.

This will be a foundation for public investment disbursement and credit to grow again in the first quarter of 2022 when the capital absorption capacity of the economy improves.