barclays_ the emerging markets quarterly_vietnam_sep 2012

7/29/2019 Barclays_ the Emerging Markets Quarterly_Vietnam_Sep 2012

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Barclays | The Emerging Markets Quarterly

25 September 2012 94

EMERGING ASIA: VIETNAM

Headline risks

Banking sector concerns have come to the fore recently. We believe the government remains

committed to cleaning up the banking sector; however, in the near term, headline risk ishigh. We expect the balance of payments to remain in surplus allowing FX reserves to rise.

Concerns about Vietnams banking sector have come to the fore following the recent report

from the Macro-economic Group, a group of independent specialists under the National

Assemblys economic committee. The report estimated that the financial system needs a

USD12bn capital injection. The report is a recommendation from the independent

specialists and is not the view of the National Assemblys economic committee.

We have been pointing to the banking sector as a key vulnerability of the sovereign and its

credit ratings (see The Emerging Markets Quarterly, December 2011). Although the market

regarded the news as a negative, we believe it is important to highlight that, by providing an

initial estimate of potential recapitalisation needs, policymakers are showing a commitment to

clean up the banking system. We believe clarity on funding these capital needs will be key forinvestor sentiment. We also think the news should be evaluated in the context of the countrys

improving FX reserves and restructuring plans for state-owned enterprises (SOEs).

In June, SBV Governor Binh told the National Assembly bad debts were 10% based on Vietnam

accounting standards, up from 6% at the end of 2011 (WSJ). As per Governor Binh, 84% of the

bad debts are secured by assets worth up to 130% of the value of the debts. In order to gauge

the potential loan losses for the banking system, we undertake a scenario analysis (Figure 1).

As an example, if NPLs were 20% and the recovery value 50%, the loan write-off would likely

amount to USD14bn, or 10% of GDP.

Vietnamese banks had provisions of VND70trn (USD3bn) at March 2012. Assuming that

provisions remain the same, in our scenario above, additional funding needs to cover realised

loan losses would be USD11bn. Note, all NPLs will not come due at the same time, but will be

spread out over time however, most of loans will likely come due over one to two years.

Given slow growth in H1 12 and a still-challenging external environment, we believe NPLs in

the banking sector are likely to rise further.

Figure 1: Scenarios for loan write-offs

Bad loans VND trn USD bn % of GDP

SBV (Vietnam accounting standards) 10% 280 13.5 10

Possible scenario (international accounting standards) 20% 560 27 20

10% NPLs 20% NPLs

70% recovery 50% recovery 30% recovery 70% recovery 50% recovery 30% recovery

Loan recovery scenarios

write off (USD bn) 4 7 9 8 14 19

write off (% of GDP) 3 5 7 6 10 14

Assuming bank provisions remain at March 2012 level of VND70trn or USD3bn

further funding needs to coverrealised loan losses (USD bn)

1 4 6 5 11 16

(% of GDP) 1 3 4 4 8 12

Source: Barclays Research

Prakriti Sofat

+65 6308 [email protected]

Concerns about Vietnams

banking sector heightened

following a report that USD 12bn

is needed for recapitalisation

We believe policymakers are

committed to clean up the banking

system clarity on funding the

capital needs will be key for investor

sentiment

Bad debts were10% or USD

13.5bn as of June

We undertake a scenario

analysis to gauge possible loan

write offs

Banks have USD 3bn worth of

provisions
https://live.barcap.com/go/publications/content?contentPubID=FC1772130https://live.barcap.com/go/publications/content?contentPubID=FC1772130https://live.barcap.com/go/publications/content?contentPubID=FC1772130https://live.barcap.com/go/publications/content?contentPubID=FC1772130


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In terms of financing the loan losses, we believe the bias will be to expedite consolidation in

the banking sector by seeking investments from foreign banks. Governor Binh said that

increasing foreign ownership of commercial banks was a solution proposed in the scheme

to restructure the credit institution system (see Viet Nam News, 8 Aug 2012). We also

believe the government will likely draw funds from multilateral/bilateral organisations and

from countries with close relations with Vietnam. The government will likely raise money

onshore and cut back on spending.

In July, PM Dung approved the (SOE) restructuring project and groups for 2012-2015. The

objective of the project is to make SOEs more rationally structured and centred on core

businesses. The SOEs will be classified into three categories, required to stop making

investments in non-core business by 2015. According to Finance Ministry data, as quoted

by state media, SOEs cannot repay as much as 20-30% of the VND415trn they owe banks

(see Banks Bad Debts Weigh on Vietnam, The Wall Street Journal, 14 June 2012).

Vietnams balance of payment position continues to improve, in line with our expectations.

The January-August trade deficit was only USD583mn, compared with USD6.7bn in the

same period last year. On the capital account side, we raise our FDI forecast by USD1bn to

USD8.5bn (H1 12: USD5.4bn) and maintain our remittances projection of USD9bn for 2012.

However, FX appreciation/stability has meant that resident outflows have been smaller. Overall,

we raise our BoP surplus forecast by USD2bn to USD7bn for 2012, allowing FX reserves to

end the year at USD23bn. We also expect the BoP to remain in surplus in 2013.

The dong has appreciated by 0.9% year-to-date a first since 2007 and before that in 1995

consistent with the turn around in BoP. While we expect the BoP to remain in surplus in

2013, our sense is that the banking sector issues could potentially increase demand for

gold/dollars and weigh on the dong. We expect a marginal 2% depreciation through 2013

and maintain our view that any depreciation will be gradual rather than a one-off.

