Central bank likely to tighten foreign loans into securities, real estate

The State Bank of Vietnam plans to limit enterprises’ short-term foreign loans for securities and real estate purposes, which may lead to price bubbles.

The central bank is soliciting feedback on a draft circular to replace Circular 12 with stricter foreign loan criteria, in order to ensure firms' self-borrowing and self-repayment occur within foreign debt limits, thereby securing the national debt safety target.

Accordingly, short-term foreign loans can be used to pay short-term debts incurred within 12 months, excluding debts arising from stock trading and real estate investment. The regulator believes that project transfers and acquisition of shares/capital contributions for merger and acquisition (M&A) activities are long-term operations.

If short-term foreign loans were used to fund medium-term investment, it will create liquidity risks. It contradicts the nature of short-term capital flows that only support temporary liquidity shortages.

Borrowers' usage of the loans to benefit from M&A activities but not for project development or business management can create the risk of price bubbles and should be limited.

Massive growth of the stock and real estate markets raises significant concerns, as it may result in a virtual capital situation and bubbles of assets, which is the root of macro-financial instability.

The proposal was designed against the backdrop of many banks and businesses increasing overseas loans in recent years to take advantage of international low-interest rates.

The government aims to prioritize foreign loans to processing and manufacturing sectors that directly create economic value.