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.”
Prime Minister Nguyen Tan Dung has approved the formation of an asset management company, effective July 9, to acquire non-performing loans from lenders, according to a statement on the government website today. 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 $12 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.”
Lenders with bad-debt ratios of 3 percent and above will be required to sell their non-performing loans to the asset management company, according to the government statement. The company will have an initial registered capital of 500 billion dong ($24 million) and be overseen by the central bank, it said.
The Ho Chi Minh City Stock Exchange’s benchmark VN Index (VNINDEX) rose 0.6 percent at the break, heading to its highest close since April 11. Asia Commercial Bank surged as much as 7.5 percent, 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 percent and Vietnam Joint-Stock Commercial Bank for Industry and Trade gained as much as 1.6 percent in the morning session.
The reluctance of banks to lend may result in economic growth of less than 6 percent for a third straight year, based on forecasts from the International Monetary Fund and the World Bank. Gross domestic product expanded 5.03 percent last year.
While the economy will continue to face challenges, the central bank and the government have pursued policies to achieve growth of 5.5 percent and keep inflation at about 6.5 percent this year, Tien said.
The State Bank of Vietnam cut the refinancing rate to 7 percent from 8 percent effective May 13, while the discount rate was reduced to 5 percent from 6 percent as it joined policy makers from Sri Lanka to Australia (RBATCTR) in monetary easing this month. The rate cuts were the eighth since the start of 2012, following a similar reduction in March.
“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 2 percentage points annually and the interest-rate cap on dong deposits by 0.5 percentage point each year, it said.
Vietnam will need other “prudent” policy measures to spur growth, the deputy governor said. He forecast actions to clean up banks will contain bad debt at less than 5 percent of total loans at the end of the year, from 7.8 percent 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 percent of a bank, with total non-Vietnamese ownership in each bank currently capped at 30 percent.
The asset management company will be wholly state-owned, with initial charter capital funds provided by the State Bank of Vietnam, according to the government statement. Investors can bid at auctions on the bad debt, and special bonds will be issued to lenders in exchange for non-performing loans with a maximum maturity of five-year, it said.
Non-performing loans reported by commercial lenders stood at 4.51 percent 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 percent 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 percent and 20 percent, 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 percent as of the end of June 2012, State Bank of Vietnam Governor Nguyen Van Binh said last August.
“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 responses. “However, non-performing loans are still within the central bank’s control.”
About 22.5 trillion dong of bad debt was resolved in 2012 by lenders’ loan-loss provisions, the central bank 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 is “very good,” and while bad debt may rise because of economic difficulties, measures to clean up banks will keep it at acceptable levels, he said.
Still, “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 is expected to resolve about 100 trillion dong of bad debt, Vu Viet Ngoan, chairman of the National Financial Supervisory Commission, said last week.
“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.”
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