Recently, some international observers have cast doubt on Vietnam’s economic performance
The Economist has run a piece titled “Vietnam’s economy: Plus one country.” Fitch Ratings, a credit-rating agency based in New York and London, has downgraded the ratings of Asia Commercial Bank (ACB) and Bank for Foreign Trade of Vietnam (VCB), two leading banks in Vietnam.
Cheap labor, creaky infrastructure and State monopolies
The articles published in The Economist comments that Vietnam’s economic growth relies on cheap labor, which proves beneficial in the face of escalating wages in southern China and has lured various multinationals aiming to cash in on low compensations and diversify risks. A chart in the article shows that the average monthly wage in Vietnam trails behind that in China, Thailand, the Philippines, Indonesia and Malaysia. In other words, cheap labor is clearly one of Vietnam’s competitive advantages.
The article cites power cuts as testament to Vietnam’s appalling infrastructure. Meanwhile, Vinashin’s plight is deemed as an example of State-owned conglomerates which are “too big to fail.” This article contends that State-run groups with access to easy credit and government incentives have become a hurdle to free competition in some sectors.
These assessments are hardly new to Vietnamese people but may lead foreigners to question the managerial capabilities and efficiency of Vietnam’s State-owned enterprises. This can be a cause for concern.
Credit quality, relianceon foreign capital and piecemeal policies
The deteriorating ratings of ACB and VCB come as no surprise, especially as Fitch already downgraded its assessments of Vietnam’s long-term loans from BB- to B+ in late July. In general, this move will spark off lower credit ratings for firms in the affected country.
One of the reasons behind Fitch’s decision has long been a source of worry for local experts – questionable credit quality bred by excessive loan expansion. Much has been said about how such capital is utilized and whether it can turn into bad debt. Worse, Vietnam’s definition of bad debt differs from that adopted by many other economies. Considering that Vietnamese economists themselves cast aspersions on local credit quality, Fitch’s concern is entirely understandable.
In general, banks must set aside reserves to maintain the minimum capital adequacy ratio set by the State Bank of Vietnam (SBV) and protect themselves against the risks induced by galloping credit growth. Foreigners cannot know clearly whether Vietnamese banks can mobilize capital with ease. It is clear, however, that the stock market is sliding and the pressure to increase capital is mounting. ACB’s and VCB’s ability to ensure capital adequacy is therefore in doubt. Ultimately, falling credit ratings are attributable to both the internal problems gripping each bank and how Vietnam’s economic policies are perceived from the perspective of foreign institutions.
Notably, credit expansion assessments, whether rosy or gloomy, are subjective. ACB’s and VCB’s credit growth rates may be staggering in Fitch’s view, but they may pale in comparison with the Vietnamese Government’s target. In an investment-led economy plagued with high incremental capital output ratios (ICOR), Vietnam must rely on rapid loan expansion to meet growth targets. Credit quality may be hampered as a result and exert tremendous pressure on banks, which must now hike charter capital as a protection tools.
Vietnam may want the best of both worlds by highlighting the need for both capital adequacy, in line with Circular 13, and staggering credit growth to fuel economic development. However, foreigners are skeptical about this approach and do not understand the country’s approach. Lower credit ratings are thus inevitable.
In addition, foreign institutions are not confident in Vietnam’s policies, which Fitch describes as “stop-go” and “inconsistent.” The Economist, meanwhile, frets what it calls “policy flip-flops.” Such a knee-jerk, piecemeal approach is certainly not to credit-rating agencies’ liking, especially given the lack of information on Vietnam’s economy.
The country’s perennial trade deficit and dependence on foreign capital also put it in a bad light, especially after Greece’s travails. Credit-rating agencies certainly wonder how Vietnam’s foreign reserves can cope if Vietnam’s forex management continues to hinge on what The Economist calls “short-term fixes” and foreign capital no longer pours in.
Foreign views
Foreign institutions clearly think that Vietnam is fraught with imbalances and that its growth is fueled by rapid credit expansion, foreign borrowing, an inflexible exchange rate and piecemeal, unpredictable policies.
Fitch’s and The Economist’s assessments of Vietnam’s economy may be contentious, but their bearing on the country’s image is indisputable. It is inadvisable for Vietnam to dismiss these evaluations, which may affect its borrowing costs. The challenge lies in polishing Vietnam’s credibility, not through vehement objections, but through concrete action on the part of the Government. When such phrases as “stop-go,” “flip-flops” and “inconsistent” disappear from reports on Vietnam’s policies, the country’s reputation among international investors will indubitably receive a boost.
