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Vietnam is suffering from debt overload

Vietnam is suffering from debt overload

Thursday 06, 02 2020
which is due to the fact that the huge amount of bad debts in banks and public debt / GDP are soaring, and huge amount of corporate debt.

At the Government-to-Local video conference held on December 30 and 31 2019, chaired by Prime Minister Nguyen Xuan Phuc, it was showed that Vietnam’s economy continued to grow rapidly at over 7%, with a GDP scale of USD 266 billion, per capita income of USD 2,800 dollars, which is something unprecedented in history.

Comparing data of the US and Vietnam

Interest rates in the USA (2019)

  • Long-term interest rate (Schiller index): 1.82%
  • Basic loan interest rate: 4.75%
  • 30-year loan interest rate: 3.74%
  • 3-year deposit interest rate: 1.9-2.2%
  • Non-term deposit interest rate (withdraw at any time): 0.27%
  • Inflation: 1.65%

If the demand deposit interest rate is deducted from the basic lending rate, banks can earn 4.5%. When inflation is 1.65%, real interest that banks earn is 2.8%.

Interest rates in Vietnam

  • ​Preferential loan interest rate: 8-9% in the first year, 11-12% in the following years
  • 10-year home loan interest rate: 11%
  • 1-month deposit interest rate: 4.3%
  • 1-year deposit interest rate: 6.8%
  • Deposit rates: over 9% / year
  • Inflation: 2.8%

If the 1-month deposit interest rate of 4.3% is deducted from the preferential interest rate (10%), banks’ interest will be 5.7%. With inflation of 2.8%, banks actually gain 2.9%. However, when the interest rate and deposit interest rate is increased to 9%, banks only enjoy 1% interest rate and after deducting inflation (even 3%), banks are actually suffering from a heavy loss.

Why high interest rates?

In Vietnam, interest rates depend mainly on the level of risk as in Modigliani-Miller theory, which is due to the fact that the huge amount of bad debts in banks and public debt / GDP are soaring, and huge amount of corporate debt. This is a serious problem that Vietnam needs to take 5-10 years to solve.

Vietnamese banks are raising deposit interest rates close to the lending level because of the regulation of reducing the ratio of medium and long-term loans to mobilized capital. Therefore, lending ability is limited, especially real estate loans. In addition, the State Bank of Vietnam (SBV) has requested an increase in the rate of risk provisioning for real estate. The immediate consequence is decreasing real estate price as in the period of 2009-2012.

Moody's lowering Vietnam's national credit rating and 12 banks reflects the risk of that immediate crisis. However, the Ministry of Finance again said that Moody’s had misjudged and that the downgrade was due to administrative and management-related issues, not liquidity or debt repayment.

>>> Related: Moody’s to downgrade credit ratings of 17 banks

Vietnam’s economy

Short-term and long-term solutions

The debt of non-financial enterprises is worrisome: the total capital at the end of 2017 was VND 22.3 million billion, of which own capital was VND 8.5 million billion. Thus, the debt of the non-financial sector was VND 13.8 million, equal to 276% of GDP. Supposing that GDP was 25% higher than the figure stated by the General Statistics Office, equivalent to VND 6.25 million billion, the debt was still extremely high, equal to 220% of GDP. This means if GDP increases by 7%, the country still has to pay 9% interest.

With the total corporate debt being 3 times higher than the GDP, not to mention the government debt (excluding guarantees) which is about 52% of GDP in 2017, the GDP generated in one year is not enough to pay interest. It can be said that Vietnam's economy is growing fast thanks to excessive debt, similar to the Ponzi system.

Raising interest rates will increase the possibility of bankruptcy when Vietnam's corporate debt is so large. Without timely adjustment measures, debt crisis cannot be avoided. It is only a matter of time.

The Ministry of Finance had seen this risk. Recently, the Government has constantly requested to lower interest rates but the SBV has not yet provided an effective solution except for administrative orders to lower interest rates for commercial banks and most recently, the State Bank has reduced the operating rates by 0.25%. However, long-term bank interest rates (over 12 months) are still high.

The SBV has also asked commercial banks to step up real lending instead of increasing credit growth. Perhaps the SBV has not seen the risk. The Ministry of Finance has recently sharply reduced interest rates and extended government bond maturities. However, in the past 1-2 years, the Ministry of Finance seems to have neglected this risk, ignoring the requirement of tightening the Government's guarantee.

It is not clear who will be responsible for the debts of state-owned enterprises, even though as assigned in the Law on Public Debt Management, the debts of enterprises in general, including SOEs' debts, are under the control of the State Bank. In fact, the State Bank can only manage SOEs' debts like that of other business types, and cannot ask for more. Therefore, the debt situation of SOEs has not improved.

What Vietnam achieved in 2019 should be highly appreciated. However, we should not be subjective because major issues have not been solved while chances are high that economic crisis will arise. In addition, the race to raise interest rates is making the risk of crisis come closer.

That Coco Bay could not pay the committed interest rate (12%) is an initial warning for the bankruptcy of businesses, which is not only limited to real estate businesses but also affecting a range of other businesses, including credit and financial institutions. The Government should take measures to promptly lower current interest rate to avoid debt crisis.

>>> Read more: What is a Debt Collection Service? 

​Source: compiled by VietnamCredit

Economy News Banking

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