Private economic sector’s debts worryingly high

After economists gave the warning about the increasing ratio of the public debt on GDP, they have also pointed out another worrying problem – the sharp increases of the private economic sector’s debts.

According to the World Bank (EB), the total credit outstanding loans of the private economic sector in Vietnam is now equal to 125 percent of GDP, the highest level in the region.

The worrying thing here is that the figure has been increasing rapidly over the past few years, from 35 percent of GDP in 2000 to 71.2 percent in 2006, 93.4 percent in 2007, 90.2 percent in 2008, 112.7 percent in 2009 and 125 percent in 2010.

To date, no one can give a satisfactory answer about why the figure has been increasing so rapidly. Some have blamed this on the “real estate bubble”: the profitable investment deals in real estate have prompted people to borrow money to in the sector.

Meanwhile, some other experts believe that this should be attributed to the increases in the lending to fund import and export. The total import and export turnover has been increasing rapidly, now above 150 percent of GDP, therefore, it is understandable if the credit funneled to the field has also increased.

Some other analysts think that the rapid increase in the number of credit institutions has led to the inevitable increase in the total outstanding loans to the national economy. The argument proves to be reasonable if noting that Vietnam’s economic growth in the last few years has been relying on investment.

They have also pointed out that the demand stimulus policy, under which the State provided a four percent interest rate subsidy to enterprises, was also behind the rapid increases of the outstanding loans.

However, the credit ratio of 125 percent of GDP can show many things. It shows that the outstanding loans do not increase in accordance with the GDP growth rate, and that Vietnam needs a big increase in credit in order to create a certain GDP growth rate. In 2007, for example, Vietnam’s credit increased by 53.4 percent, while the GDP grew by 8.6 percent only.

The figure also shows that the channels through which capital is pumped into the national economy have not been working properly and effectively. Only modest volumes of corporate bonds were issued, while the stock market proves to be not the place where businesses should go to to seek capital. To date, commercial bank remains the only way for businesses to look for capital, and therefore, businesses may easily face high risks.

The first risk that businesses may face is that the bad debt ratio of banks would increase due to the credit expansion. One percent in bad debt ratio in a national economy with the total outstanding loans of 50 percent of GDP, would be clearly different from one percent in bad debt ratio in the economy with the total outstanding loans of 125 percent of GDP.

According to Dr Vu Quang Viet, a high ranking specialist of the United Nations, a worrying thing here is that the bad debt ratio reported by the State Bank of Vietnam has been over 3 percent. Meanwhile, if referring to international standards, the actual bad debt ratio would be much higher than 3 percent.

The second risk is that since businesses rely on bank loans, they would fall into big difficulties if banks tighten their credit policies and set up high interest rates – the thing that is happening now. As a result, a lot of enterprises have seen the production becoming stagnant.

According to Viet, Vietnam should learn the lessons from the debt crisis in Europe. In the past, economists only paid attention to the figures about public debts. However, new analyses have pointed out that the overly high ratio of credit on GDP was the origin of the high public debts.

Source: TBKTSG

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