The Economist has run a piece titled “Vietnam’s economy: Plus one country.” Fitch Ratings, a credit-rating agency based in New York and London, has downgraded the ratings of Asia Commercial Bank (ACB) and Bank for Foreign Trade of Vietnam (VCB), two leading banks in Vietnam.
Cheap labor, creaky infrastructure and State monopolies
The articles published in The Economist comments that Vietnam’s economic growth relies on cheap labor, which proves beneficial in the face of escalating wages in southern China and has lured various multinationals aiming to cash in on low compensations and diversify risks. A chart in the article shows that the average monthly wage in Vietnam trails behind that in China, Thailand, the Philippines, Indonesia and Malaysia. In other words, cheap labor is clearly one of Vietnam’s competitive advantages.
The article cites power cuts as testament to Vietnam’s appalling infrastructure. Meanwhile, Vinashin’s plight is deemed as an example of State-owned conglomerates which are “too big to fail.” This article contends that State-run groups with access to easy credit and government incentives have become a hurdle to free competition in some sectors.
These assessments are hardly new to Vietnamese people but may lead foreigners to question the managerial capabilities and efficiency of Vietnam’s State-owned enterprises. This can be a cause for concern.
Credit quality, relianceon foreign capital and piecemeal policies
The deteriorating ratings of ACB and VCB come as no surprise, especially as Fitch already downgraded its assessments of Vietnam’s long-term loans from BB- to B+ in late July. In general, this move will spark off lower credit ratings for firms in the affected country.
One of the reasons behind Fitch’s decision has long been a source of worry for local experts – questionable credit quality bred by excessive loan expansion. Much has been said about how such capital is utilized and whether it can turn into bad debt. Worse, Vietnam’s definition of bad debt differs from that adopted by many other economies. Considering that Vietnamese economists themselves cast aspersions on local credit quality, Fitch’s concern is entirely understandable.
In general, banks must set aside reserves to maintain the minimum capital adequacy ratio set by the State Bank of Vietnam (SBV) and protect themselves against the risks induced by galloping credit growth. Foreigners cannot know clearly whether Vietnamese banks can mobilize capital with ease. It is clear, however, that the stock market is sliding and the pressure to increase capital is mounting. ACB’s and VCB’s ability to ensure capital adequacy is therefore in doubt. Ultimately, falling credit ratings are attributable to both the internal problems gripping each bank and how Vietnam’s economic policies are perceived from the perspective of foreign institutions.
Notably, credit expansion assessments, whether rosy or gloomy, are subjective. ACB’s and VCB’s credit growth rates may be staggering in Fitch’s view, but they may pale in comparison with the Vietnamese Government’s target. In an investment-led economy plagued with high incremental capital output ratios (ICOR), Vietnam must rely on rapid loan expansion to meet growth targets. Credit quality may be hampered as a result and exert tremendous pressure on banks, which must now hike charter capital as a protection tools.
Vietnam may want the best of both worlds by highlighting the need for both capital adequacy, in line with Circular 13, and staggering credit growth to fuel economic development. However, foreigners are skeptical about this approach and do not understand the country’s approach. Lower credit ratings are thus inevitable.
In addition, foreign institutions are not confident in Vietnam’s policies, which Fitch describes as “stop-go” and “inconsistent.” The Economist, meanwhile, frets what it calls “policy flip-flops.” Such a knee-jerk, piecemeal approach is certainly not to credit-rating agencies’ liking, especially given the lack of information on Vietnam’s economy.
The country’s perennial trade deficit and dependence on foreign capital also put it in a bad light, especially after Greece’s travails. Credit-rating agencies certainly wonder how Vietnam’s foreign reserves can cope if Vietnam’s forex management continues to hinge on what The Economist calls “short-term fixes” and foreign capital no longer pours in.
Foreign views
Foreign institutions clearly think that Vietnam is fraught with imbalances and that its growth is fueled by rapid credit expansion, foreign borrowing, an inflexible exchange rate and piecemeal, unpredictable policies.
Fitch’s and The Economist’s assessments of Vietnam’s economy may be contentious, but their bearing on the country’s image is indisputable. It is inadvisable for Vietnam to dismiss these evaluations, which may affect its borrowing costs. The challenge lies in polishing Vietnam’s credibility, not through vehement objections, but through concrete action on the part of the Government. When such phrases as “stop-go,” “flip-flops” and “inconsistent” disappear from reports on Vietnam’s policies, the country’s reputation among international investors will indubitably receive a boost.
Ph.D. candidate, University of Manchester, Britain
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