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It’s Time to Talk About Vietnam’s Credit Growth Policy…

Last week, State Bank of Vietnam Permanent Deputy Governor Dao Minh Tu, assured attendees at a press conference that record-high bank deposits were not sitting idle with Vietnam’s banks but rather had been repurposed to make loans.

“There is no way that 14-15 million billion VND is still in the bank because the banks have lent out all the money they mobilised to the economy,” he said. It’s not clear why this needed to be clarified but it is maybe not quite as reassuring as the Deputy Governor had intended.

Specifically, Dao went on to say that bank loans now exceed deposits, VND 14.7 trillion to VND 14.5 trillion. This would, however, give Vietnam’s banks a collective loan-to-deposit ratio of 101.38 percent which should be a cause for concern with anything above 80 percent generally considered a liquidity risk.

Furthermore, it’s unlikely to stop anytime soon with deposits growing just 2.52 percent from the start of the year to July, but credit growth reaching 5.93 percent working its way toward a target set by the State Bank, of 14 percent for the year.

It’s not just the gap between loans and deposits that is getting wider too. Vietnam’s private debt-to-GDP is already well-high at 128 percent compared to its regional economic contemporaries like Indonesia which is at about 30 percent and the Philippines at about 48 percent.

Furthermore, on its current trajectory, if GDP growth reaches the government target of 7 percent this year and the State Bank hits its 14 percent credit growth target, Vietnam’s private debt-to-GDP ratio would jump by about 8 points to around 137 percent.

Of course, that’s not necessarily a bad thing. When invested in, say, expanding a business or buying a house or apartment, there are obvious, long-term economic benefits to a robust credit system. 

That said, it’s not at all clear that that is how this credit is being used.

Notably, last year when credit growth had reached just 6.96 percent by the end of September, Vietnam’s banks went on a mad lending spree. As a result, in the last three months of the year US$31 billion worth of credit was issued, almost as much as the US$32.9 billion issued in the combined nine months before. This brought total credit growth to 13.5 percent for the year just a cat’s whisker from the 14 percent target.

But this spike was clearly an anomaly and well out of the ordinary with Vietnam’s export-oriented economy, typically seeing credit demand peak around August-September as Vietnam’s factories ramp up production for the Western hemisphere’s Christmas holiday period.

It did, however, correlate to a spike in retail sales across October, November, and December, as well as a jump in car sales of 18 percent in November and 41 percent in December.

That said, in January, with credit growth reset for the new year the pressure to lend had been relieved. Subsequently, credit growth went on to contract by .68 percent, retail sales fell back to their September levels, and car sales fell by 53 percent. This was all the more pertinent in that this was the lead-up to the Lunar New Year holiday which fell entirely in February this year, the month before which generally sees retail sales peak for the year.

That is to say, not only was credit growth during this period not consistent with the general ebbs and flows of credit demand in the past but looking at where increased spending was recorded, it does not look like this lending was the aforementioned, good-quality, long-term economy-growing kind.

This is further supported by rising bad debts with non-performing loans up from 4.55 percent at the end of 2023 to 6.9 percent by July. On a side note, this last piece of data was announced right around the same time that amendments to Circular 39 were issued that relaxed some lending requirements, with loan applications for less than VND 100 million or about US$4,000 no longer requiring a detailed spending plan, for example, presumably to further stimulate lending.

This looks to have worked too with credit growth jumping from 3.43 percent in May to 7.31 percent at the end of August. This also gels with increases in corporate bond issuances from Vietnam’s banks over the same period in their quest to find new capital sources, which fits with Dao’s assertion that the bulk of deposits in Vietnamese banks have already been redeployed.

That said, as a means of raising capital in order to make the loans necessary to meet the 14 percent target, using bonds does come with some challenges. Namely, new rules around bond transactions now limit bond sales to ‘professional investors’ which on a practical level leaves mostly just securities firms and other banks.

That’s not to mention that all of that extra capital can have significant knock-on effects. In particular, it can create inflationary pressure which, in a weird twist, is exactly what credit growth limits were introduced to tackle back in 2010.

This, however, is not the only twist in that in their original role as limits, they encouraged caution by the banks and created competition among borrowers–the better the borrower’s case and the safer the loan, the more likely it would be approved. This has now been flipped around with banks competing for borrowers, which could result in lower interest rates and better terms for borrowers, although it could just as easily encourage banks to take greater risks–the latter thesis supported by the aforementioned jump in non-performing loans.

All of that is to say, that it’s not clear at which point or why these growth limits were transformed into growth targets nor how it was decided that 14 percent was the number that should be reached.

What is clear, however, is that a complex and convoluted credit system has emerged from this policy shift that by design is unsustainable–with credit growth targets set well beyond GDP growth, it won’t be long before there is nothing left to lend.

That said, Vietnam’s economy is very dynamic and tends to play by its own rules. With this in mind, to keep up to date with what those rules are, make sure to subscribe to the-shiv.

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