Evergrande’s debt bomb a lesson for Vietnam
Experts believe that the huge debt of $300 billion incurred by Chinese Evergrande will have an indirect impact on Vietnam.
The news that Chinese regulators have threatened to let the “debt bomb” Evergrande collapse has worried Vietnamese real estate developers.
At the talk show on ‘Looking from Evergrande case to the future of Vietnam’s real estate market’, Nguyen Tri Hieu, a respected finance and banking expert, said the collapse of Evergrande, if it happens, won’t have a direct impact on Vietnam, but just an indirect influence.
If the ‘debt bomb’ Evergrande bursts, the real estate developer won’t have money to pay its contractors. It will be bad news if the contractors are also contractors of projects in Vietnam. If so, they would not have money to provide materials to Vietnam.
Hieu said that the risk of Evergrande going bankrupt should be seen as a lesson for Vietnam’s real estate firms which are rushing to issue corporate bonds to mobilize capital for developments at sky-high interest rates.
Bank deposit interest rates are currently at a low level, 5-5.5 percent per year for 12-month term deposit, while realty bond yield rate is 8-12 percent.
Can Van Luc, chief economist of the Bank for Investment and Development of Vietnam (BIDV), said that risks in corporate bonds are increasing.
Sharing the same view, Dinh The Hien, a finance expert, believes that the Vietnamese real estate market won’t bear an impact from the debt bomb.
According to Hien, there are similarities of the Chinese and Vietnamese real estate markets, and both of them are witnessing hot development. This is a risk if prices escalate to overly high levels.
Meanwhile, real estate firms in both countries develop from loans from banks and corporate bonds. Real estate firms have been rushing to issue bonds in the last two years.
Another similar characteristic is that Vietnamese firms sell housing products for the future while there are no sustainable finance investment funds, or large and long-term capital.
According to Hien, Vietnamese real estate firms issue international bonds in large quantities like Chinese. Regarding mobilization of domestic resources, capital must be put into two accounts – from commercial banks and investors. When banks provide loans, they always require collateral.
According to analysts, in 2016-2021, Vietnam’s credit growth rate was lower than the GDP growth rate, which meant that Vietnam’s production and exports increased sharply, so Vietnam is no longer capital intensive in real estate investment as it was in previous years. So, despite the worries about the debts of Vietnam’s real estate firms, lending to the real estate sector is still under control of the central bank.
Lesson from Evergrande
Experts pointed out that the collapse of Evergrande is a lesson for Vietnam.
Under a new regulation set by the State Bank of Vietnam (SBV), the short-term capital proportion that commercial banks can use for medium- and long-term lending must not be higher than 37 percent, instead of 40 percent as previously applied.
The move will help control lending to the real estate sector. Sources said SBV is considering lowering the proportion to 30 percent from the current 37 percent.
Legally, Vietnam, like China, allows realtors to mobilize capital from people under the mode of selling properties to for the future, and buyers make payment by installments, in accordance with the construction process.
There are millions of people in China investing this way and they hope when the construction is complete, realtors will deliver products on schedule and pay debts. That is why Chinese people are worried about the Evergrande collapse.
The amended law stipulated that realtors must have banks’ guarantee in mobilizing capital from people. If realtors cannot pay debts, the banks will have to pay the debts.
“I wonder how many banks have acted as guarantees for real estate firms and how many guarantees have been disputed?” Hieu said.
He warned that if real estate firms are insolvent, this will have big impact on the economy, debtors and the clients who pour money into projects. State management agencies should learn a lesson from the case.
He proposed that the Ministry of Finance (MOF) and the State Securities Commission (SSC) strengthen supervision and inspection over all bond issuance campaigns to prevent businesses with weak financial capability from issuing bonds.
After continuously issuing warnings about investment in corporate bonds, the Ministry of Finance has decided to take strong action against companies issuing "problematic" bonds to prevent risky behavior to the market.
The fledgling property-backed bond market is tempting investors for its inviting high yields but experts still warn investors of potential risks of the products.