Street vendors ply their goods in downtown Ho Chi Minh City. The Asian Development Bank has lowered Vietnam’s economic growth forecast in 2012 to 6.3 percent from 6.5 percent forecast last September.
With the world economy remaining mired in difficulty, the Asian Development Bank forecasts a difficult year ahead for Vietnam. However, it can achieve its goal of reducing inflation to single digits this year, ADB country director in Vietnam, Tomoyuki Kimura, tells Vietweek.
Vietweek: How do you assess the Vietnamese government’s commitment to restructuring the economy with a focus on public investment, financial markets, and state-owned enterprises (SOEs)?
Tomoyuki Kimura: We highly appreciated the presence of Prime Minister Nguyen Tan Dung at the Consultative Group meeting in early December, where he reaffirmed the government’s commitment to restructuring the economy in 2012. The government promised to continue restructuring the banking and financial sector, SOEs, and public investment. Like other development partners, ADB hopes to see concrete action in implementing the reform agenda.
The root causes of economic instability can only be addressed by deepening the financial sector, imposing market discipline on state-owned enterprises, and improving the efficiency of public investment.
What are the biggest challenges in restructuring the banking and finance sector?
For the banking and finance sector, the biggest challenges are the tightened monetary policy and credit conditions, and structural risks. Tightened monetary policy is necessary to fight inflation. However, it created a credit crunch for banks and enterprises.
The structural risk I mentioned is the prolonged period of high credit growth, which has deteriorated the quality of banks’ loan portfolios, while capital adequacy continues to be an issue for many banks.
Financial sector restructuring is a long-term and complex task, requiring comprehensive and costly reform of all aspects of the financial sector, including the banking sector, capital markets, and other non-banking financial institutions. In undertaking these reforms, the cost, having in place necessary legal and institutional frameworks for accommodating the reforms without creating any unrest among citizens or in society, and human resource capacity building are challenges for the entire financial sector.
For the banking sector, addressing the structural vulnerabilities due to the prolonged period of high credit growth in an environment of weak risk-management systems at banks and weaknesses in the State Bank of Vietnam’s regulatory and supervisory framework remains a challenge.
More specifically, since loan classifications are based on the Vietnamese accounting system – which is less strict than the international accounting system – the precise magnitude of non-performing loans (NPLs) and how much is unrecoverable remain unclear.
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Thus the starting point for restructuring the banking sector is an accurate assessment of the NPLs and related provisions to sufficiently assess the cost of restructuring by reducing NPLs, which is really a challenge for the system. The capital adequacy ratio (CAR) has been raised, but remains an issue for not only smaller banks, but also the larger ones, given the rising NPLs and risk profile on some bank balance sheets, including from exposure to loss-making SOEs and the real-estate sector. The CAR remains low by regional standards. How to undertake the restructuring and more specifically mergers and acquisitions of banks while ensuring deposits’ and other stakeholders’ rights without creating any unrest is also a challenge since restructuring the banking sector is complex, affecting different stakeholders, especially the wide range of depositors who are easily psychologically affected.
As such, the banking sector reforms require strengthening human resources across the sector and the capacity of the State Bank of Vietnam to transform into a modern central bank which adopts a forward-looking approach and market-based principles in monetary policy and conducts supervision on a risk-based instead of compliance-based approach.
These reforms also require substantial improvement in individual banks’ capacity to manage risk and their corporate governance. Given the weaknesses in risk management and corporate governance of some small banks, it is really a big challenge for the larger banks to ensure efficient risk management and corporate governance after consolidating weak small banks.
You also mentioned reform of SOEs. What are the major issues in restructuring the SOEs?
I think the biggest challenge is to manage resistance from various groups with vested interests. Restructuring SOEs needs strong political will and leadership. The first step is to improve transparency and accountability. The government should immediately improve information disclosure and hold SOE managements accountable for their performance. At the same time the government should develop a policy framework to address various aspects of the reform including business and financial restructuring and corporate governance.
Several factors are expected to affect Vietnam’s economy in 2012. Where do you see it going?
Considering the world economy has not shown clear signs of recovery, we think that 2012 will be a difficult year for Vietnam. The growing sovereign debt problems in the eurozone and an anemic US economy raise the specter of a deep global economic downturn, which will have impacts on emerging Asian economies, including Vietnam. The impact could be clearly seen on Vietnam’s exports to eurozone economies and the US.
The ADB has lowered Vietnam’s economic growth forecast for 2012 to 6.3 percent from the 6.5 percent it had forecast last September.
The government targets reducing inflation to 9-11 percent, and keep economic growth at 6.5 percent in 2012. To us, year-on-year inflation over 20 percent is too high. It is right the government is prioritizing economic stability in the short-term. Headline inflation fell from 23 percent to 7 percent in 2009, so it is possible to reach single-digit inflation in 2012.
The main risk to these projections is premature easing of macroeconomic policies, weakened global economic growth, and high external food inflation.
In Vietnam, inflation remains very high and foreign reserves remain inadequate. The State Bank of Vietnam should gradually reduce interest rates as inflation trends down, thereby helping to safeguard dong assets and anchor inflation expectations.
Monetary and fiscal policies have been consistent, helping stabilize the exchange rate and inflation trend down. Increased transparency and communication would enhance policy coordination. For example, the fiscal deficit reported should include off-budget items in line with international standards.