April 15th, 2013
Author: Vu Quang Viet, UN
Vietnam’s economic growth in the last decade has been driven by a tremendous expansion of bank credit.
Domestic credit was 35 per cent of GDP in 2001; this figure had surged to 120 per cent by 2010. As a consequence, the ratio of average debt to owners’ net equity of state-owned enterprises (SOEs) in 2011 reached 1.77, an extremely high figure compared to the US ratio of 0.7. Thirty SOEs had debt to equity ratios exceeding 3, and eight had ratios exceeding 10.
The strategy of SOE-based growth was championed by Prime Minister Nguyen Tan Dung, who set a target growth rate of 9.5 per cent per year from 2008 on. In service of that target, money supply was increased by 46 per cent and as much as 60 per cent of bank credit was allocated to SOEs — even though they accounted for only approximately 27 per cent of GDP. These actions immediately generated high inflation, which reached 23.1 per cent in 2008. But even though the Political Bureau of the Communist Party of Vietnam demanded inflation be dealt with, when it subsided to 5.9 per cent Nguyen pushed again for a high growth target — over the objection of many economists — arguing that stimulus was necessary to counter the effects of the global financial crisis.
Read more: http://www.eastasiaforum.org/2013/04/15/why-vietnam-needs-more-banking-reform/
