Economic stability will require serious adjustment

Economic instability across the entire globe is bound to affect Vietnam as well. Although economic data for Vietnam shows that difficulties have been overcome, but the fact remains that scores of businesses are still struggling.

Illustrative photo.

Banks have tightened credit room and the risk of bad debts is worsening. Since it is difficult for businesses to access capital, interest rates are increasing and capital mobilization from corporate bonds has slowed down after a spate of unfortunate recent incidents. In a talk with Saigon Investment, Dr. NGUYỄN TRÍ HIẾU, a banking and financial expert, analyzed many of these issues.

JOURNALIST: - Sir, many people think that Vietnam's economy is quite stable at the macro level in the current scenario. What is your opinion on this?

Dr. NGUYỄN TRÍ HIẾU: - In the first half of 2022, Vietnam's economy in terms of macro was relatively stable, and showed signs of coming out of the drastic Covid-19 pandemic phase. Businesses were starting to recover, and inflation was also quite low. However, in the second half of 2022, global economic fluctuation has affected the economy in Vietnam very strongly.

Specifically, the economy has been affected more after the US Federal Reserve (FED) raised the interest rate six times in quick succession in 2022. This directly affected the Vietnamese stock market and put great pressure on the foreign currency market as well. The exchange rate then started to increase in the second quarter. Under these circumstances, the State Bank of Vietnam increased the operating interest rate two times in September and October. The ceiling interest rate for deposits under six months was also raised and the US dollar to Vietnam dong exchange rate band was widened to fend off bad impact from the world financial markets.

In the third quarter the domestic economic situation was strongly influenced by the global economy. This is to say that Vietnam's economy has stabilized, but macro is putting it too optimistically. Internal factors in Vietnam's economy may remain stable, as controlling inflation or controlling gasoline prices requires all measures of monetary policy. However, the pressure of interest rate increase from the FED is getting stronger day by day, forcing Vietnam to respond by increasing the operating interest rate, and widening the foreign currency trading band to deal with external and internal instability factors.

- Sir, as you said, the State Bank of Vietnam is still trying to stabilize the Vietnamese currency and control inflation to support businesses and keep the economy stable. This puts pressure on the Government. What is your opinion on this, and do you believe that the State Bank of Vietnam is on the right track? Also, how long do you think this phase will last?

- It is true that up to now, the State Bank of Vietnam has tried to maintain stability of the domestic currency. This is reflected in many measures, including selling foreign currencies to stabilize supply and demand. Foreign exchange reserves were about USD 110 bln before and the State Bank of Vietnam has sold more than USD 20 bln. However, the State Bank of Vietnam cannot sell foreign currency forever to stabilize the exchange rate, hence it is being forced to use stronger monetary policy tools rather than raising interest rates to increase the value of the Vietnamese currency. This has slowed down the bleeding of foreign currency into the black market or illegal channels.

Many financial experts now say that the State Bank of Vietnam was flexible in managing the exchange rate. But in my opinion the State Bank of Vietnam was actually very slow in raising interest rates and thereby allowed the exchange rate to rise. If it had been flexible and acted timely, the State Bank of Vietnam would have had to consider raising the exchange rates and interest rates right from the beginning of the year, so as not to be affected as strongly in the second half of 2022. Hence it is correct to say that the State Bank of Vietnam is on the right track, but I do not think it acted timely or was flexible.

As for how long this will last, I think the State Bank of Vietnam will not stop at raising interest rates and increasing exchange rates, but will continue to do more, but the extent will depend on the economic conditions of the world. This is because the State Bank of Vietnam is under pressure from outside and must make changes if the global economy fluctuates. If the demand for foreign currency increases in the last months of the year, the State Bank of Vietnam should raise the exchange rate instead of keeping the exchange rate low, which will lead to the phenomenon of the US dollar flow into the black market.

Recently, the State Bank of Vietnam increased the trading ceiling to ± 5%. But this range is not a fixed wall, and when the market is stable it can be pulled down. And if it is restrained, only the State Bank of Vietnam can sell foreign exchange reserves, although not sell beyond the permissible limit. As a result, monetary security is threatened.

- Sir, due to lack of liquidity, the Vietnam dong deposit rates are currently very high. Some commercial banks have mobilized at over 10%, while output is tightened by the State Bank of Vietnam to control inflation. Do you think this is an unstable situation? What is the source of commercial banks?

- The fact that commercial banks are raising the deposit interest rates very high, creates a risk for the banking system and the whole economy. First let us talk about commercial banks. Output is being tightened, and there is not enough credit room to give loans, and the banks should have slowed down in mobilizing at this time, but they raised the interest rate up to 10% per year. It seems that banks are having liquidity problems, which may be due to bad debts that have been restrained for two years, which are now bouncing back.

Because these bad debts are blocked by not transferring debt groups, and we must have real cash flow, and this real cash flow does not return to the bank, then it is forced to mobilize with high interest rates.

In addition, recent cases of misconduct related to corporate bonds issuances by large corporations have also had a domino effect on the financial market. Because the issuance volume of real estate enterprises is very large, banks are the components that buy real estate corporate bonds a lot. Money invested in corporate bonds does not return, which also affects the liquidity of some banks. Currently, banks all report high interest, but that interest may be just on-book profit, but the main problem is real cash and whether this cash flows back to serve the businesses and return to customers is another matter altogether. The fact that the banks are constantly pushing the deposit interest rate up at this time can be seen as proof that the banks are having liquidity problems.

