Vietnam should consider establishing crisis and financial stability monitoring function at SBV: IMF

On the occasion of new year 2024, Jochen Schmittmann, resident representative of the International Monetary Fund (IMF) in Vietnam, talks to The Investor about the prospects of Vietnam’s economy and recommendations on deepening the capital market.

In its conclusions on the 2023 Article IV Consultation with Vietnam released in September, the IMF forecast Vietnam’s GDP growth at 4.7% in 2023 and 5.8% in 2024. The Vietnamese government has put the 2023 growth at 5%-plus. Has the IMF changed its view on Vietnam’s economy since? What will be the growth drivers and challenges for Vietnam next year?

In the first half of 2023, economic growth slowed to 3.7 percent year-on-year, with investment recording one of the worst performances in more than a decade. The unexpected and abrupt deterioration was driven by both domestic and external shocks; specifically, turmoil in the real estate sector and a sharp contraction in exports as global demand weakened. The economy started to rebound in the second half of 2023, and we expect this momentum to carry over into 2024.

We maintain our projection of 5.8 percent growth in 2024, driven by a continued recovery in domestic and external demand. There are, however, risks to our forecast. Underlying weaknesses remain in the real estate sector and some banks have limited ability to lend given the worsened quality of their assets. The manufacturing recovery depends on a sustained pickup in external demand. Vietnam will also need to navigate the risks from geoeconomic fragmentation given that Vietnam’s largest export partner is the U.S. whereas its largest import partner is China. Reforms to improve the business environment and enhance economic governance are important to sustain high growth.

Vietnam has experienced turbulence in the real estate and corporate bond markets this year. The government adopted Decree 08/2023 in March in an attempt to fix the corporate bond market. Many companies are still issuing bonds with high coupon rates. How do you see the Vietnamese government’s efforts to regain investor confidence? What recommendations do you have?

The government successfully contained risks in the real estate and banking sectors through a series of measures. While these provided temporary relief, further reforms to fully address the problems and achieve a more robust corporate bond market and healthy real estate sector are needed. Financing remains limited for many real estate developers given high leverage. Troubled bond issuers took advantage of regulatory relief, for example, Decree 08/2023 that you mentioned, which among other measures granted a two-year extension in bond maturities conditional on shareholder approval.

Other efforts included temporary forbearance on bank loans and allowing bond buybacks by banks. The State Bank of Vietnam acted decisively within the limitations of the existing legal framework in October 2022 when it took control of Saigon Commercial Bank and prevented further contagion. While these actions prevented worse outcomes, some may have shifted more risks to banks and weaknesses in the real estate and bond markets still need to be fully addressed.

For real estate developers, the authorities should consider creating an environment that promotes swift restructuring of viable firms and liquidation of non-viable firms when there is distress. Strengthening the effectiveness of the debt enforcement and insolvency framework is key. The 2022 episode also highlights the importance of strengthening cooperation on prevention and management of crises.

We think that the establishment of a crisis and financial stability monitoring function at the SBV, in consultation with the Ministry of Finance (MoF), would be important in this regard.

We also recommend the creation of an effective bank resolution framework that ensures that swift action can be taken, includes contingency plans to enhance crisis preparedness, and incorporates an emergency liquidity framework that makes liquidity available to illiquid solvent banks against adequate collateral and with appropriate pricing. Other reforms to enhance financial sector resilience are strengthening bank regulation and supervision, fully disclosing ownerships and related party lending, and enhancing securities markets oversight and implementing risk-based supervision of securities markets participants.

Vietnam’s economy remains highly reliant on bank loans, with the credit to GDP staying above 120% in recent years. What risks does this pose to the banking system? Do you have any recommendations on deepening the financial market?

Vietnam’s financial system is bank centered which partially explains the high credit to GDP ratio. In 2021, credit growth outpaced nominal GDP growth significantly, bringing the credit-to-GDP ratio to about 125%. Coupled with high borrower leverage this could pose risks to asset quality, especially if the economy weakens. To manage these risks, strong bank regulation and supervision are essential. Aggregate and bank specific credit targets should be phased out as they can undermine banks’ incentives for prudent lending. Instead of pushing for faster credit growth, the government should make use of its fiscal space to stimulate the economy if needed.

To deepen domestic capital markets, further institutional reforms to strengthen governance are essential. Such reforms include ensuring that investor protection and transparency principles are respected and that all investors are treated equally. Improving the capacity of rating agencies and making the process for the public listing of bonds less cumbersome would also boost confidence in the bond market and make it a more durable and stable source of funding. Equity markets could benefit from more SOE equitization.