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Economists call Fitch debt downgrade “a warning”   2010-08-03 - Nguoi lao dong

Two Vietnamese economists say they’re not surprised that Fitch Ratings has downgraded its assessment of Vietnam’s sovereign debt.


Fitch Ratings, one of three firms that rate sovereign debt, downgraded its assessment of Vietnam’s creditworthiness on July 29.  It reduced its rating of Vietnam’s ability to manage long-term loans to B+, four levels below ‘investment grade.’ Meanwhile, short term loan creditworthiness was rated B.


Fitch explained that it lowered Vietnam’s long term credit rating of Vietnam because the demand for capital is increasing, while the supply becomes weaker. Fitch also said that the nation’s economic policies remain ‘inconsistent,’ and pointed to continuing problems in the banking system.


Regarding foreign currency reserves, Fitch cited a report last month by the International Monetary Fund (IMF) that forward coverage of imports has fallen from ten to seven weeks.  It predicted that the deficit in Vietnam’s current account (i.e., not taking into account foreign investment, loans and remittances) would be 9.9 percent in 2010, a small improvement on the 10.4 percent deficit recorded in 2009.


Only a few economists have commented on the Fitch downgrade.  One, former State Bank (SBV) Governor Cao Sy Kiem, who now sits on the National Advisory Council for Monetary Policies, told Nguoi Lao Dong that the downgrading is a rough indicator of the tendency and quality of Vietnamese credit organizations. In many cases, commercial banks do not keep strict control over loans.  Many banks do not respect the current regulations on providing credit. That implies a low capability of taking back capital and a higher rate of non-performing loans.


Kiem noted the big debt -- 80 trillion dong, or $4.2 billion -- that the Vietnam Shipbuilding Industry Group (Vinashin) owes to the Bank for Investment and Development of Vietnam (BIDV), Vietinbank and Agribank, all state-owned banks.  In addition, Kiem judged, many of the loans provided under anti-recession interest rate subsidy programme were granted for improper objectives.  These loans, worth seven trillion dong according to SBV, may also become bad debts.  Other weaknesses in the banking system have been highlighted in the National Assembly’s supervision reports.


Economist Nguyen Minh Phong says the Fitch downgrade is not a surprise for three reasons.


First, says Dr. Phong, many enterprises have fallen behind in debt payments. Second, growth in exports has weakened.  Lower than expected earnings of foreign currencies have increased demand for credit.  Third, many loans are not properly collateralized, so banks will have trouble recovering their assets if borrowers default.


Low liquidity is a worry


The big difficulty the national economy may face in the time to come, according to Dr Nguyen Minh Phong, is reduced liquidity. The capital supply is weak because firms are slow to repay capital loans and because at current interest rates, banks have found it difficult to attract a high volume of deposits.  Additionally, there are difficulties in the foreign currency market for Government bond issues.  Moreover, Vietnam is also among the countries which suffer from a budget deficit.


Analysts say that by trying to force interest rates down, the State Bank is following the right track.  However, its ability to implement the policy on interest rate reduction is limited.  Because over the last year, deposits have been lower than expected, while the demand for loans remains high, no commercial bank wants to lead in reducing interest rates.  Though they have promised to bring down rates, implementation has been negligible.


Vietnam continues to suffer from a high trade deficit and stagnant foreign direct investment. Analysts worry that if these conditions persist, the dong may weaken further against the dollar toward the end of the year, when businesses must collect dollars to pay bank debts.


When asked to comment specifically about the Fitch downgrade, Dr. Phong said it should be seen as a timely warning for Vietnam to consider, so that it can avoid big consequences.

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