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HSBC: CREDIT MISALLOCATION DAMPENS GDP GROWTH
While the Government is seeking to boost credit growth, HSBC Bank has voiced concerns over likely adverse impacts on economic growth due to the misallocation of credit among economic sectors.
Both the International Monetary Fund (IMF) and the World Bank (WB) have noted in recent studies that State-owned enterprises (SOEs) are absorbing a disproportionate amount of credit in the economy at the expense of small and medium enterprises.
In Hanoi, for instance, a majority of loans still go to the State corporate sector. An empirical study from the IMF also shows that SOEs borrow at lower interest rates than private firms, enabling weak SOEs to access bank funding to avoid shrinking their balance sheets.
Meanwhile, a WB survey of Vietnamese businesses showed that only 29% of small enterprises, which have one to 20 employees each, have an active credit line, with SOEs and large domestic companies taking the lion’s share of credit in the market.
The data thus suggests that high credit growth alone is not enough to lift Vietnam’s economic growth. The misallocation of credit and crowding out of private investments may weigh on gross domestic product (GDP) growth and increase the risk of future non-performing loans (NPLs), if left unchecked, HSBC said in a macro economic report released on September 11.
In addition, the decline of the NPL ratio in recent years somewhat belies the true level of problematic loans in the economy. Part of the reduction in NPLs is due to transfers to the Vietnam Asset Management Company (VAMC), where the underlying credit risks of such loans have not been fully eliminated.
Ongoing SOE equalization and reforms also remain crucial to leveling the playing field for credit access, as it could help divert credit away from supporting weak SOEs and to helping boost private sector investments.
This is an area where there has been growing momentum as non-state investments have recently caught up to State investments in percentage of total investments in the economy, HSBC said in the report.
HSBC predicted this year’s credit growth rate at 19.3%, assuming credit growth for the remainder of the year remains exactly in line with last year’s pace.
Top Government officials are calling for an increase in the credit growth target from 18% to 21% in hopes of reaching the Government’s 6.7% GDP target for all of 2017. The economy grew just 5.7% in the first half, and in light of already high public debt, Vietnamese officials are signaling that they aim to achieve higher growth via the credit expansion.
For now, there has been no official announcement that the credit growth target has been increased.
It is worth noting, however, that rapid credit growth may create new risks for the banking sector, especially if new credit is placed in less productive industries. For instance, real estate related sectors still appear to be contributing the most to total credit growth, despite their declining contribution in recent months, HSBC said.
The country’s real estate sector, which sank after a bubble period in 2006-2008, was one of the primary reasons for a rise in NPLs and the banking sector crisis in 2011.
Source: The Saigon Times
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