VietNamNet Bridge – Although Moody’s upgraded Vietnam’s credit rating last month, ANZ Vietnam Bank said in its latest report that the nation still needs to do much more to unlock its full potential given challenges ahead.

Moody’s raised Vietnam’s credit rating to B1 from B2 on July 29. This is the first upgrade after the country’s downgrade in 2010.

ANZ said in the report that Moody’s decision to raise its credit rating of Vietnam is an affirmation that Vietnam’s recovery is stable though it is still slow. Still within the highly speculative rating range, Vietnam is now four notches away from the highly coveted investment grade status.

Although Vietnam’s macroeconomic progress is increasingly being recognized, the fact remains that much more needs to be done, ANZ said.

Filings for bankruptcy are still high despite the emerging stability in economic growth. By the end of July, over 37,600 businesses had either filed for bankruptcy or suspended operations, increasing 9.8% year-on-year.

Meanwhile, credit growth remained low at 3.6% as of July 2, far from the 12-14% credit growth target set by the central bank. The risk of missing this year’s target is rising in the absence of strong incentives from the regulators.

The State Bank of Vietnam (SBV) has recently urged commercial banks to expand its appraisal capability to support non-collateral lending. However, the delayed resolution of the non-performing loans (NPLs) in the banking sector continues to weigh on banks’ willingness to extend financing to cash-strapped enterprises.

By the end of June, the bad debt ratio stood at 4.84%, or VND240 trillion according to SBV’s estimate, up from 3.61% at the end of 2013. If the central bank’s circulars 02 and 09 on debt classification are implemented as expected within the next couple of months, the NPLs could rise significantly. As a result, increased risk provisioning could further dampen credit growth.

Meanwhile, Vietnam Asset Management Company (VAMC) continues to face headwinds.

The central bank expected VND70-100 trillion worth of bad debt would be bought in 2014. VAMC intends to dispose of the assets used as collateral for such debt by selling them to foreign investors. Meanwhile, the few foreign entities that have indicated their interest are willing to buy the debt at 20-40% of its value.

On the other hand, banks are also reluctant to sell bad debt to VAMC to settle their NPLs. Instead, banks face the alternative of selling collateral to clear bad debt.

However, regulations prevent banks from holding fixed assets that would exceed 50% of the required VND3 trillion chartered capital. Some banks are also considering the exchange of bad debt for equity ownership in the companies owned by counterparties.

ANZ said the resolution of the high nonperforming loans in the banking system is key to unlocking Vietnam’s full economic potential.

The bank also noted that weak domestic demand is putting a firm handle on inflation dynamics. July inflation marginally declined to 4.94% year-on-year as sequential price gains remained soft at 0.23% month-on-month.

In yet another bid to spur domestic confidence, the National Wage Council has recommended a minimum wage adjustment to the Government for 2015.

The plan proposes the minimum wage to rise by VND300,000-400,000 to VND2.42-3.1 million per month, depending on locations. Higher minimum wages may boost consumer confidence and spending, the bank said.

The ANZ-Roy Morgan Consumer Confidence Index for Vietnam posted another strong increase (3.1 points) to 134.1 in July, taking it above the average of 131 since early this year. Easing political tensions appear to have contributed to the rise in confidence over the past month.

The country’s trade surplus stood at US$1.3 billion as of July compared a deficit of US$300 million over the same period last year.

“If public spending on infrastructure fails to boost imports, then we are increasingly of the view that the trade balance will likely post its third annual surplus in 2014,” the bank said.

SGT/VNN