Barclays | The Emerging Markets Quarterly

EMERGING ASIA: VIETNAM

Headline risks
Prakriti Sofat +65 6308 3201 prakriti.sofat@barclays.com Concerns about Vietnams banking sector heightened following a report that USD 12bn is needed for recapitalisation We believe policymakers are committed to clean up the banking system clarity on funding the capital needs will be key for investor sentiment

Banking sector concerns have come to the fore recently. We believe the government remains committed to cleaning up the banking sector; however, in the near term, headline risk is high. We expect the balance of payments to remain in surplus allowing FX reserves to rise. Concerns about Vietnams banking sector have come to the fore following the recent report from the Macro-economic Group, a group of independent specialists under the National Assemblys economic committee. The report estimated that the financial system needs a USD12bn capital injection. The report is a recommendation from the independent specialists and is not the view of the National Assemblys economic committee. We have been pointing to the banking sector as a key vulnerability of the sovereign and its credit ratings (see The Emerging Markets Quarterly, December 2011). Although the market regarded the news as a negative, we believe it is important to highlight that, by providing an initial estimate of potential recapitalisation needs, policymakers are showing a commitment to clean up the banking system. We believe clarity on funding these capital needs will be key for investor sentiment. We also think the news should be evaluated in the context of the countrys improving FX reserves and restructuring plans for state-owned enterprises (SOEs). In June, SBV Governor Binh told the National Assembly bad debts were 10% based on Vietnam accounting standards, up from 6% at the end of 2011 (WSJ). As per Governor Binh, 84% of the bad debts are secured by assets worth up to 130% of the value of the debts. In order to gauge the potential loan losses for the banking system, we undertake a scenario analysis (Figure 1). As an example, if NPLs were 20% and the recovery value 50%, the loan write-off would likely amount to USD14bn, or 10% of GDP. Vietnamese banks had provisions of VND70trn (USD3bn) at March 2012. Assuming that provisions remain the same, in our scenario above, additional funding needs to cover realised loan losses would be USD11bn. Note, all NPLs will not come due at the same time, but will be spread out over time however, most of loans will likely come due over one to two years. Given slow growth in H1 12 and a still-challenging external environment, we believe NPLs in the banking sector are likely to rise further.

Bad debts were10% or USD 13.5bn as of June We undertake a scenario analysis to gauge possible loan write offs Banks have USD 3bn worth of provisions

Figure 1: Scenarios for loan write-offs

Bad loans SBV (Vietnam accounting standards) Possible scenario (international accounting standards) 10% 20% 10% NPLs 70% recovery Loan recovery scenarios write off (USD bn) write off (% of GDP) further funding needs to cover realised loan losses (USD bn) (% of GDP)
Source: Barclays Research

VND trn 280 560

USD bn 13.5 27

% of GDP 10 20 20% NPLs

50% recovery

30% recovery

70% recovery

50% recovery

30% recovery

4 3

7 5

9 7

8 6

14 10

19 14

Assuming bank provisions remain at March 2012 level of VND70trn or USD3bn 1 1 4 3 6 4 5 4 11 8 16 12

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We believe policymaker bias is to expedite banking sector consolidation by seeking investment from foreign banks

In terms of financing the loan losses, we believe the bias will be to expedite consolidation in the banking sector by seeking investments from foreign banks. Governor Binh said that increasing foreign ownership of commercial banks was a solution proposed in the scheme to restructure the credit institution system (see Viet Nam News, 8 Aug 2012). We also believe the government will likely draw funds from multilateral/bilateral organisations and from countries with close relations with Vietnam. The government will likely raise money onshore and cut back on spending. In July, PM Dung approved the (SOE) restructuring project and groups for 2012-2015. The objective of the project is to make SOEs more rationally structured and centred on core businesses. The SOEs will be classified into three categories, required to stop making investments in non-core business by 2015. According to Finance Ministry data, as quoted by state media, SOEs cannot repay as much as 20-30% of the VND415trn they owe banks (see Banks Bad Debts Weigh on Vietnam, The Wall Street Journal, 14 June 2012). Vietnams balance of payment position continues to improve, in line with our expectations. The January-August trade deficit was only USD583mn, compared with USD6.7bn in the same period last year. On the capital account side, we raise our FDI forecast by USD1bn to USD8.5bn (H1 12: USD5.4bn) and maintain our remittances projection of USD9bn for 2012. However, FX appreciation/stability has meant that resident outflows have been smaller. Overall, we raise our BoP surplus forecast by USD2bn to USD7bn for 2012, allowing FX reserves to end the year at USD23bn. We also expect the BoP to remain in surplus in 2013. The dong has appreciated by 0.9% year-to-date a first since 2007 and before that in 1995 consistent with the turn around in BoP. While we expect the BoP to remain in surplus in 2013, our sense is that the banking sector issues could potentially increase demand for gold/dollars and weigh on the dong. We expect a marginal 2% depreciation through 2013 and maintain our view that any depreciation will be gradual rather than a one-off. The government revised down its 2012 growth forecast to 5.2% from 6% we maintain our forecast at 4.8%. For 2013 we are cutting our expectation by 30bps to 5.5% given weaker regional growth, though more rate cuts and fiscal support will provide some offset (government target: 6%). Inflation was 5% in August 2012, down from a peak of 23% last August. We believe the bottom in inflation is probably behind us given the pick-up in commodity prices and base effects; however, lacklustre domestic demand should keep a tab on core inflation. Overall we expect inflation to average 9% in 2012 and come in slightly higher at 9.4% next year. We believe the pick-up in inflation will weigh on government bonds together with concerns over supply given rising contingent liabilities from the banking sector. Following 500bps of cumulative cuts on moderating inflation and weak growth performance, the policy rate has been on hold at 8% since late July. Given the challenging growth environment, and fairly tight credit conditions onshore (1.8% YTD early September, SBV annual target 8-10%), we believe the policy easing will not derail macro stability, though the risks have increased. In the near term we expect rates to be unchanged, but believe that by mid-2013 the SBV will start reversing the easing. We expect no change in Vietnams credit ratings over the coming three to six months. Key drivers for the ratings will be: 1) progress on bank consolidation/recapitalisation; 2) continued focus on macro stability; 3) restructuring of state-owned enterprises; and 4) increased transparency. The sovereign is currently rated BB- Stable by S&P, B1 Negative by Moodys and B+ Stable by Fitch.

