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Ripple effect to be contained
With billions of dollars being injected in property-mortgaged loans in Vietnam, some are worried that a credit crisis will hurt the country's banking system, similar to that caused by the UK lender Northern Rock last year or Freddie Mac and Fannie Mae recently in the US. But analysts at VietCapital Securities Company (VCSC) have reasons to think otherwise.
The property market in Vietnam became hot in October 2006.
The need for property loans increased rapidly, prompting banks to pump an abundance of money into the market. There appeared many forms of home loan services with repayment by installments spreading over 20 years. When real estate prices went sky-high, a wave of speculation in property, which was swelling up, created a property bubble.
According to the State Bank statistics, by the end of April 2008, loans for real estate projects amounted to VND135 trillion ($7.94 billion), accounting for 10.8 per cent of the entire system’s lending. Property-mortgaged loans, meanwhile, accounted for 27 per cent of the total outstanding loans for individuals and the community, equivalent to nearly VND151.9 trillion ($8.94 billion).
However, when the economy was faced with difficult times, the property market declined [see table below]. The continual property price decrease has made property loans an insoluble problem for the banking system. The fact that commercial banks have focused too much on profits has increased credit growth and loosened credit quality management. This weakness will cause the banking system to face great difficulties in the near future.
Liquidity risks
Loans for property projects or for mortgage financing are usually on a long-term basis, or even 20 years. But more than 80 per cent of commercial banks’ mobilised capital was on a short-term basis, less than 12 months. Discrepancies between loan and deposit terms pose a liquidity problem for banks.
The tightened monetary policy has had a direct impact on the property market. Most banks have stopped lending and tried to recover loans that matured. A series of projects was suspended due to the lack of bank loans, and enterprises have had to bear the increased costs of materials like steel and other building essentials.
The property market has been frozen and property companies have suffered decreased turnover and had to pay back both interest and principal at mature rates. The delivery of buildings is delayed or even cancelled, because enterprises would suffer losses if they are to continue.
When the property market freeze it is difficult to recover property loans, especially when speculative trading is involved. Bad debts are forecast to exceed 2 per cent of the total lending. Besides, collaterals are usually priced at 70 per cent of the market prices at their peak, while actual prices fell by 50-60 per cent.
Property credit crisis in Vietnam?
The potential demand for housing remains very high, with about 52 million people of working age, accounting for 65 per cent of the country’s population. The urbanisation rate will increase at 35 per cent, per year for the next 15 years. The land fund, land remaining available for use, has become smaller and urban areas are expanding into the outskirts. An estimate shows that the urban area will increase its land fund from 105,000 hectares to 460,000ha in 2020.
Along with the rise of the economy, incomes and living standards have improved considerably, with income increases of about 13 per cent per year on average. There are now about 80,000 foreigners living in Vietnam and more than three million overseas Vietnamese throughout the world. Their need for real estate will be greater once they are permitted to buy houses.
The Vietnamese stock market capitalisation before 2007 accounted for only 7-10 per cent of the country’s gross domestic product, but reached 40-50 per cent in 2007. This shows that enterprises mobilised a large amount of capital through the stock market in 2007. Property enterprises also seized this opportunity to mobilise capital for themselves.
Other property and construction companies took advantage of the securities market peak to strengthen their financial potential in order to cope with the current difficulties. By late last December, about 46 property and construction companies were listed on the bourse. Their total market capitalisation was VND84,721 billion ($5.26 billion).
It is believed that this property crunch happened at just the right time, and was a needle that broke the stock and property bubble before it swelled any bigger. Suppose the crunch would occur in two years from now, when the price of property has risen 10-20 times the current amount.
The consequences would be unpredictable. It may have a strong impact on the entire financial system and stunt the growth of the country’s economy. This close look into the situation leads to the belief that no credit crisis will take place in the near future. A measure is needed to screen property companies, selecting efficient ones and projects that meet practical requirements instead of speculative ones.
Banks will still play an important role in providing capital for enterprises to continue to operate and recover. At the same time, banks themselves must improve their capacity for managing credit and appraising borrower solvency in specific cases. It is necessary to stress that macroeconomic forecasting and credit risk management must take priority in the task of assessing, disbursing and recovering loaned money in order to avoid such upheavals as was the case recently.
VNN
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