By BLOOMBERG
Vietnam will find it “difficult” to cut interest rates further this year, central bank deputy governor Nguyen Dong Tien said, as the nation moves to create an asset company that would clean up bad debt and revive growth.
“The pressure on inflation still remains and there are still some factors that will cause inflation to quicken toward the end of the year,” Tien said in an interview in Hanoi yesterday. “A further rate cut by the central bank is difficult. There’s a small chance.”
Nguyen Tan Dung
Prime Minister Nguyen Tan Dung has approved the formation of an asset management company to acquire non-performing loans from the nation’s lenders, the central bank said yesterday. Officials are under pressure to rejuvenate an economy that grew last year at the slowest pace since 1999, as one of the highest bad-debt levels in Southeast Asia hurts credit to businesses.
“They’re pausing for now on rates,” said Edwin Gutierrez, a London-based portfolio manager at Aberdeen Asset Management Plc, which oversees about US$12 billion (RM36.21 billion) in emerging-market debt including Vietnamese foreign-currency bonds. “Further rate cuts wouldn’t really stimulate the economy anyway. The banking sector’s focus is not on providing credit, it’s on the asset management company. There’s not much appetite to lend.”
The asset company will start operations in the second quarter, the central bank said in an e-mailed statement yesterday. Deputy governor Le Minh Hung said at a meeting with economists and bank executives yesterday that the prime minister approved a regulation to set up the vehicle, after the government missed an earlier target at the end of March.
Stocks rise
The Ho Chi Minh City Stock Exchange’s benchmark VN Index rose 0.6% at the open. Asia Commercial Bank surged as much as 7.5%, the most since Nov 27, 2009. Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, the biggest listed lender by market capitalization, climbed as much as 1.7% and Vietnam Joint-Stock Commercial Bank for Industry and Trade gained as much as 1.1%.
The reluctance of banks to lend may result in economic growth of less than 6% for a third straight year, based on forecasts from the International Monetary Fund and the World Bank. Gross domestic product expanded 5.03% last year.
While Vietnam’s economy will continue to face challenges, the central bank and government have pursued policies to achieve growth of 5.5% and keep inflation at about 6.5% this year, Tien said.
The State Bank of Vietnam cut the refinancing rate to 7% from 8% effective May 13, while the discount rate was reduced to 5% from 6% as it joined policy makers from Sri Lanka to Australia in monetary easing this month. The rate cuts were the eighth since the start of 2012, following a similar reduction in March.
Rate cuts
“The government will be consistent in pursuing its goal of maintaining macroeconomic stability,” the central bank said in written answers prepared separately in response to Bloomberg’s questions. Vietnam plans to cut policy rates by two percentage points annually and the interest-rate cap on dong deposits by 0.5 percentage point each year, it said.
Vietnam will need to focus on other “prudent” policy measures to spur growth, the deputy governor said. He forecast measures to clean up banks will contain bad debt at less than 5% of total loans at the end of the year, from 7.8% in December 2012.
Prime Minister Dung may approve in June a central bank proposal to raise the caps for foreign investment in local lenders, as an additional measure to help weak financial institutions, Tien said.
Higher foreign-ownership caps in lenders may be allowed on a case-by-case basis, Tien said. Vietnam now allows each foreign investor to own as much as 20% of a bank, with total non- Vietnamese ownership in each bank currently capped at 30%.
Special bonds
The asset management company would be wholly state-owned, with initial charter capital funds provided by the State Bank of Vietnam, according to the central bank statement. Investors could bid at auctions on the bad debt, and special bonds would be issued to lenders in exchange for the non-performing loans.
Non-performing loans reported by commercial lenders stood at 4.51% at the end of March, the government said in a report this week, without giving the central bank’s estimate for the period. Credit grew about 2% in the first four months of the year, the government said last week.
Market participants and credit rating companies estimate bad debt may be between 10% and 20%, according to JPMorgan Chase & Co Vietnam Bank for Agriculture & Rural Development, or Agribank, the country’s largest lender by assets, had a bad-debt ratio of 6.1% as of the end of June 2012, State Bank of Vietnam Governor Nguyen Van Binh said last August.
Many difficulties
“Bad debt in the banking system may rise in 2013 as the economy is still facing many difficulties,” the central bank said in its written answers. “However, non-performing loans are still within the central bank’s control.”
About 22.5 trillion dong (RM3.02 billion) of bad debt was resolved in 2012 by lenders’ loan loss provisions, the monetary authority said, citing figures reported by commercial banks. In the first three months this year, about 5.5 trillion dong was resolved. Provisions for loan losses increased to 68.5 trillion dong as of the end of March, from 64.2 trillion dong at the end of 2012, it said.
There are no plans to inject cash directly into lenders, Tien said. Banks’ liquidity conditions are “very good,” and while new bad debt may increase because of economic difficulties, measures to clean up banks will keep non-performing loans at acceptable levels, he said.
Injecting cash
“One would have to expect some government capital injection sooner or later,” Gutierrez said. “No one expects much recovery value on a lot of those loans. I don’t think foreign banks are beating down the doors to get a piece of the Vietnamese financial sector. I don’t think it’s that likely that these guys can raise much money through stake sales.”
The debt asset management company will resolve about 100 trillion dong of bad debt, Vu Viet Ngoan, chairman of the National Financial Supervisory Commission, said last week. Lenders with bad-debt ratios of 3% and above will be required to sell their non-performing loans to the vehicle, State Bank Chief Inspector Nguyen Huu Nghia said this month.
“Many foreign investors and banks are showing great interest in investing in Vietnamese banks,” Tien said. “If we open up mechanisms for foreign investment, more investors will want to put money in since they see the potential.”
– BLOOMBERG
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