Credit rating agency Moody’s has downgraded its outlook on Vietnam’s banking system to “stable” from “positive” due to bigger asset risks in the property sector and declining profitability.
However, Vietnam’s strong economic growth will offset the headwinds, Moody’s said Monday, with their analysts expecting funding and liquidity to remain tight in the Southeast Asian country.
The global agency forecast Vietnam’s economy to expand between 6 and 6.5% this year, supported by continued domestic recovery after the pandemic and increases in government spending on infrastructure projects.
The government is seeking to accelerate the progress of public-funded infrastructure projects to support the country's growth in 2023, predicted as a year still facing global headwinds. The National Assembly, the country's legislative body, has set the 2023 growth target of 6.5%.
The World Bank, in its latest Global Economic Prospects released earlier this January, expects Vietnam to be the fastest-expanding economy in ASEAN this year with 6.3%.
Meanwhile, Vietnam’s 2023 growth was revised up to 6.8% in the ASEAN+3 Macroeconomic Research Office's (AMRO) January update, higher than 6.5% in its October report.
As for Moody’s, its analysts said the nation will remain an attractive destination for foreign direct investment, though the debt-servicing capacity of borrowers could be dampened by high inflation and interest rates. Nationwide, banks’ non-performing loans are expected to rise to 2.5% by the end of this year, due to their material exposures to the real estate and construction sectors, which Moody’s analysts noted were facing a liquidity crunch.
Furthermore, Vietnamese banks’ net interest margins will likely decline due to higher funding costs, as the rate of increase in deposit and interbank interest rates outpace those in loan yields.
The State Bank of Vietnam in December raised its 14% cap on the Vietnamese banking system’s credit growth for the year by 1.5-2 percentage points to provide more financing amid a credit crunch.
However, funding conditions for Vietnam’s banks are expected to remain tight, as credit growth keeps pace with deposit expansion. According to Moody’s, private banks are likely to face greater funding risks amid stiff competition for deposits because they have weaker deposit bases than state-run banks.
Le Xuan Nghia, a member of Vietnam’s National Financial and Monetary Policy Advisory Council, told The Investor that harmonizing monetary policy with fiscal policy in 2023 would help the government curb inflation and cope with forex risk pressures to ensure macroeconomic stability.
A proper approach now for the Vietnamese economy is to increase credit supply on one hand and use fiscal policy on the other to reduce import taxes, reduce commodity prices and control inflation, he said. Concerted coordination is needed because current core inflation is around 5%. If credit supply increases, it will reduce interest rates but increase inflation pressure, he explained.
The Ministry of Construction's latest report shows that cash flow difficulties and escalating material prices were among the reasons behind a 38.7% year-on-year increase in the number of Vietnamese real estate businesses going bankrupt or being dissolved in 2022.
Many property developers had to downsize operation scale and cut staff, with some laying off 50% of employees. In addition, many firms were forced to stop or postpone investment activities, project implementation and initial public offerings (IPOs).