INVESTMENT BANKING | Staff Reporter, Vietnam

Massive bank bad debts endanger Vietnamese economy

The stimulus that led to Vietnam’s huge economic growth the past decade has raised a huge problem of its own.

With huge numbers of borrowers defaulting on their loans, the government said that the total bad debt at Vietnamese banks now stands at 10%, up from 6% in 2011. Bad debts were less than 3% in 2008. One economist described the problem as serious.

The government said the total bad debt in the banking system has hit US$13.3 billion or 11% of Gross Domestic Product. The bad debt problem has contributed to the abrupt slowing down of Vietnam’s economy.

The problem contributed to GDP growth sliding to 4% in this year's first quarter from an average of 7.7% from 2003 to 2008. Lax credit policies helped push inflation above 20% in 2011, one of the highest in Asia.

The government said dealing with bad debts is the main task among its plans to reform the country's banking system.

The bad debt problem is also affecting Vietnam’s state-owned businesses. The government believes its state-owned enterprises will be unable to repay as much as 20% to 30% of the US$19.8 billion they owe banks.

Vietnam relies heavily on inefficient state-owned firms to boost economic growth. These firms control some 40% of the country's economic output.

Central bank Gov. Nguyen Van Binh said the government is planning to create a national asset management company with a capital of US$4.8 billion to cope with the worsening debt problem.

Vietnam's government is under increasing pressure to urgently cut the country's ballooning bad debts. Some economists, however, believe Vietnam is taking the steps to handle its bad debt problem.

The government has cut interest rates several times, which could help some borrowers refinance debts. It has also tightened credit significantly. This move helped lower inflation to 8%.

Loan growth dropped to 10.9% in 2011, significantly lower than the high credit growth that averaged 35% from 2006 to 2010.

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