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Banking & Finance

1H credit growth at 6-year high

Released at: 16:01, 03/07/2017

1H credit growth at 6-year high

Illustrative image (Source: cafef.vn)

Outstanding credit up 7.54% in first half against end-2016.

by Duy Anh

Total outstanding credit in Vietnam’s banking system grew 7.54 per cent in the first half of this year compared to the end of 2016, hitting a six-year high, the General Statistics Office (GSO) revealed in a report released last week.

“This indicates that enterprises’ capital absorption capacity and banks’ earnings from interest have improved significantly,” the government-run office noted.

Lending far outpaced money supply, increasing 5.69 per cent in the six-month period. Deposits at banks, meanwhile, rose 5.89 per cent from end-2016 compared to 8.23 per cent in the same period of 2016.

According to the GSO, annual interest rates commonly range between 6 per cent and 9 per cent for short-term loans and 9 per cent to 11 per cent for long-term loans, which are higher than those in many regional countries.

Together with a recovery in agricultural production and the service sector, faster credit growth helped Vietnam’s GDP growth accelerate to 6.17 per cent in the second quarter of this year from 5.15 per cent in the first quarter.

Strong credit growth, however, also means a rapid accumulation of debt. The debt to GDP ratio is now about 122 per cent, up from 95 per cent in 2012 and will likely continue to rise further. In addition, though the central bank has kept its monetary policy steady, it expects money supply (M2) to rise by 16-18 per cent this year due to such credit expansion.

Rapid credit expansion is typically accompanied by rising bad debt. This challenged Vietnam during the 2008-2012 period, and while the reported non-performing loan (NPL) ratio appears low at present, at 2.6 per cent, it does not include NPLs sold to the Vietnam Asset Management Company (VAMC) and “special mention” loans.

According to the State Bank of Vietnam (SBV), if bad debts managed by the VAMC were to be included, bad debts in the overall system were likely around 8.9 per cent of the total as at end-2016.

Though improved economic performance could lower NPLs, the rapid and sustained increase in credit growth poses risks to financial stability in the medium-term. The Development Bank of Singapore (DBS) Group Research, in its June 27 report, noted that policymakers may be better off focusing on productivity gains instead of credit expansion to achieve sustainable growth.

Concerning the exchange rate, the Vietnam dong has depreciated about 2 per cent against the US dollar since the second half of 2016, partly due to deteriorating external balances. While the depreciation was marginal, pressure will remain in the coming months given the backdrop of US monetary policy normalization and the drag from external balances, the DBS report noted.

A weaker currency on top of strong domestic demand fueled by credit expansion also means that the economy will be prone to any inflationary shock. Although inflation remains benign for now, the high NPLs within the financial system could impede the central bank’s ability to mitigate any potential inflationary risk via rate hikes.

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