Gross domestic product (GDP) growth is estimated at 4 per cent for the first quarter and some government sources are putting it as low as 5 per cent for 2012. This economic slowdown is reflected most clearly by the sharp reduction in the trade deficit estimated at only $250 million in 2012’s first three months, or about one-tenth of the normal deficit expected for this quarter.

Furthermore, domestic credit growth was at negative 2.4 per cent in the first two months of 2012, after the relatively slow growth of 14 per cent in 2011 compared to the restricted credit target of 18-20 per cent. All in all, this reflected the low credit absorption capacity of a weak economy, in sharp contrast to the rampant credit growth of preceding years.

Although it is good news from a financial point of view, in reducing the trade and balance of payment’s current account deficits, this is alarming for the government as imports of most materials and equipments, necessitated by locally-used and export industries, sharply dropped. This will signal further slowdowns in output and notably exports in the coming months, if not quarters.

But as a result, perhaps a favourable impact, the State Bank has been able to build up its foreign reserves in recent months to an equivalent of about 12 weeks of imports from only seven weeks last year, a rather strong FX position not seen since 2007, which will be a nice cushion for the State Bank in dealing with any currency crisis in the future. Lately, the State Bank has also issued special central bank bonds in parallel to government bonds issued by the Treasury to offset the impact of domestic currency issuance to buy FX.

Quick action is lauded

But, most notable in the last six months was the State Bank’s apparent success in handling a mini banking crisis. To this writer, who issued an early warning system (EWS) report last July about an imminent nascent banking crisis, that crisis did come to the front in last year’s fourth quarter, according to some established quantitative thresholds.

But that crisis was relatively well contained and possibly well concealed among official circles. The government and notably the State Bank were mostly in crisis mode to help solve the crisis by pumping substantial liquidity on the open market operations (OMO) and other urgent measures in the critical periods right before and after the recent Lunar New Year Tet holiday.

Most particular was the forced merging of three weak southern banks when there were initial signs of a run on those banks. The action was swift, discreet and efficient. Now, in the State Bank Governor’s words during a recent meeting with some economists, the situation seemed to be much improved when the interbank rates were stabilised at 6-8 per cent, compared with 25-30 per cent in the crisis period and 12-13 per cent in recent weeks.

This transparent communication made Vietnam’s overall financial situation much clearer to some analysts and was apparently the main reason for the quick recovery of almost 35-40 per cent of the country’s two stock market indices in Hanoi and Ho Chi Minh City, respectively, during January 6 to March 5.

In my opinion, more frequent press briefings or more transparent communications with the media on the FX situation and monetary situation as with regular communications with the IMF, or the banking system’s improvements would provide more useful PR services for Vietnam’s economy. This would have enticed more foreign direct and indirect investment in the past few months, reversing perhaps the weak downtrends in the first quarter.

Much needed transparency

One should also appreciate the economic authorities’ initiative to conduct regular and frank assessments of the economic situation. They are done every few months with a group of senior economists inside and outside the government, emphasising the need for continued stabilisation measures to contain inflation, notably the required and efficient coordination between fiscal and monetary policies for quickening banking system, public investment and state enterprise structural reforms.

They are to be put under one roof to be headed by one senior and dynamic deputy prime minister. The establishment of a serious medium-term policy framework aimed at re-establishing macroeconomic equilibrium and the need for more transparency to help rebuild domestic and foreign investors’ confidence, as mentioned above, should also be appreciated.

In appreciating the apparent short-term control of inflation and financial improvements, one should emphasise the need for a longer-term view of the development strategy, pointing out the current “struggle” between the profit-making/market-oriented and rent-seeking economic sectors. The former is the result of economic reforms under doi moi in recent years, consisting of those who work hard to make a living and notably those who aim to make a profit by having revenues grossing over lower costs under a market mechanism, albeit under nascent conditions. In contrast, the rent-seeking economy consists of those who tend to rent under monopoly or quasi-monopoly rights protected by government or public entities’ umbrellas. Corruption is the most obvious example of this rent concept. Those who benefit from access to privileged information are also under this category.

Of course it is apparent that colossal financial losses by public conglomerates like Vinashin or EVN were partly the result of the government’s policy favouring the state sector and state-owned enterprises (SOEs) at the expense of more dynamic private sector. Poor development and low economic efficiency (evidenced by the very high ICOR of 7-8) are the consequences.

Market forces were also put away and replaced by blossoming administrative measures in many sectors, but most notably in the credit and foreign currency markets. This tends to give more benefits to rent-seekers at the expense of those who work under regular market conditions/regulations. This has also distorted financial markets and given rise to the current malaise of very high interest rates, causing the economic slowdown as described above.

The critical issue

One would ask the natural question as to the reason why, despite considerable efforts by the State Bank and even recent softening of inflation with declining month-to-month rates since last August, have interest rates not come down significantly?

The key issue is continuing banking system liquidity problems and this, in turn, is linked to the bad debts related to non-performing loans of several banks due to the seriously frozen real estate market since 2009.

Essentially, since banks cannot collect repayments from real estate debts, and given the State Bank’s continued tight money policy to contain inflation, they cannot give out loans at rapidly declining rates. Besides the high rates, stringent lending conditions also limit the availability of bank loans, especially for small- and medium-sized enterprises. So, behind the veil of liquidity trouble, the true issue is the low quality of bank assets, meaning truly bad debts.

But according to State Bank information, bad debts amount to only $4.3 billion and are concentrated in only nine banks, which are already identified and under strict central bank supervision. The central bank is working on various solutions to address these bad debts. One of them, and perhaps the key issue, is the possibility of a serious bank recapitalisation programme with possible borrowing from international sources like the World Bank, the ADB, or even the IMF.

The State Bank has also announced that it might continue to reduce the ceiling deposit rate by 1 percentage point per quarter until it reaches 10 per cent by the year’s end. Or, down the road, if the liquidity situation can improve significantly, one cannot exclude the possibility that the State Bank might remove the ceiling deposit rate altogether in June or July, 2012. This will be, of course, the much desired light at the end of the tunnel for the liberalised credit system and the economy at large.

Source: VIR