Vietnamese firms face Q1 debt crunch amid sluggish recovery

[HO CHI MINH CITY] Despite lower interest rates and ample liquidity, Vietnamese firms saw limited access to debt financing through bank loans and corporate bonds in the first quarter of this year, hindered by a sluggish economic recovery and tighter lending rules.

Bank credit and corporate bond issuance are the key funding sources for medium and long-term projects in Vietnam.

The country’s bank credit grew a meagre 0.26 per cent in the year to Mar 25 – significantly lower than the 1.99 per cent observed over the same period a year ago, according to the country’s statistics agency based on data provided by the State Bank of Vietnam (SBV), the central bank.

SBV reportedly attributed the moribund credit growth to seasonal factors and the weak capital absorption capacity of firms and consumers amid tough economic conditions. The regulator set a credit growth target of 15 per cent for the local banking system this year.

Vietnam’s Prime Minister Pham Minh Chinh weighed in on the matter last month at a conference, stressing the point that firms were struggling with limited access to bank lending and relatively high borrowing costs.

As many nations tightened monetary policies last year to tackle rising inflation, Vietnam bucked the trend with accommodative measures. As a result, average lending rates at Vietnamese banks declined 2.5 per cent by end-2023 and the downward trajectory has persisted.

However, since early 2023, the decline in lending rates has not been commensurate with the reductions in deposit rates, and the servicing cost for existing loans remains high.

The going appears tough for businesses. Official data for the first three months of 2024 indicates that business closures outnumbered new firms in the country.

Nearly 60,000 firms were created or resumed business during the first three-month period – up 5 per cent from a year ago. On the other hand, closures saw a sharp uptick of 23 per cent to nearly 74,000 from the same period a year ago.

SBV deputy governor Dao Minh Tu noted that, due to high levels of non-performing loans, some banks have become cautious about extending credit, enforcing stricter requirements for collateral assets.

According to SBV, the ratio of bad debt to total outstanding loans at commercial lenders jumped from 2 per cent at the start of 2023 to 4.6 per cent by year’s end.

This year holds some hope. Vietnam Investors Service – a local credit rating agency launched by Moody’s – expects bad loans at Vietnamese banks to slow down this year on the back of a stronger domestic economy and low-interest-rate environment. 

It forecasts the average bad debt ratio at 27 listed banks in Vietnam to decrease to as low as 1.7 per cent in 2024 from the five-year high of 1.9 per cent last year.

In the corporate bond market, new issuance in the first three months sank 36 per cent from a year ago to 18 trillion dong (S$962.9 million), significantly lower than the quarterly average of 85 trillion dong last year.

It is worth noting that the same period last year already saw new issuance plummet by 63 per cent year on year. This was due to the introduction of more stringent regulations governing the bond market and weak investor confidence following the bond fraud scandal of local developer Van Thinh Phat.

Industry insiders have generally anticipated this bleak outcome as the relief of some tighter regulations for new private corporate bond issuance came to an end at the beginning of this year. 

Those stricter rules – effective from January 2024 – included the requirements of professional bond investors, timely and detailed information disclosures, and the use of credit ratings, are a means to strengthen bond market discipline for sustainable growth. 

“We expect that with the efforts of both regulators and market participants, especially bond issuers, the corporate bond market can witness a clear and sustainable recovery from the end of 2024,” local securities firm VNDIRECT wrote in a note to investors.

Vietnam also launched the official privately placed corporate bond trading system last July, which is aimed at boosting secondary market trading activities and overall liquidity. In Q1 this year, a report from the country’s finance ministry showed that corporate bond market transaction volume rose 50 per cent year on year to 9.8 trillion dong.

By end-2023, total outstanding corporate bonds issued via private placements amounted to some 11 per cent of Vietnam’s gross domestic product. The government aims to increase it to 20 per cent of GDP by 2025 and 30 per cent by 2030.

Vietnam Investors Service forecasts that bond defaults in 2024 could total around 40 trillion dong, significantly lower than the 147 trillion dong recorded in 2023.

Despite the ongoing slump primarily affecting issuers in the residential real estate and construction sectors, the agency anticipates that banks and property-related firms will lead the demand for new bond issuances this year.

The optimism stems from the expected resumption of legal approvals, development and sales of property projects following the roll-out of revised property laws. These changes are expected to aid developers in accessing new financing and boosting cash flow.

The new regulations have brought clarity and transparency to previous opaque practices of the sector, such as land valuation, revocation and compensation. 

Determining land prices for land-use levies was the biggest hurdle causing delays in about half of real estate projects nationwide, according to a survey last year by the country’s construction ministry. 

“However, the adoption of the amendments in property-related laws is not a cure-all and fundamentally, those new laws were not adopted simply to address newly emerged challenges faced by businesses,” said Nguyen Van Hai, partner at Vietnam-based law firm YKVN.

“The remaining challenges faced by property firms must be, in part, tackled on an individual basis, requiring considerable efforts and capabilities of both firms and authorities,” he added.

Companies in the real estate sector were among the biggest borrowers in the economy, taking up about 21 per cent of banks’ total outstanding loans and 23 per cent of new bond issuance value in 2023. 

Vietnam Bond Market Association estimated that the total value of bonds reaching maturity is expected to reach its highest point this year at 279.2 trillion dong, of which about 41 per cent are in the real estate sector.