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Sunday, February 5, 2023

Pressure to revive financial market

By Can Van Luc and experts at BIDV Training and Research Institute

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Apart from six major challenges from the international environment as well as internal risks, Vienam’s financial market will be exposed to risks and challenges

Vietnamese economy

Against the backdrop of global economic uncertainties, the Vietnamese economy in 2022 witnessed eight outstanding achievements: (i) The pandemic has been contained since March 2022, enabling socio-economic recovery across the board; (ii) The economy made a strong rebound with the Index of Industrial Production (IIP) rising an estimated 10% against 2021; (iii) Consumption bounced back strongly with the retail revenue surging 15-16%; (iv) Foreign trade made robust growth, with export revenue rising some 14% to US$380-384 billion, and a decent trade surplus (at some US$10 billion) helped stabilize the forex rate and other macroeconomic balances; (v) Disbursement of FDI rose an estimated 13% year on year to US$21-22 billion; (vi) State budget balance was healthy, as the budget revenue beat the annual target by 14% and rose 20% y-o-y, resulting in a budgetary surplus (partially due to lower-than-expected disbursement of public investment); (vii) Interest and forex rates rose sharply, albeit under control, with the dollar price rising by 8-9% against Vietnam dong over early 2022 (it is noted that the dollar index has risen by 12% in 2022); (viii) Businesses have recovered well owing to the socio-economic expansion, despite challenges stemming from higher interest and forex rates, narrower access to credits and falling external demands.

The country’s GDP growth is estimated at 8%, and inflation is well harnessed, with the average CPI rising an estimated 3.3%.

However, the Vietnamese economy is still grappling with six key challenges: (i) The international environment has become less favorable when a number of regions/countries, especially Vietnam’s major business partners, may slide into a recession, affecting their demands, investment, and tourism; (ii) Disbursement of public investment, execution of national target programs and the 2022-2023 Socio-economic Recovery Program have moved at a snail’s pace; (iii) Pressures from high interest rate and forex rate still intensify and are a major challenge in 2023; (iv) Bad debt may rise in the coming time; (v) Risks from the corporate bond segment, real estate and banking liquidity still linger on; and (vi) Signs of ruptures on the labor market.

In 2023, as the global economy slows down with some regions possibly sliding into a short-term recession, and given the high growth base in 2022, it is predicted that Vietnam’s economic growth will decelerate, but still at a rate of 6.0-6.5% (low scenario); with export revenue rising an estimated 8% to 10%; investment, local and foreign alike, rising some 8%, and final consumption increasing some 9% to 10%.

Regarding inflation, the average CPI in 2023 will hover around 4-4.5% as the impact from higher import spending and money supply in end-2022 is carried over to the new year, while prices of certain State-governed commodities and services (base salary, power, healthcare, education, etc.) will increase. Pressures from high interest rate and forex rate remain strong, challenging macroeconomic management, while budget revenue targets will also prove difficult due to hurdles facing enterprises.

Challenges to Vietnam’s financial market

Apart from six major challenges from the international environment as well as internal risks mentioned above, Vienam’s financial market will also be exposed to the following risks and challenges.

For the banking market:

First, the slow-moving package to offer the interest rate discount of two percentage points under the socio-economic recovery and development program 2022-23; and the slow issuance of policies on digital transformation. As of October 2022, the rate discount package had seen only VND23 billion disbursed out of VND16,035 billion planned for 2022.

Second, room for monetary policy maneuver has shrunk. By the end of November, the State Bank of Vietnam (SBV) had hiked the interest rate twice, by one percentage point each time, to stabilize the forex rate, while other avenues had been exhausted. Foreign reserves now just meet the IMF-recommended level (three months’ imports). Further, changes to the compulsory reserve ratio will not pay off as expected as banks also have to observe safety standards under Circular 22/2019, which often apply when the economy undergoes big shocks. The forex trading band has also been widened to 5%. Therefore, with the Fed likely further hiking its funds rate by 50 basis points in December and the next quarter, the pressures from rising interest and forex rates will stay strong.

In addition, the SBV continues its credit growth limit policy in 2022-23 to contain inflation and control banking liquidity, and given the dreary corporate bond market and slow disbursement of public investment, access to credits for enterprises proves difficult.

Third, the capital adequacy ratio among Vietnamese banks improves slowly compared to regional peers. As of June 2022, for local banks applying Circular 41/2016, their CAR had fallen slightly against 2021, from 9% to 8.9%, while that of private banks had risen from 11.9% to 12%, which are all lower than the regional average. That is not to mention regional banks have applied the more stringent Basel 3, fully or partially, while Vietnamese banks have only applied Basel 2. The capital cushion among Vietnamese banks remains thin, preventing them from absorbing shocks in the business environment.

Fourth, the economy’s bad debt in 2023 is feared to increase alongside the policy of monetary tightening by the SBV. The interest rate hike in 2023 will cause sums payable by borrowers to swell, while the recovery tempo and economic growth will slow down, resulting in a higher amount of doubtful debt. It is estimated that in 2023, doubtful debts, or on-balance sheet debts, will be some 2% while gross bad debt some 4%. The gross bad debt of local credit organizations is estimated at 4.99%, rather high compared to the regional average.

Fifth, although cross ownership among banks has been eliminated, major shareholders or groups of shareholders can still exert influence on investment or credit activities. It is difficult to establish such behaviors, but recent irregularities at some real estate giants have pointed to this connection.

