Vietnam’s Credit Rating Cut

Moody’s agency says the government will likely be forced to save Vietnam’s failing banks.
2012-09-28
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Customers make transactions at a local Asia Commercial Bank branch in Hanoi, Aug. 24, 2012.
Customers make transactions at a local Asia Commercial Bank branch in Hanoi, Aug. 24, 2012.
AFP

Global ratings agency Moody’s on Friday lowered its credit rating for Vietnam, saying the government faced an “elevated risk” of bailing out the nation’s banks, which are mired in toxic debt.

Vietnam is expected to be hit by lower medium-term economic growth stemming from its banking problems, Moody’s Investors Service said in a statement as it reduced the government’s debt rating to “B2” from “B1” with a “stable” outlook.

There is “a higher likelihood that contingent risks to the government's balance sheet will be realized due to more pronounced weaknesses in the banking system,” it said.

The ratings agency last cut Vietnam’s credit rating in 2010.

The latest downgrade followed state media reports on Thursday that police are probing former minister and ex-chairman of Vietnam's Asia Commercial Bank (ACB) Tran Xuan Gia along with three deputy chairmen for illegally approving the deposit of U.S. $34 million into other banks, which was then stolen by other bankers, state media said.

Both ACB’s founder and a former director general were arrested in August for economic crimes, triggering a run on deposits and forcing Vietnam's central bank to provide emergency liquidity to the institution.

Moody’s also lowered the deposit ratings of all of its eight rated Vietnamese banks to “E” from “E+.”

It reduced the country’s long-term foreign currency deposit ceiling to “B3” from “B2,” citing “the intensification of banking system vulnerabilities because of the overhang from a prolonged credit boom and the subsequent tightening in policy.”

In the five years to 2011, Vietnam’s average domestic credit growth far exceeded its average annual gross domestic product (GDP), or total market value of the country’s annual goods and services.

Restrictions placed on the country’s loan growth by the Vietnamese government since early last year helped to rein in runaway inflation, but also slowed GDP growth in a system Moody’s said was “already characterized by relatively low levels of capital adequacy and poor transparency.”

Vietnam’s GDP slowed to a preliminary rate of 4.73 percent in the first nine months of 2012 from 5.77 percent a year earlier.

Policy changes

The number of Vietnam’s lenders grew to 42 in the decade since the government began rapid liberalization of the country’s banking system, but many of them are weighed down with debt held by state-owned companies.

Attempts to restructure the banking system have hit a wall, and Moody’s said Hanoi will likely be forced to help the country’s lenders stay afloat.

“Given the apparent lack of private sector solutions, Moody's believes that there is an elevated risk that the costs of recapitalizing the banking system will have to be borne, at least in part, by the government,” the ratings agency said.

“This is expected to have a material impact on Vietnam's financial metrics.”

Vietnam’s central bank has cut interest rates five times this year in an attempt to reverse slowing GDP, and the economy has responded with an increase in inflation for the first time in 12 months to 6.48 percent.

But while inflation has increased, it is nowhere near the 23 percent rate it reached in August last year.

Public frustration

Growing public frustration over the economy has led the government to renew an anti-corruption drive which has landed a number of banking executives and heads of failed state-owned companies in hot water.

The arrest of the founder and a former director general of ACB has caused clients to withdraw their money, forcing the central bank to provide the lender with emergency funding.

But many see the arrests as a result of infighting between the camps of Vietnamese President Truong Tan Sang and Prime Minister Nguyen Tan Dung, who are seen to be at increasing political odds with one another.

Nguyen Duc Kien, the founder of ACB who was arrested for “illegal business activities” in connection with three private companies he chaired, is believed to be aligned with Prime Minister Dung.

Authorities last month also arrested two employees of National Assembly Deputy Dang Thanh Tam, a businessman with strong ties to President Sang, on charges of “stealing state secrets.”

The Vietnamese stock market has tumbled since Kien was put into custody, as investors fear further arrests in the country’s finance industry.

Reported by Joshua Lipes.

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