Viet Nam is restructuring its economy, with particular priority placed on reforming the banking sector. Viet Nam News spoke to two key participants on the sideline of a conference on global financial challenges held this week by the Ministry of Finance, the Asian Development Bank and the Korea Asset Management Corporation.
|John C Tsang
|Kim Eng Tan
John C Tsang, financial secretary, Hong Kong Special Administrative Region:
Hong Kong intends to sign a free trade agreement (FTA) with ASEAN, but China has already signed one. What is the difference between the two agreements?
Hong Kong and China are separate members within the WTO. In Hong Kong, we have total autonomy in terms of our commercial transactions and our economic relations with different countries. What we think is very useful is that we can provide the services platform that is absent in the China-ASEAN FTA, so that that aspect would make this FTA an even a richer one. That is why we have been speaking with different ASEAN capitals to gain their support. I have also had a very useful discussion with the Vietnamese Minister of Finance, and he generally supports that.
If Hong Kong cannot reach an agreement with ASEAN as a whole, does it intend to sign a separate one with Viet Nam?
We have already signed a double taxation agreement with Viet Nam which is a very useful instrument for businesses in both places to have a lot more certainty in terms of tax commitments. We can do more. But I think it's important that we look at the whole region rather than a single nation because nowadays, many products are not just made in one place, one country.
Viet Nam is likely to support, and we are going to work through the process, and hopefully we will be very soon able to join the China-ASEAN FTA. I think it will benefit all concerned.
You said Vietnamese companies could take advantage of Hong Kong's position to access the mainland China market. However, Hong Kong is considered a costly place in which to invest. What is your recommendation on how to tackle this issue?
For most people doing business, cost is not the major factor but profit. So you may have extra costs, but in the end of the day, if you can make money, that's more important.
Different markets have different costs. Doing business in Hong Kong is expensive, but there are alternatives that you can choose. You do not need to have an office in the tallest tower in the centre of Hong Kong and you also can choose different people. The important thing is how much profit you can make from the business transactions.
In Viet Nam, you have mostly small- and medium-sized enterprises (SMEs). We well understand that it is often very difficult for SMEs to access a new market because they have limited resources.
Hong Kong people have a better understanding of doing business in China than anybody else in the world. We are also a service economy with over 95 per cent of our economy being services. Moreover, Hong Kong and China have an FTA, which means that anything manufactured in Hong Kong can access China free of tariffs. We also have 47 different service areas which provide good conditions to help Vietnamese SMEs access China.
Kim Eng Tan, senior director and analytical manager (sovereign ratings), Standard & Poor's Asia-Pacific:
n How will the global financial crisis affect Viet Nam's economic restructuring process?
Viet Nam's economic growth has been volatile in recent years because credit growth has been strong, but a lot of that credit has been allocated to State-owned enterprises where productivity of investment was not so good compared to the private and foreign sectors. It's timely that the Government should undertake this process.
However, the international environment is very important. At the beginning of any structural reform, the impact on growth will be negative, resulting from shrinking credit growth and investments. At this time, global economic conditions have also turned negative, and the pressure on Vietnamese growth will be so severe that it may prevent the Government from being committed to the restructuring. Nevertheless, we believe as long as the world economy does not deteriorate and head into a second recession in the near future, there will be hope for Viet Nam to pursue its restructuring process.
How do you assess the security of Viet Nam's banking system, particularly bad debt levels?
We don't have good data coming out of the State Bank of Viet Nam to analyse, but there're are a few indications that the health of banking system now is not as strong as it could be. One thing is that for a long period of time, credit growth has been very strong, about 20-50 per cent over the past 5-6 years, while there haven't been sufficient deposits in the banking system to finance the loans. That's is why deposit and lending interest rates are very high.
The second thing is that a lot of these loans were made to unproductive State-owned enterprises, and to the real estate sector, which is not productive from a long-term growth prospective, especially at a point when Viet Nam is severely in need of more infrastructure and industries to be developed.
When economic growth is slow, you will see a lot of non-performing loans (NPLs). But even if economic growth remains strong, you will still see NPLs in these sectors. But you won't see NPLs rising to the extent that the Government needs to help prop up some banks like in some other countries.
Many are currently encouraging mergers and acquisations in the banking industry as a way to improve its efficiency. What is your opinion on this issue?
I'm not sure that efficiency would improve, but risks in the system will be lessened. There're a lot of small banks in Viet Nam and many are having liquidity problems so that in the past 2-3 years they have had to borrow directly from the State Bank. Right now they have to attract depositors with high interest rates. This becomes a systemic problem as now all banks offer high deposit rates, and because of these high rates, they have to increase lending rates to an even higher level or face losses.
For that reason, it becomes a risk to not just the banking system but also the economy because if borrowers all borrow at a rate of 20 per cent or more, if the economic situation becomes worse and they will likely default.
One of the responses is to lower interest rates, and one way to do this is to consolidate weaker institutions and make them stronger.
On the other hand, from the point-of-view of bank owners, even if they're small bank owners, it's far better to have a weaker bank under their control than to own a part of a bigger one. But the fact that the State Bank of Viet Nam does not allow banks to fail basically reduces the risk for bank owners as they know that, no matter what happens, their banks will survive. As long as the State Bank continues to guarantee that, it will be hard to push for bank equitisation and mergers.
Regulators now have become stricter, putting pressure on banks by allocating weak banks zero loan-growth targets, and banks now are under more severe pressure to merge. If the State Bank continues its tightened regulatory pressure on banks, there should be more M&A deals among banks in the near future. — VNS