Vietnam’s Beleaguered Bad Debt Battleground
Vietnamese shares topped the MSCI Asia frontier through July on a 20 percent increase despite the central bank’s admission that non-performing loans doubled the past year to one-tenth of state bank portfolios and prompted immediate creation of a single asset resolution unit with $5 billion in initial capital. However the overdue move to recognize and tackle the problem upgraded the sovereign ratings outlook to stable, as progress was also hailed on reducing inflation to single digits and paring the trade deficit which stands out in the Asean bloc. Food prices and credit growth have both dropped sharply as GDP growth halved to a 4 percent clip in Q1. With better monetary control 400 basis points of rate easing will come by year-end on programmed currency depreciation of 3 percent. International reserves have rebounded to around $20 billion by IMF calculation on a combination of aid, FDI, remittances and resident capital repatriation from gold and the dollar. Interest rates are now positive, but the fiscal gap will rise on wage hikes as public debt nears 50 percent of GDP. A tax reform scheme will broaden VAT and eliminate investment exemptions, although property may continue to escape stricter treatment. To raise revenue additional government enterprises may be listed on the stock market, and many have divested non-core operations in preparation. Banking cleanup is the subject of new legislation in effect until 2015 that will emphasize risk management and corporate governance overhaul after 2011’s introduction of blanket deposit insurance. The industry loan-deposit ratio is to drop under 100 percent by the end of the period and the biggest rehabilitated state-owned groups are to forge a regional footprint in Indochina and elsewhere. They already maintain ties in Cambodia and Laos which each recently launched securities markets, as well as in Myanmar which has just unified the exchange rate regime and seeks neighboring partners and assistance for banking modernization.
Thailand which is up 15 percent on the MSCI core roster is also positioning for the sudden area attention as former prime minister Thaksin spent part of his exile in the Cambodian capital. His successor sister in Bangkok has injected fresh political risk into the post-flood bounce-back by championing a reconciliation law for re-entry without criminal charge after a 2008 corruption conviction. “Yellow shirts” again took to the streets to block parliamentary action, while the red shirt supporters of premier Yingluck are in turn dismayed by the lack of military prosecutions for protester killings in 2010. The constitutional court has challenged the bill, which would also allow the ousted telecoms company founder to reclaim seized assets. Although domestic and external demand have steadied the GDP growth forecast is down to 3-4 percent as concentric comeback fights rage.
