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Moody's: Focus on meeting GDP target risks macroeconomic stability

Released at: 14:33, 25/08/2017

Moody's: Focus on meeting GDP target risks macroeconomic stability

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Moody's warns of risk from overly focusing on reaching GDP target.

by Quang Huy

With Prime Minister Nguyen Xuan Phuc recently calling for the country’s credit growth target to increase to 21 per cent this year as a measure to meet the GDP growth target of 6.7 per cent, Moody’s has warned that a goal likely to undermine macroeconomic stability, particularly amid already rapid credit growth, “is credit negative for the sovereign and its banks.”

The Prime Minister’s reference to 21 per cent credit growth was one of several instructions made at a periodic government conference in mid-August, during which he urged ministries and agencies to make “drastic efforts” to meet growth targets.

The central bank has a credit growth target of 18 per cent for this year. Although there has been no announcement that its target has been raised, it is not improbable that future monetary policy measures will be implemented to achieve the stated 21 per cent target.

Vietnam’s economy has been growing at a robust pace and expanded 6.2 per cent year-on-year in 2016 from 6.8 per cent in 2015. During the first half of 2017, GDP was up 5.7 per cent year-on-year.

In early July, the State Bank of Vietnam (SBV) cut policy rates by 25 basis points for the first time in three years to support GDP growth against a backdrop of low inflation, which fell to 2.5 per cent at the end of July, below the SBV’s target of 4 per cent.

To a large extent, domestic demand has already been supported by a sustained rise in credit growth, which accelerated to 18.3 per cent in 2016 from 14.2 per cent in 2014, outpacing nominal GDP growth.

At the end of April, credit growth was already up 20 per cent year-on-year, suggesting that meeting the 21 per cent target should be easily achieved. However, at these rates, and given that credit already amounts to 122 per cent of GDP, “significantly higher than the 46.2 per cent median for B-rated sovereigns, there are risks that credit is misallocated and does not generate sustainable growth,” Moody’s said.

Policymakers’ focus on achieving GDP targets risks compromising banks’ asset quality and hence, broader macroeconomic stability. Over the past two years, Vietnam has benefited from low and stable inflation, sizeable current account surpluses (although these have recently turned negative), and a steady rise in foreign reserves.

There has already been a shift towards lending to households and away from State-owned enterprises (SOEs), reducing the government’s contingent liabilities. However, SBV’s figures suggest that at least 10 per cent of outstanding credit was allocated to the construction sector as at April 30.

Because of reporting deficiencies, Moody’s estimates that this share is likely higher when taking into account the broader real estate sector, which is particularly prone to boom-bust cycles. This lending has contributed to a relatively high problem loan ratio of 6.8 per cent of total loans as at year-end 2016 for the 15 banks Moody’s rates in Vietnam.

An acceleration in credit growth will also pose systemic risks to the banking sector by eroding banks’ capital buffers, Moody’s noted. “Capital adequacy in the banking system is poor because rapid credit growth is already outpacing internal capital generation and sources of external capital are limited.”

While the government intends to rely on banks’ earnings to close their capital shortfalls, given its lack of fiscal resources to inject fresh capital, Moody’s continue to expect government support via liquidity assistance and regulatory forbearance.

“An even more rapid rise in credit growth would raise the probability of a return to Vietnam’s historic susceptibility to damaging boom-bust cycles,” the New York-headquartered financial services company said.

In April this year, Moody’s affirmed the government of Vietnam’s B1 issuer and senior unsecured debt ratings and revised the outlook to positive from stable.

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