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Heavy hangover to last into 2012
Inflation is a favoured scapegoat for Vietnam’s economic woes. However, rampant inflation tends to be a symptom rather than the origin of the problem.
In the current investment climate, it’s challenging to find a bright spot for Vietnam’s real estate market.
Transactions in the residential sector are fairly limited. Price discounting is expected, yet not guaranteed to attract buyers. Debt financing is near impossible to secure. Vacancy rates in commercial office buildings are rising and more supply is coming online. Needless to say, 2011 has been an incredibly challenging year for Vietnam’s real estate market. Will 2012 be any better?
The one positive patch of news is that the annualised inflation rate is receding.
Tightened monetary conditions instituted by the State Bank throughout the year have finally reined in inflation. Early estimates indicate that the headline inflation rate will recede from a peak of 23.02 per cent in August to 18.12 per cent year-over-year. While the government is aiming for a single-digit target in 2012, the more plausible forecast would be in the 12 per cent range.
Inflation is a favoured scapegoat for Vietnam’s economic woes. However, rampant inflation tends to be a symptom rather than the origin of the problem. The real blame is best bestowed upon credit and M2 growth, which are positively correlated to inflation as indicated by historical trends. Yes, commodity prices and rising input costs play their part, but excessive credit growth can be fingered as the major culprit for inciting inflationary pressures.
The opposite is true for interest rates, which have a negative correlation with inflation. Thus, as the State Bank raised interest rates and clamped down on credit growth, inflation headed south. Tightened monetary policy, however, does not come without consequences.
The bad news: Real estate is in the ditch
Singled out as a non-productive sector with lower lending targets (16 per cent for the year as opposed to 20 per cent), the real estate sector has suffered worse than other industry groups. Cash starved developers have felt the pain from tightened liquidity, as their cost of capital has risen. In worse case scenarios, developers have found their credit facilities closed.
With lenders closing their doors, the capital market has been even less inviting. Stock prices for real estate developers listed on the local exchange slipped more than 50 per cent on average for the year, compared to the VN-Index which has fallen roughly 40 per cent. Vincom is the one real estate firm to buck the trend, as its share price will end roughly on par with how it started 2011.
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| Vietnam’s economy needs more than an aspirin to overcome a hangover caused by binge on easy credit |
The pain felt on the ground has been even more acute, as the market has witnessed developers across the board falter on their projects. Delayed starts, construction halts, and deep discounting were a common theme throughout the year. Several distressed acquisitions - a rarity in Vietnam - even materialised.
For the residential sector, absorption rates dropped to a two-year low across all grades in the condominium market, with low-end housing the only segment seeing real action. Prices have softened and buyers are hanging back, wary of catching a falling knife. In the commercial office markets of Hanoi and Ho Chi Minh City, vacancy rates have inched higher, as new supply comes online amid dampened demand. Recent data indicates that vacancy rates in Ho Chi Minh City’s Grade A office segment has escalated north of 25 per cent, and there are more offices set to open in 2012.
The ugly truth: credit handover hurts the economy
Do we expect to see a turnaround in 2012? The fact of the matter is that Vietnam has structural issues that must be resolved before we begin to see any real optimism return to the real estate sector. To start, the government must mend the weak banking sector.
Efforts to this effect have taken hold in recent months, as we’ve seen some of Vietnam’s flagship banking institutions, such as Vietcombank and Sacombank, sell stakes to foreign partners. Recapitalisation must also be coupled with consolidation, a more arduous process that has begun with the recent merger of Ficombank, Tin Nghia Bank and SCB.
Alongside recapitalisation and consolidation, the banking sector will also have to address the credit overhang that plagues the economy. At present, credit as a percentage of GDP has reached 120 per cent, according to Citibank.
The absolute percentage is indeed a lot of debt for an emerging market to work through. However, more alarming has been the rate at which loan growth has expanded. Annual credit growth averaged 35 per cent between 2007 and 2010, and the excessive buildup of credit has placed Vietnam in a precarious position.
The stark reality of this credit overhang is that it leads to investment inefficiencies, which will and have manifested themselves into loan losses as economic growth slows. Non-performing loans in the banking sector are estimated to have risen.
Furthermore, inefficient public investment is a core problem and economic restructuring is needed to ensure continued growth. State-owned enterprises account for 35 per cent of GDP, but absorb an estimated 60 per cent of bank loans.
The state’s economic contribution is waning in importance vis-à-vis the private sector and Vinashin’s near bankruptcy has alarmed us to the inefficiencies of SOEs. Vietnam cannot afford another high-profile debt default and must move quickly to overhaul the banking sector, which will in turn revive the real estate market.
What will the future hold?
The outlook for the global economy in 2012 is fairly bleak, as economic growth forecasts for the US have slipped and the Eurozone stumbles towards a solution for its sovereign debt crisis. The EU and the US are both major trade partners with Vietnam, and any weakness in these economies will have a negative impact on Vietnam’s export industries and FDI inflows.
The priority for 2012 will be for the government to illustrate more discipline in its monetary and fiscal policies to ensure greater economic stability. From our experience working with global institutional investors, one of the major deterrents for foreign investment into Vietnam stems from economic management, the leading symptoms of which are high inflation, a weakening currency and a widening trade deficit.
In addition to sound macroeconomic policies, the government must get serious about economic restructuring. We believe the current administration has made the right advances to redefine the role of the state, but we believe that accelerating the equitisation process and strengthening the private sector are the only means for Vietnam to achieve its ambitious growth targets.
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