What is going on with the credit market in Vietnam?

Vietnam is growing. Growth generally requires credit. In developed markets, bonds are a popular way for big companies, but in emerging markets, bonds are rarer. Syndicated loans, with lots of banks joining together to lend to a company, are more often used.

SOURCE: STATE BANK OF VIETNAM, VIETECON.COM

These loans are growing massively in Vietnam, according to Bloomberg. They have increased to $2 billion, up 119% yoy. These loans are dollar loans, so interest and principle payments have to be dollars too. This is in contrast to domestic credit growth, which is up just 5% in the first five months. At the beginning of the year it was even slower - growth in the first two months of the year was just 1%. This compares to the government’s target of 14% growth in bank lending for the full year. That’s going to be hard. I don’t know why domestic lending has been so slow, but we can see that companies are going to external sources instead.

To give you a sense of the size of loans in the country, outstanding domestic credit in the Vietnamese economy is $334 billion. That’s a lot, but we really should compare the net change, which is just $9.9 billion. This means that the growth in syndicated loans is actually sizeable - something like 11% of domestic credit growth.

There are a few risks to these foreign loans. On April 8, I highlighted that external debt is actually pretty high, and much of it is private. Because of this debt, the government needs to maintain large and growing foreign reserves and a fixed foreign exchange rate. If the currency falls, it will make it harder for many of these companies to actually pay their debts. One mitigating factor is that a fair amount of the debt is for foreign investment, and if the investment is for export manufacturing, then there is less of a currency mismatch.

The other thing that disturbed me was the very high interest rates. From the original article:

Vietnamese deals are providing some of the fattest margins in the region. Consumer finance company VPBank Finance paid 275 basis points over Libor on its 364-day $215 million facility closed in March. The average margin for loans of a similar tenor from ASEAN borrowers was 105 basis points in 2018, Bloomberg data show.

That will be expensive over time. It is unclear if this VPBank is really representative, but if so, then it does not bode well for other borrowers. It’s surprising given how low interest rates are all over the world.

Risks to economic growth if credit growth doesn’t pick up

I am surprised that domestic credit growth has been so slow. It really is going to be hard for the government to reach its growth targets, unless domestic credit grows. Although one way to meet the target is through significant foreign investment (which is probably partially driving the high syndicated loan growth). More foreign investment can be good, but I am a bit wary of just export-led growth, since so much seems to be based on the trade war and low wages. Both of which can go away fairly quickly.

Credit growth is something that I will be watching closely. It’s strange to me that it has been so sluggish. I will have to look around for some answers.