When the input interest rate increases, then sooner or later the lending interest rate will also increase, and it will then affect the economy. The increase in interest rates not only creates the cost burden for businesses and individuals but also affects the growth of the economy. Businesses borrow higher interest rates from banks, and individuals borrow from financial companies at higher interest rates, thereby limiting production and business activities and the consumption power within the economy.

Currently, the State Bank of Vietnam is tightening the credit room with the aim of limiting the amount of money in circulation, so as to control inflation. A battle is tightening from many sides, but the State Bank of Vietnam cannot help but keep credit growth at an appropriate level.

- Sir, the pressure on interest rates is already hot, but the pressure on corporate bonds is even hotter. The fact is that enterprises could not mobilize bonds due to a spate of unfortunate incidents in a few enterprises. There is an opinion that top leaders in management as well as experts must clear the psychology of investors. What is your opinion on this matter?

- Currently, investor sentiment is very confused. In October, businesses also stopped issuing bonds because they knew that no one buys corporate bonds. Therefore, it is necessary to recreate the trust of the corporate bonds market. At this time, in addition to the bonds of businesses involved in large cases, there are many corporate bonds that are coming into maturity between now and the end of the year and by 2023.

In such a market, issuing new corporate bonds to pay old debts is almost impossible. There are suggestions that corporate bond issuers must sell assets to repay debts when it is time to sell, but that solution is also limited. Many corporate bonds without collateral or collateral assets remain unfinished projects with no market value, so they are difficult to sell off.

In my opinion, we have to solve problems for corporate bonds that are due, and not having money to repay can easily lead to very dangerous default, which will create a domino effect from one corporate bond to another. The Government must immediately set a program to postpone repayment for customers of corporate bonds that are due this year and next year. This must be delayed by one more year.

This is a very extreme measure because according to regulations, corporate bonds are self-borrowing and self-paid, like a civil contract where the Government does not intervene. But this is a special situation and not coming to the rescue now will lead to mass defaults. However, this deferral program must come with strict conditions.

In addition to the government debt deferral program, the State Bank of Vietnam also needs to have a loan program for issuers who are allowed to defer debts in order to pay interest to investors. When the Government allows debt postponement and the banking industry lends to pay interest to investors, perhaps investors will also be ready to negotiate.

For corporate bonds to be issued at this time, it is best for businesses to go to the bank and ask the bank for a guarantee. If the bank does not provide a guarantee, the possibility of issuance is very low, because at this time, for investors to trust, at least there must be a guarantee from the bank or a good credit rating to show investors that the issuing company has ability to repay the debt.

- Sir, the difficulty for businesses, especially real estate businesses, is that they only rely on capital from banks and customers. When a project freezes, bad debts  explode. In your opinion, what will the bad debt situation be like in coming years?

- In the last five years, the issue of corporate bonds has been welcomed, because it reduces the burden on banks as well as helps develop the capital market. But this optimism was premature. The corporate bonds market does not have a solid foundation, and more than 90% of corporate bonds are issued individually instead of to the public. The private market is a market where the issuer avoids the investigation and reviews of authorities, and also avoids strict regulations where individual investors do not have much investment knowledge. The corporate bonds market is actually built on a very thin foundation and faces huge risks.

When corporate bonds are in crisis, businesses return to banks, and the bank doors are closed. Even current investment funds do not accept. All doors are closed, and this phenomenon causes businesses a lot of damage, as they no longer have capital and cannot run projects, especially real estate enterprises. But banks also have their problems. The bank is a big investor in corporate bonds, and when the real estate market freezes  the bank falls into a bad debt situation.

I think this is a very expensive price to pay, but this difficulty forces banks and businesses to review their financial plans. More broadly speaking, the market will have to adjust for the better.

- Sir, in your opinion, what will the economy be like in 2022 and 2023 when the current complexities are analyzed but not removed?

- Let us suppose that in 2023 banks run out of money, businesses also run short of money, and the whole economy also has very little money. The State Bank of Vietnam can then print money. However, printing of money is dangerous in that it will certainly increase inflation. Therefore, the problem is that the State Bank of Vietnam will have to consider creating liquidity for banks, in small sufficient doses so as not to increase inflation. When banks have money, they lend to the economy. Here I want to say that inflation according to the General Statistics Office data is below 4%, but in fact, inflation increased much more than that.

Under the current pressure, the State Bank of Vietnam may have to raise the exchange rate because the demand for buying US dollars is very huge, allowing the US dollar to appreciate and slow down the demand to buy US dollars. Hopefully, when the world situation stabilizes, the FED will not raise interest rates anymore, in which case Vietnam will be less pressured to raise interest rates and exchange rates. The economy of a country can be compared to a human body, and that body will adapt to all actual conditions. Under circumstances where there is a lack of capital, all sectors of the economy will have to adjust, lower needs if they are individuals, and produce less if they are enterprises.

I believe that the main managers of the economy like the Ministry of Finance and the State Bank of Vietnam must use all the tools of monetary policy and fiscal policy to operate, and gradually self-regulate the economic sectors. This may take time and some people will have to tighten their belts, spend less, import fewer goods, and use exports to get more foreign currency to adapt to the new economic environment.

- Thank you very much.

Báo Sài Gòn Đầu Tư

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