Vietnam Risks Biggest East Asia IMF Rescue Since 1990s: Economy

Vietnamese Prime Minister Nguyen Tan Dung
Nguyen Tan Dung, prime minister of Vietnam. Photographer: Kimimasa Mayama/Bloomberg

Vietnam risks becoming the biggest East Asian economy to seek an International Monetary Fund rescue loan since the region’s financial crisis more than a decade ago as it moves to support a faltering banking system.

The nation may need IMF aid to recapitalize banks and must act quickly to clean up bad debt or risk “prolonged stagnation,” the National Assembly’s economic committee said in a Sept. 4 report published on its website yesterday. The financial system needs an injection of 250 trillion dong ($12 billion) to 300 trillion dong, according to the 298-page report that included recommendations to address economic risks.

Prime Minister Nguyen Tan Dung’s government is struggling to regain confidence in Vietnam after the arrest of a banking tycoon last month highlighted the frailty of a financial system hobbled by Southeast Asia’s highest bad debt levels. Growth slowed to 4.4 percent in the first half of this year from 8.5 percent in 2007 as lending stagnated, damping state revenue and crimping the country’s ability to rescue banks.

“Vietnam got itself into this mess and the government will have to take responsibility to solve this before it worsens,” said Gareth Leather, an economist at Capital Economics Ltd. in London. “Credit has been one of the main drivers of the economy and you’re not going to see growth return to 7 percent to 8 percent so long as banks are stuck with this problem.”

The benchmark VN Index of stocks fell 1.4 percent today. The dong was little changed at 20,855 a dollar. Shares of Asia Commercial Bank fell 1 percent to 19,500 dong.

Foreign Funding

“We are not so desperate yet that we would need an imminent rescue loan from the IMF,” Nguyen Duc Kien, deputy head of the committee that published the report, said by phone today. “This is just one of the recommendations to the government in case it’s needed.”

Apart from the suggestion for Vietnam to seek an IMF loan to restructure the banking system, which was mentioned in pages 178 and 181 of the report, the National Assembly committee’s report also recommended other funding sources such as selling government bonds with three-to-five-year maturities, trimming state spending and drawing funds or investments from foreign companies.

The Southeast Asian nation’s constitution should also be amended to address state-ownership of companies, the report said. Currently, the constitution stipulates that the state must hold a leading role in the economy.

Seeking foreign funding is “unavoidable” in order for Vietnam to quickly solve its bad debt problem, the report said. Funds from foreign companies would be one of several sources accessed to help buy bad debt, it said.

‘Good’ Option

“I’d be very happy if I heard the IMF was involved,” said Son Nam Nguyen, managing partner of Vietnam Capital Partners Ltd. in Ho Chi Minh City. “There would be a whole set of conditions, which would be very good for Vietnam.”

Vietnam’s non-performing loans climbed to 4.47 percent of total lending as of May 31, from 3.07 percent at the end of 2011, according to central bank data. State Bank of Vietnam Governor Nguyen Van Binh said in April that the level of non-performing loans at some lenders may be “much higher” than reported figures, with Mizuho Corporate Bank Ltd. estimating as much as 20 percent of debts may be bad.

The central bank should set up a company to buy bad debt using foreign funding, the parliamentary panel said in this week’s report, which was funded by the United Nations Development Programme. Cross-ownership of banks are at “alarming levels” and lending based on relationships have led to rising non-performing loans and need to be promptly dealt with, according to the report.

“The ratio of bad debt and overdue debt in the banking system is at an alarming level,” while bank provisioning for bad debt is inadequate, it said.

Not Imminent

The central bank hasn’t officially been presented with the report by the National Assembly and the recommendations are “just the committee’s view” for now, Nghiem Xuan Thanh, chief administrator at the bank, said by phone today.

“Vietnam is now at a point where it really does have to explore ways of recapitalizing and restructuring the foundation for its banking system,” said Peter Ryder, the Hanoi-based chief executive of fund manager and property developer Indochina Capital. “However, for the Vietnamese, particularly given their history of fierce independence, to go to the IMF before exhausting all other alternatives would be very surprising.”

Asian stocks snapped a five-day decline today as investors awaited details of a European Central Bank plan to stem the region’s debt crisis.

ECB President Mario Draghi will hold a press conference today where he may offer details of a bond-purchase plan to lower borrowing costs in Spain and Italy. The event is scheduled to follow the ECB’s decision on interest rates.

Obama Speaks

Spanish Prime Minister Mariano Rajoy and German Chancellor Angela Merkel meet in Madrid today to discuss the euro crisis. The Bank of England persisted with its quantitative-easing program as it carries the burden of reviving Britain’s economy. Sweden’s central bank cut interest rates.

The U.S. will report initial jobless claims and President Barack Obama may outline his goals for the economy as he gives an acceptance speech at the Democratic National Convention.

In the Asia-Pacific region, Australia’s jobless rate unexpectedly declined in August and in South Korea the central bank said the economy expanded 0.3 percent in the second quarter from the previous three months, less than initially estimated.

Vietnam had recognized the risks and unveiled plans to prevent a collapse of its banking system months ago. The country said in March it would buy bad debt from lenders as the nation sought to overhaul the industry and cut bad-debt ratios at state-owned banks to below 3 percent by 2015.

Forcing Mergers

The central bank has also said it’s ready to force mergers among weak lenders, and Dung has ordered the monetary authority to “solve” a shortage of funds after the credit crunch forced thousands of companies out of business.

Restructuring the banking system is necessary as lenders are “not truly strong,” Vu Duc Dam, chairman of the government office, said at a briefing in Hanoi yesterday. Gross domestic product growth could be as low as 5 percent this year, Dam said.

Vietnam’s state spending has risen 19 percent this year as of Aug. 15, while income gained 1.7 percent, a government statement showed yesterday. Government expenditure totaled 534 trillion dong, compared with income of 418.5 trillion dong.

Nguyen Duc Kien, who helped found Asia Commercial Bank, Vietnam’s fourth-biggest lender by market value, was arrested in August, and the central bank said police were investigating violations at three companies managed by Kien after he allegedly “conducted business illegally.” That was followed by the arrest of former Chief Executive Officer Ly Xuan Hai by the police for alleged economic mismanagement.

Vietnam’s stocks plunged, dragging the benchmark index into in a bear market on Aug. 27 on concern the arrests may signal further instability in the nation’s financial system.

The country’s last IMF lending program was a poverty reduction and growth facility of as much as $368 million when it was announced in April 2001.

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