ADB predicts modest VN growth

The Asian Development Bank has maintained the forecast for gross domestic production (GDP) growth for Viet Nam at 5.2 per cent this year in its updated annual publication Asian Development Outlook 2013 (ADO) released yesterday.

The modest growth was due to sluggish domestic demand and soft export markets, said Dominic Mellor, an economic expert at the bank.

In April the bank forecast the country’s GDP growth at 5.2 per cent and its inflation at 7.5 per cent.

However, in the update to ADO , the inflation forecast is revised down to 6.5 per cent because food price inflation has decelerated more quickly than expected.

According to the update, Viet Nam’s economic growth should benefit from positive steps taken by the government to address problems in the banking sector but reforms have generally been fitful and ineffective.

In the country, vulnerabilities in the banking sector centre on high non-performing loans (NPLs), insufficient bank capital and inadequate prudential standards.

Credit institutions reported that the NPL rate rose to 4.5 per cent of total loans in the first half of 2013 from 4.1 per cent at the end of last year. The State Bank of Viet Nam estimated NPLs at 6 per cent in February but independent analysts believe the figure would be 3-4 times higher if international accounting standards were applied.

In May, Prime Minister Nguyen Tan Dung approved a programme to deal with NPLs which included the formation of the Viet Nam Asset Management Company (VAMC) which would acquire and later sell the bad debt.

The Government established an inter-ministerial steering committee to improve co-ordination between government agencies and local authorities in implementing bank restructuring.

As mentioned in the ADO update, “progress on strengthening the banking system is expected to be fitful. Current capitalisation for VAMC is unlikely to be sufficient to deal with large number of NPLs.”

“The success of the NPL programme also depends on strengthening the bankruptcy law and the legal framework for dealing with secured asset transactions, and establishing mechanisms to value and auction bad debts.”

Tomoyuki Kimura, ADB Country Director for Viet Nam said: “The creation of VAMC is very positive but its success could depend on strengthening the legislative framework for dealing with secured assets, which will require strong inter-ministerial co-ordination and collaboration.

“Implementation of improved loan classification and provisioning standards would have reduced risks to the banking system and improved investor sentiment.”

Despite policy rate cuts, growth in lending was constrained by banks’ impaired balance sheets, concerns over the financial health of borrowers, a sagging property market and weak demand for credit.

The ADO Update suggested progress on NPL resolution would allow a further lowering of interest rates and increased flows to productive sectors of the economy.

“Gradual progress in resolving NPLs will improve business sentiment,” added Mr. Kimura. “As this happens, policy stimulus, including the cuts in interest rates this year, could gain traction in boosting credit and GDP growth.”

The bank also urged Viet Nam to step up the implementation of restructuring plans for several State-owned enterprises (SOE). Indicating the difficulties attached to SOE reform, State-owned Viet Nam Shipbuilding Industry Group (Vinashin) reported last month that it intends to cut 14,000 jobs as part of its restructuring.

ADB experts are worried that the Vinashin case could set a precedent that restructuring must require large-scale layoffs when State-owned enterprises are generally expected to generate jobs in Viet Nam.

The bank expected Viet Nam’s GDP growth at 5.5 per cent for next year, one per cent lower than that set in April and inflation is projected to average 7.2 per cent due to monetary easing and increased liquidity. — VNS