Vietnam’s economic growth has been mostly fueled by foreign direct investment (FDI) and credit but those two are not long-term solution. The country’s leadership is well aware of that and seems committed to developing its capital markets, according to Viet Dragon Securities Company (VDSC).
Nevertheless, Vietnam is expected to witness significant financial deepening in the next decade, while the country is the only in Asia excluding China where bank credit exceeds the sum of listed bonds and equities. Credit provided by the financial sector has grown from 21% of GDP in 1997 to 142% 20 years later. Such growth rates are unsustainable for Vietnam, VDSC commented.
But things might be improving. Last year, credit growth was 13.9% year-on-year while GDP expanded 7.1% year-on-year, or in other words just under 2% of credit growth was required for 1% of expansion, down from 2.9x in 2016 and 4.6x in 2010.
Debt-fueled growth.
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According to VDSC, there are early signs of that already with significant growth in consumer and mortgage lending in recent years.
The total market capitalization rose 230% over the past five years and is expected that over the next five years, the value of equities (now US$190 billion) could double and Vietnamese stocks will be added to the MSCI Emerging Market Index, not to mention the growth potential of the bond market, in which over 90% of all bonds are government issued.
Market capitalization.
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As for the large banking sector, there are some concerns as Basel II requirements are not yet met by all banks, non-performing loans (NPLs) remain relatively high and lenders rely too much on interest income for profits. The first can be solved via recapitalization. In fact, if foreign ownership limits are being relaxed, that should be fairly easy.
Risk management however remains in its infancy and needs more serious consideration. At a time where most of bad loans from the previous credit cycle have been dealt with, there are potential areas of new NPLs including consumer finance. A positive development is the step by step move towards more fee-based revenue. Caution is advised, but VDSC expected long-term bullish on the sector while bank stocks remain an excellent proxy for the economy.
Lack of liquidity and breadth means that stocks which may be attractive are not in high demand and remain undervalued while when foreign capital flows in, those stocks with better liquidity can become more overvalued. There are no stocks that trade more than US$10 million per day but a little over 40 do US$1 million or more per day and nearly 100 between US$100,000 and US$1 million. 600 companies currently trade less than US$100,000 per day.