The government revised down its 2012 growth forecast to 5.2% from 6% we maintain our

forecast at 4.8%. For 2013 we are cutting our expectation by 30bps to 5.5% given weaker

regional growth, though more rate cuts and fiscal support will provide some offset(government target: 6%). Inflation was 5% in August 2012, down from a peak of 23% last

August. We believe the bottom in inflation is probably behind us given the pick-up in

commodity prices and base effects; however, lacklustre domestic demand should keep a tab

on core inflation. Overall we expect inflation to average 9% in 2012 and come in slightly higher

at 9.4% next year. We believe the pick-up in inflation will weigh on government bonds

together with concerns over supply given rising contingent liabilities from the banking sector.

Following 500bps of cumulative cuts on moderating inflation and weak growth

performance, the policy rate has been on hold at 8% since late July. Given the challenging

growth environment, and fairly tight credit conditions onshore (1.8% YTD early September,

SBV annual target 8-10%), we believe the policy easing will not derail macro stability,

though the risks have increased. In the near term we expect rates to be unchanged, butbelieve that by mid-2013 the SBV will start reversing the easing.

We expect no change in Vietnams credit ratings over the coming three to six months. Key

drivers for the ratings will be: 1) progress on bank consolidation/recapitalisation; 2)

continued focus on macro stability; 3) restructuring of state-owned enterprises; and 4)

increased transparency. The sovereign is currently rated BB- Stable by S&P, B1 Negative by

Moodys and B+ Stable by Fitch.

We believe policymaker bias is to

expedite banking sector

consolidation by seeking

investment from foreign banks

Government initiates plan for

SOE restructuring

BoP to remain in surplus in

2013

allowing FX reserves to rise

further

VND to remain broadly stable;

marginal 2% depreciation in

2013

We maintain our 2012 GDP

forecast of 4.8% but are revising

down our 2013 forecast by30bps to 5.5%

Inflation to average 9% in 2012

and 9.4% in 2013

Policy rates to be unchanged;

rate hikes to start in mid-2013

Vietnams rating to remain

unchanged


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Figure 4: Vietnam macroeconomic forecasts

2008 2009E 2010E 2011E 2012F 2013F

Activity

Real GDP (% y/y) 6.2 5.3 6.8 5.8 4.8 5.5

Domestic demand contribution (pp) 9.4 4.5 12.1 -0.6 7.0 8.3

Private consumption (% y/y) 9.3 3.1 10.0 4.4 6.5 8.0

Fixed capital investment (% y/y) 3.8 8.7 10.9 -10.4 7.0 8.0

Net exports contribution (pp) -3.2 1.7 -2.2 6.2 -1.3 -2.1

Exports (% y/y)* 29.5 -8.9 26.4 30.9 15.1 18.9

Imports (% y/y)* 27.6 -13.4 18.2 24.1 14.0 20.0

GDP (USD bn) 90 93 103 122 138 157

External sector

Current account (USD bn) -10.8 -6.1 -3.5 0.3 -0.9 -2.0

C/A (% GDP) -12.0 -6.6 -3.4 0.2 -0.6 -1.3

Trade balance (USD bn)# -12.3 -8.3 -5.1 -1.4 -0.5 -1.8

Net FDI (USD bn) 9.6 7.6 8.0 6.5 8.5 8.0

Other net inflows (USD bn) 1.8 4.6 4.8 3.6 2.8 2.8

Gross external debt (USD bn) 30.2 38.8 43.8 49.3 52.8 56.0

International reserves (USD bn) 24.2 16.8 12.9 14.3 23.0 27.0

Public sector

Public sector balance (% GDP) -5.0 -9.0 -7.0 -4.6 -4.8 -4.8

Primary balance (% GDP) -3.4 -5.5 -5.6 -3.2 -3.6 -3.7

Gross public debt (% GDP) 42.9 51.5 53.0 49.9 47.4 46.2

Prices

CPI (% Dec/Dec) 19.9 6.5 11.8 18.1 6.3 9.6

FX, eop 17,483 18,500 19,500 21,034 21,000 21,400

1yr ago Last Q3 12F Q4 12F Q1 13F Q2 13F

Real GDP (% y/y) 6.1 4.7 5.0 5.5 5.0 5.5

CPI (% y/y, eop) 22.5 6.9 5.3 6.3 7.6 10.3

FX (domestic currency/USD, eop) 20,830 20,905 20,900 21,000 21,100 21,200

Overnight policy rate (%, eop) 14.00 10.00 8.00 8.00 8.00 9.00

Note: *Nominal as real data not available. #Balance of payments basis, not customs basis. Source: Barclays Research

Figure 2: FX reserves have been rising given BoP surplus Figure 3: USD/VND has appreciated ytd

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FX reserves (USD bn, LHS) Import cover (mths)

Short-term external debt cover

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FX reserves (USD bn, LHS)FX reserves (USD bn, LHS) Import cover (mths)Import cover (mths)

Short-term external debt coverShort-term external debt cover

-2

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94 9596 9798 9900 0102 03 0405 0607 0809 1011 12

%y

ear-on-y

ear

Source: CEIC, Barclays Research Source: CEIC, Barclays Research

barclays_ the emerging markets quarterly_vietnam_sep 2012

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