Economics Vietnam: stability is key DBS Group Research 27 June 2017 Concerns are rising that Vietnam may be aiming for faster growth at the expense of stability Rising domestic leverage and non-performing loans pose risks to medium-term financial stability External balances are also deteriorating, which could complicate monetary policy Policymakers may have to sacrifice growth to ensure stability Disappointing first quarter GDP growth and the likelihood that growth will fall short of the official targets [1] raises concerns that authorities may aim for faster growth at the expense of stability. Ensuring financial stability GDP growth has been moderating since 2015 (Chart 1). Final GDP growth for last year was below expectation. With a disappointing first quarter growth of 5.1, the risk is that overall GDP growth for this year will once again fall short of the official target of 6.7%. Yet, in a bid to achieve the growth target, authorities have been aiming for faster credit growth (Chart 2). The State Bank of Vietnam (SBV) expects 18% credit growth this year, up from 12% in 2014. That means credit growth would run 3 times faster than GDP growth. Chart 1: Growth is falling short of target 7.0 Actual / forecast Chart 2: Credit growth has surged 20 6.6 Official target at start of year 18 6.2 5.8 16 14 Credit growth 5.4 5.0 2013 2014 2015 2016 2017f 12 Latest: Dec16 10 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Irvin Seah (65) 6878-6727 irvinseah@dbs.com Refer to important disclosures at the end of this report. 1
Chart 3: Outstanding credit to GDP ratio has surged % 125 122 120 115 110 Outstanding credit as % of GDP 111 Chart 4: Reported NPL ratio understating reality % 5.5 NPL as % of total outstanding credit 5.0 4.5 4.0 105 100 95 95 97 101 3.5 3.0 2.5 90 2012 2013 2014 2015 2016 2.0 2012 2013 2014 2015 2016 2017 Actual NPLs higher than reported External balances weakening Strong credit growth also means a rapid accumulation of debt. The debt to GDP ratio is now about 122%, up from 95% in 2012 and will likely continue to rise further (Chart 3). In addition, though the central bank has kept its monetary policy steady, it expects money supply (M2) to rise by 16%-18% this year due to such credit expansion. Rapid credit expansion is typically accompanied by rising bad debt. This challenged Vietnam during 2008-2012. And while the reported non-performing loan (NPL) ratio appears low at present (2.6%), it does not include the NPLs sold to the Vietnam Asset Management Company (VAMC) and special mention loans (Chart 4) [2]. According to the SBV, if including the bad debt managed by VAMC, bad debts in the overall system would likely be around 8.9% of the total as of end-2016. While the situation is not dire, it bears watching. And although improved economic performance could lower NPLs, the rapid and sustained increase in credit growth poses risks to financial stability in the medium-term. Policymakers may be better off focusing on productivity gains instead of credit expansion to achieve sustainable growth. Watch external balances Besides risk of financial imbalances, a wider trade deficit / weaker balance of payments (BOP) position is back on the radar screen. Specifically, the surge in domestic consumption and exports have led to greater imports. For example, a significant portion of the parts and components used in electronics manufacturing are imported. The local value-added in the manufacturing process is not significant. Coupled with domestic spending on imported consumer goods, there has been a deterioration in the trade balance. The trade deficit reached USD 2.6bn in the first five months of the year (Chart 5). While expectation is that this will narrow towards the latter part of the year with the shipments from Samsung s new Galaxy S8 phone, the deficit is nearly 3 times greater than during the same period last year. Moreover, the Prime Minister has made commitment to increase Vietnam s import of goods and services from the US by about USD 15bn-17bn during his recent visit to the US in a bid to reduce Vietnam s trade surplus (USD 32bn) with the US. This will only exacerbate Vietnam s overall trade deficit. The trade account is expected to experience a deficit of USD 2.1bn this year based on our estimation. This will lower the current account balance, especially 2
Chart 5: Dip in trade balance drove dong weaker USD mn Weaker VND USD/VND 1000 23000 22800 500 22600 Chart 6: FDI inflows have fallen USD mn 6.4 6.2 0 22400 6.0-11.4-500 22200 22000 5.8-1000 Trade balance 21800 5.6 USD-VND (RHS) -1500 Latest: May17-2000 Jan-16 Jul-16 Jan-17 21600 21400 21200 5.4 5.2 Jan-May16 Jan-May17 given that the goods balance is crucial in offsetting the deficits in the services trade and primary income accounts. While the economy enjoys strong inflows of foreign direct investment (FDI), which will help to buffer against any downside in the current account, this component tends to be volatile and FDI inflows in the first five months of the year is also 11.4% lower than the same period last year (Chart 6). In short, the BOP will be under pressure this year. A smaller surplus of USD 1.8bn in 2017 is expected, down from USD 8.4bn previously. Preserving stability Dong will remain under pressure The dong has depreciated about 2% since 2H16 partly due to deteriorating external balances. While the depreciation was marginal, pressure will remain in the coming months given the backdrop of US monetary policy normalisation and the drag from external balances. A weaker currency on top of strong domestic demand fuelled by credit expansion also means that the economy will be prone to any inflationary shock. Although inflation remains benign for now, the high NPLs within the financial system could impede the central bank s ability to mitigate any potential inflationary risk via rate hikes. Apart from falling short of the growth target, overall conditions in the economy have thus far remained manageable. But the economy went through a painful period in 2007-2011 while chasing growth targets (Chart 7). It was a Chart 7: A volatile past and the need to preserve stability 30 28.3% 25 23.0% 20 15 Economic stability 10 5 CPI inflation 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 3
classic case of policy mismanagement. Concerns of deja-vu are re-emerging. Policymakers could do worse than to accept slower growth in return for more stable and sustainable growth. Notes: [1] VN: cautiously optimistic, DBS Group Research 3Q17 Quarterly Report, 8 Jun17 [2] On 18 May 2013, the government issued Decree No. 53/2013/ND-CP on the establishment of Vietnam Asset Management Company (VAMC) which came into effect on 9 July 2013 (Decree 53). The setting up of VAMC is designed to alleviate the burden that NPLs have placed on the balance sheet of Vietnamese commercial banks and other credit institutions. Sources: All data are sourced from CEIC, Bloomberg and DBS. 4
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