Taking a hammer to bad debt

The concept of  “active extermination” of ineffective businesses was first appeared in first quarter 2013’s macro economic bulletin of National Assembly’s (NA) Economic Committee as a necessity to address current huge property field bad debts.

The NA experts analysed the property market’s current turmoil as mostly coming from two factors.
 
First was the serious imbalance in the actual demand and supply in respect to housing. The supply of medium and hi-end housing is enormous and starkly contrasts to the tremendous demand for competitively priced housing of most people.

Second was the faulty  expectations of property trading firms.

According to chairman of NA Economic Committee Nguyen Van Giau, the expansive and prolonged speculation of properties had totally misled market signs, creating the wrong expectation that the land price could only go up and never slide.

That was why a number of property firms held hopes that current property market mishaps were just momentary and price had hit bottom--although the property market doldrums have lasted for a fairly long period of time.
Some firms deliberately held on to their products and maintained high prices in hopes of government rescue measures.

“That expectation is totally wrong as with current size of property market bad debts the government is not in a position to rescue, even if it wants to,” said Giau.

Advocating the Economic Committee view, economic expert Vu Dinh Anh said property projects that mis-read customer segments should incur dear lessons and not expect a rescue.

“The developers would need to cut down prices to reduce losses, even to the level below VND15 million ($720) per square metre to get support or below the production cost to terminate the wrong investment ventures,” Anh said.

Latest State Bank figures regarding non-performing loans (NPLs) show that the largest NPL rate was in the manufacturing and processing sectors at 22.5 per cent (often involving state-owned enterprises)  following by property sector with 19.2 per cent.
However, bad debt in property has grabbed top attention since property-oriented credit made up a lion’s share in total outstanding loan balances.

Moreover, the property sector bad debt could hurt two important sectors that employ millions of people and contribute to social well-being: construction, which provides about 3.3 million jobs, or about  6.4 per cent of total labour pool; and  building material production, which employs 500,000 labourers or more than 1 per cent of total labour pool.

The NA economic bulletin suggest that in a correcting economy after a period of hot development and booming leveraged credit growth, the relevant sectors need  to incur toughest shake-up to restore balanced growth in a sustainable manner.

Both the NA Economic Committee and Ministry of Construction assessments mirrored the possibility of property sector bad debt continuing to grow in the medium term.

Industry experts said the scope of malicious assets in property sector was remarkable after a long period of hot development. Therefore, urgent remedy measures were crucial, including ‘active extermination’ as the best option to stamp out ineffective businesses, empowering capable ones, from there settling bad debts in an effective manner.