Government initiates plan for SOE restructuring

BoP to remain in surplus in 2013 allowing FX reserves to rise further

VND to remain broadly stable; marginal 2% depreciation in 2013

We maintain our 2012 GDP forecast of 4.8% but are revising down our 2013 forecast by 30bps to 5.5%

Inflation to average 9% in 2012 and 9.4% in 2013

Policy rates to be unchanged; rate hikes to start in mid-2013

Vietnams rating to remain unchanged

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Figure 2: FX reserves have been rising given BoP surplus

FX reserves (USD bn, LHS) Short-term external debt cover Import cover (mths) 9 8 7 6 5 4 3 2 1 0 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: CEIC, Barclays Research

Figure 3: USD/VND has appreciated ytd

14 12 10

30 25 20 15 10 5 0

% year-on-year
2009E 5.3 4.5 3.1 8.7 1.7 -8.9 -13.4 93 -6.1 -6.6 -8.3 7.6 4.6 38.8 16.8 -9.0 -5.5 51.5 6.5 18,500 Last 4.7 6.9 20,905 10.00

8 6 4 2 0 -2 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: CEIC, Barclays Research

Figure 4: Vietnam macroeconomic forecasts

2008 Activity Real GDP (% y/y) Domestic demand contribution (pp) Private consumption (% y/y) Fixed capital investment (% y/y) Net exports contribution (pp) Exports (% y/y)* Imports (% y/y)* GDP (USD bn) External sector Current account (USD bn) C/A (% GDP) Trade balance (USD bn)# Net FDI (USD bn) Other net inflows (USD bn) Gross external debt (USD bn) International reserves (USD bn) Public sector Public sector balance (% GDP) Primary balance (% GDP) Gross public debt (% GDP) Prices CPI (% Dec/Dec) FX, eop 19.9 17,483 1yr ago Real GDP (% y/y) CPI (% y/y, eop) FX (domestic currency/USD, eop) Overnight policy rate (%, eop) 6.1 22.5 20,830 14.00 11.8 19,500 Q3 12F 5.0 5.3 20,900 8.00 18.1 21,034 Q4 12F 5.5 6.3 21,000 8.00 6.3 21,000 Q1 13F 5.0 7.6 21,100 8.00 9.6 21,400 Q2 13F 5.5 10.3 21,200 9.00 -5.0 -3.4 42.9 -7.0 -5.6 53.0 -4.6 -3.2 49.9 -4.8 -3.6 47.4 -4.8 -3.7 46.2 -10.8 -12.0 -12.3 9.6 1.8 30.2 24.2 -3.5 -3.4 -5.1 8.0 4.8 43.8 12.9 0.3 0.2 -1.4 6.5 3.6 49.3 14.3 -0.9 -0.6 -0.5 8.5 2.8 52.8 23.0 -2.0 -1.3 -1.8 8.0 2.8 56.0 27.0 6.2 9.4 9.3 3.8 -3.2 29.5 27.6 90 6.8 12.1 10.0 10.9 -2.2 26.4 18.2 103 5.8 -0.6 4.4 -10.4 6.2 30.9 24.1 122 4.8 7.0 6.5 7.0 -1.3 15.1 14.0 138 5.5 8.3 8.0 8.0 -2.1 18.9 20.0 157 2010E 2011E 2012F 2013F

Note: *Nominal as real data not available. #Balance of payments basis, not customs basis. Source: Barclays Research

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