Vietnam well placed to ride out the storm

Ashok Sud, general director of Standard Chartered Bank tells Viet Nam Investment Review's Hoang Mai about the Vietnamese banking and financial sector's reshuffle amid the global malaise.

In your viewpoint, what will be the impact of the global turmoil on Vietnam’s banking and financial sector?

The financial turmoil in the west was triggered by numerous banks’ share capital being adversely impacted by absorbing large losses from their holdings of “toxic assets” such as sub prime mortgages and subordinated paper. This led to a scramble for additional capital and liquidity as the pot for both these is limited. Additionally, banks had to severely cut back and reprice upwards their lending. Fortunately, in Viet Nam, the financial sector has negligible exposure to such toxic assets and hence no material impact on account of this.

However, as the leading economies in the world slow down, Viet Nam too will be affected. I see three implications of this. Firstly as the banking sector is really a reflection of how the “real economy” performs, the slowdown in Vietnam’s economic growth will mean a slowdown for the financial services industry as well. We expect this to continue throughout 2009 and hopefully a recover in the early part of 2010.

The second impact on Viet Nam will be driven by the scarcity of liquidity globally which will impact foreign direct investment (FDI) and offshore corporate borrowings. The third effect would be driven by the paucity of capital and some of the banks may find it difficult to reach the appropriate level of capitalisation. In financially volatile times, banks should be over-capitalised rather than under. The good news is that the State Bank and the government have anticipated this and hence will have adequate policy measures to address this rather than be caught by surprise.

You commented in the Viet Nam Business Forum that more than 80 banks, including foreign subsidiaries in Viet Nam, are too many. So, how many would be okay?

Rather than putting a finite number on how many banks Vietnam should have, I would emphasise that banks need to be well capitalised and managed in order to play an effective role in its economic development. And in many developing countries we have seen that over a period of time banks have merged with each other to better realise synergies of size, distribution and skills.

This “consolidation” in the banking sector has led to fewer but more solid banks which is good for the shareholders, the customers and most importantly the economy. For the size of Vietnam’s geography, population and stage of economic development I would recommend a trend towards consolidation over the next few years. This is even more significant during times of financial stress.

The first three licenced international banks are hitting delays in locally incorporating. Why and what market share will these banks have after they have set up local subsidiaries?

As this is the first time that international banks will transform their existing branch operations into a local subsidiary, there is understandably no “standard toolkit” or precedent with the State Bank for doing this.

This has taken time and we hope that this process is now smoothened over. Setting up a 100 per cent subsidiary will allow international banks to play a more effective role in Vietnam’s development as almost $200 million of capital has to be invested per bank. Experience from other developing markets where a similar “opening up of financial sector” has happened has shown that the size of the market grows but within that the market share in percentage terms of international banks continues to remain around the 10-15% level. I foresee a similar trend in Viet Nam.

The Vietnamese government has decided to stimulate demand via enhancing both public and private investment projects in a bid to prevent the economic slow down. Do you agree with its move?

As economies globally slowdown, individual governments are looking for ways to stimulate economies. There is no standard formula and each country will have to find its own recipe to address this. In Vietnam, the State Bank has been responsive in reducing the base rates and injecting more liquidity into the market thereby signalling that it wishes to stimulate growth now that inflation has come under control for the last three months.

We see similar moves across most of Asia as well. However, given the global slowdown in demand, which will affect Vietnam as well, the emphasis should be on encouraging growth of “domestic demand” and towards this, the government is rightly looking at infrastructure build-up, which creates employment and has a multiplier effect on the economy. This, coupled with the reduction in income tax will hopefully be a catalyst for domestic demand.

FDI and international lending sources will become limited amid the global turmoil. What measures should Viet Nam address to develop infrastructure?

I would suggest that it prioritises the numerous infrastructure projects and puts the most critical ones onto a “fast track” approval process ensuring that investors have adequate assured returns. The pricing for loans is much higher today than it was a year ago. However, this should not be a deterrent as loans can be “refinanced” a few years down the line with more attractive interest rates. (Dau Tu)