Sixth, the banking industry’s liquidity is no longer ample like it was in the past two years. The ratio of short-term capital used for long-term loans, after falling steadily from 34.5% in 2016 to 24% in 2021, had risen to 25.2% in June 2022; the loan to deposit ratio had increased from 72.1% in 2021 to 74.1% in June 2022. At the same time, highly-liquid assets like deposits by banks at the SBV have shrunk. In January-September, deposit drawdowns by banks rose with the amount deposited by 28 banks as of September totaling VND176 trillion, falling by a sharp 48% compared to early 2022.

The credit growth in 2022 was stronger than in 2020-21 due to economic recovery. As of November 30, the credit growth was recorded at 12.2%, compared to 11.5% for 2021. Meanwhile, mobilization in 2022 grew slower, as more money was channeled into business and consumption. Data from the General Statistics Office shows deposits at credit organization as of November grew by 5.5% compared to the growth rate of 6% in the same period of 2021, while money supply expanded by nearly 7% compared to 9% in the previous year’s same period.

Seventh, the ratio of net service income to total net income barely improved in 2022 and stayed low compared to the global average. This ratio inched up gradually during 2019-2021 but tumbled in the first nine months of 2022 to some 10.5%, far lower than that in other countries.

Eighth, the amount of call deposits as a source of low-cost capital was falling in 2022.

For the bond market:

First, the capital volume injected into the stock market tumbled in 2022 compared to 2020-2021, as main sources of capital for securities trading have dwindled. Specifically, foreign investors no longer had easy access to low-cost capital like before as stimulus packages have expired, interest rates risen, the global financial market liquidity thinned, and global banks also had tightened lending upon higher risks of recession and other financial risks worldwide.

Meanwhile, domestic enterprises saw their capital pool for investment reduced, while individual investors also shied themselves away from margin trading.

Second, the stock market came under the pressure of foreclosure sale. Though outstanding loans for margin trading have fallen by 18% from the peak in late March 2022 (VND201.2 trillion), it was still high compared to 2020-21. As stock prices crashed, many investors saw their holdings undergo forced sell by securities firms to avoid risks stemming from the price fall of stocks used as collateral in margin trading.

Third, stock investors’ confidence has been eroded to a great extent. Apart from negative impacts from global uncertainties that gave way to higher risks and challenges, stock investors have also been discouraged by irregularities and consequently arrests of some major business leaders, as well as corrective measures for the stock and real estate sectors alongside disinformation on social media. Slow responses to remove difficulties and legal hurdles have also had adverse impacts on the market and investors. Many stock investors have now shifted to lower-risk channels like deposits at banks (more so as interest rates surge), resulting in tighter market liquidity, touching on the nerve of individual investors and prompting stock prices to take a nosedive.

Fourth, herd behavior is widespread on the stock market, and its impact on the market is stronger than in other developed economies for the following three reasons: (i) The investment structure in Vietnam is in stark contrast with others, as individual investors make up some 80% of transactions on bourse (while this rate is only 40-50% in advanced economies, with the remainder being institutional investors). These individual investors do not base their investment decisions on logic or financial analysis, but on rumors, and a large number of them do not have financial knowledge; (ii) The high rate of leveraged investment coupled with herd behavior has led to the downward spiral of prices and forced sell, which cause stronger pressure on the market upon any correction; (iii) Vietnam’s stock market has for some time seen manipulation by certain enterprises which managed to drive up stock prices to a level several times higher than the real value, causing investors to disregard objective analysis and evaluation, prompting them to go wild from excessive excitement to extreme depression upon market corrections.

For corporate bond market:

With a sizeable volume of corporate bonds issued during 2018-2021 and an average term of four years, a large number of bonds will become due in 2023-2025 (over VND700 trillion, excluding bond yields).

Two sectors that issue the most bonds are banking and real estate, but those issued by banks pose almost no risks.

Real estate enterprises issued nearly VND215 trillion worth of corporate bonds in 2021 and VND50 trillion in January-October 2022, with an average coupon of 10.35%. The amount of corporate bonds issued by real estate enterprises that are coming due is huge, at some VND115 trillion in each of 2023 and 2024.

Under normal conditions, bond issuers will seek new capital sources (from issuing new bonds, tapping bank loans, issuing shares, etc.) to refinance debts and maintain or develop business. However, it will be tough for enterprises in the coming time to secure funds due to: (i) Numerous irregularities, one after another, have sapped investors’ confidence; (ii) Decree 65/2022 has introduced more stringent regulations on corporate bonds issued under private placements; (iii) Credits for this channel are limited due to funds being prioritized for production and business as credit growth is still capped at 14-15% to contain inflation and ensure liquidity for banks; (iv) The stock market is no longer bustling like before, so mobilizing funds via this channel turns tougher; (v) The foreclosure of assets to pay debts is also difficult (due to the gloomy real estate sector). Therefore, a number of enterprises (especially in real estate) may become insolvent regarding corporate bonds if no appropriate measures are taken promptly.

The consequences of this insolvency are heavy and complicated, and need scrutiny due to the strong correlation between banking, stock market and real estate (banks have granted credits worth VND2,360 trillion to the real estate sector, making up 21% of oustanding loans for the entire economy; assets used as collateral for loans are for the most part real properties – accounting for 65%; banks invest heavily in corporate bonds – at some VND284 trillion, or 2.3% of credit organization’s outstanding loans; many banks are listed on bourse with the market capitalization at 23-25% of the total stock market size, and also issue bonds; many real estate companies are also listed with the market capitalization at 15-16% of the total, and also issue bonds as stated above).

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