Vietnam grows at slowest pace since '99 on credit slump

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Vietnam's economy expanded at the slowest pace in 13 years in 2012 as a slump in bank lending damped domestic demand, adding pressure on the government to revamp the financial system and attract more foreign investment.

Gross domestic product rose 5.03 percent this year, down from 5.89 percent in 2011 and the least since 4.77 percent in 1999, the General Statistics Office said in Hanoi yesterday. GDP increased 5.44 percent in the fourth quarter from a year earlier, up from a revised 5.05 percent in July-to-September.

Foreign investment pledges fell 14 percent this year and Vietnam's credit rating was cut by Moody's Investors Service as mounting bad debt and weakened state-owned enterprises limited room for policy makers to boost growth. The government has said it may form an asset manager to clean up lenders, and the World Bank and International Monetary Fund are preparing their first review of the banking system as a blueprint for the sector.

"It was only explosive credit growth that allowed for the level of economic growth that Vietnam had previously been achieving," said Edwin Gutierrez, a portfolio manager at Aberdeen Asset Management in London, which manages about $11 billion in emerging-market debt, including Vietnamese bonds.

Prime Minister Nguyen Tan Dung said on Dec. 10 growth may reach 5.2 percent this year, down from earlier targets of as much as 6.5 percent. The country averaged expansion of 6.5 percent in the five years to 2011 and 7.8 percent in the five years before that. The pace has slowed due to falling productivity linked to inefficiencies in state-owned companies, banks and public investments, the World Bank said last week.

Bad debt

Moody's cut Vietnam's credit rating in September, citing "more pronounced weaknesses in the banking system" and costs related to recapitalizing banks. Concerns about the sector are increasing, the World Bank said this month, even as the government said it averted risks to the safety of the lenders.

Banks have reported bad debt to be about 4.5 percent of outstanding loans, while the central bank's estimate is about 8.75 percent, the IMF has said. Credit growth through October was 3.48 percent, compared with a full-year target of 8 percent to 10 percent, the Vietnam Investment Review reported Nov. 26. That is still lower than figures of 14 percent last year and 32 percent in 2010, according to the IMF.

The real-estate market "stays stagnant" and shows no sign of recovery, while the number of insolvent businesses continues to rise, the government said on Dec. 10. About 58,000 companies, or about 71 percent, in Hanoi posted losses in 2012, Cong An Nhan Dan newspaper said, citing the Hanoi People's committee.

Structural issues

Vietnam's central bank this month cut benchmark interest rates for a sixth time even as the World Bank warned against easing too soon, to help companies "cope with difficulties in production and business."

"We are not going to go back to 6 percent, 7 percent growth, until we fix some of the structural issues, banking being perhaps the most important of them," Deepak Mishra, the Hanoi-based lead economist for the World Bank, said on Dec. 10. "The point is whether the banks are ready to cut, even if policy rates are coming down."

Industry and construction, which made up 40.7 percent of the economy, grew 4.52 percent in 2012, while the sub-category consisting of construction alone expanded 2.09 percent, the statistics office said. Services, which accounted for 37.7 percent of GDP, grew 6.42 percent this year, while agriculture, forestry and fisheries, which made up 21.7 percent of the economy, expanded 2.72 percent, the data showed.

Stronger exports

Pledged foreign direct investment fell to $12.7 billion this year from $14.7 billion in 2011, while disbursed FDI slipped 4.9 percent, according to the ministry of planning and investment. Still, stronger exports helped prevent an even sharper slowdown, as the country posted its first annual trade surplus in two decades. Overseas shipments of goods including electronics increased from companies such as Intel Corp., Samsung Electronics Co. and Jabil Circuit Inc.

The trade surplus for the year was $284 million, based on preliminary figures from the statistics office. The last time Vietnam recorded a positive balance was 1992, data on its website show. Exports gained 18.3 percent to $114.6 billion in 2012, while imports advanced 7.1 percent to $114.3 billion.

"Exports made up for what was probably sluggish domestic demand," said Jonathan Pincus, a Ho Chi Minh City-based economist with the Harvard Kennedy School's Vietnam program. "It's not a bad outcome considering all the deleveraging that's going on, though in the long run this is not the type of growth that Vietnam would hope to attain."

The surplus helped the dong advance almost 1 percent versus the dollar this year. The benchmark VN Index of stocks has risen nearly 14 percent, poised for its first annual gain since 2009.

Stocks advance

Asian stocks advanced, with the MSCI Asia Pacific Index gaining 0.4 percent as of 11:44 a.m. in Tokyo, snapping three days of losses. Most bourses in the region are closed today for Christmas, with Japan and China the only major markets open.

China will stick to home purchase restrictions and "strictly" curb speculative housing demand in 2013, the official Xinhua News Agency reported, citing the Ministry of Housing and Urban-Rural Development. The economy will continue to recover in December, and may grow 7.7 percent this year and 7.8 percent in 2013, Shenyin & Wanguo Securities said in a report today.

Vietnam may expand about 5.5 percent next year, the government said on Dec. 10. The IMF and World Bank expect to conclude next year their first analysis of Vietnam's financial system, which may bolster government efforts to strengthen the banking sector and boost investor confidence.

Growth this year "is good enough given that we made curbing inflation our top priority for the year," Do Thuc, general director of the General Statistics Office, said in Hanoi.

Inflation slowed for the first time in four months in December, with consumer prices rising 6.81 percent from a year earlier after climbing 7.08 percent in November, a report showed.

"The government is hoping that if inflation remains under control, they'll be able to ease monetary policy and growth will accelerate back to the 6 percent range," said Pincus. "But it's entirely possible that if the banks don't get fixed, that when they loosen monetary policy we'll come right back to a period of inflation and then they'll have to tighten up again."

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