VietNamNet Bridge – Vietnam’s economy will continue growing in the short term but in the medium term, its growth path will be bumpy, according to a special report.

The “Vietnam: Maybe underrated but structurally shaky” report was done by Natixis, a corporate, investment, insurance and financial services arm of Groupe BPCE, the second largest banking group in France.

According to the report, the Vietnamese economy is being built on a shaky foundation. Despite reforms, the banking sector still prefers State-owned enterprises (SOEs) to small and medium firms.

The report authors said the slow pace of financial market reforms will dampen long-term growth prospects. The trajectory of gross domestic product (GDP) will continue heading north in the next couple of years thanks to rapid inflows of foreign direct investment (FDI), but the economy has weak fundamentals.

The efficiency of credit is low. Vietnam is also facing weak domestic demand and a deterioration of domestic firms’ competitiveness. These two problems are indicative of slow banking sector reforms.

Vietnam is seeing its debt steadily inching up while its avenue to generate more income is getting narrow. The banking system has remained fragile though the Government and the State Bank of Vietnam (SBV) have pulled it out of the 2011 crisis. Many of the problems that plagued banks in the crisis are here to stay at the moment.

The SBV classifies banks as “good” or “bad” without resolving the issue of what has led the balance sheets of banks to deteriorate in the first place.

The Government has taken some positive steps such as opening up the banking system, scrapping the foreign ownership limit at local firms in most sectors, boosting equitization of SOEs and selling bad debt at banks to the Vietnam Asset Management Company (VAMC).

However, funds have remained inefficiently allocated. The underlying issue is the banking sector channels most of its loans into SOEs, thus causing problems for the economy as a whole.

The ultimate goal of the Government’s establishment of  VAMC is to freeze bad debt to help clean up the balance sheets of banks. VAMC buys bad debt from banks by issuing special bonds, thus allowing those banks to temporarily freeze non-performing loans. Their balance sheets are still problematic, however.

The Government has taken some measures to stimulate demand in the real estate sector by opening it up to foreign investors and facilitating budget housing development, among others.

However, how credit is allocated and who has access to credit have yet to be tackled. In the medium term, Vietnam will see a rough road ahead. Things in the past two years have not been positive.

The falling consumer price index (CPI) indicates dropping goods prices and weakened demand for capital. While domestic private firms are struggling with a heavy debt burden, they have limited access to funding sources to stay competitive.

The role of domestic private and foreign-invested enterprises has changed. Vietnamese export-oriented firms are losing market share while foreign-invested exporting firms are capitalizing on the country’s low labor cost to turn out competitive items and create a trade surplus for the economy.

Data shows domestic exports have declined further this year.

Private domestic firms, be they most efficient in the market, are being weakened due to limited access to credit.

The report authors said Vietnam is underrated unless it adopts a growth model that never favors inefficient firms.

SGT