Property bubble, inflation, monetary and commercial fluctuations and fiscal deficit are huge challenges for many countries, including Vietnam. How to build a strong financial institution is a topic raised by Vietnamese leaders at the 44^th Annual Meeting of the Board of Governors of the Asian Development Bank (ADB).

Loopholes in financial system

According to Dr. Tran Du Lich, Vietnam’s fledging financial market is dynamic and potential.

In the commercial bank system, the state-run sector accounts for 62 percent of transactions, joint commercial banks (36 percent) and foreign banks (2 percent). The banking system meets 97 percent of credit demand and non-banking financial system just 3 percent. The 10-year-old stock market makes up 40 percent of the country’s GDP.

However, there remain structural weaknesses in the national economy. Its credit growth in 2007 was estimated at 52 percent but GDP growth only at only 8.4 percent. The figures dropped to 37.5 percent for credit growth and 5.3 percent for GDP growth in 2009 and stayed at 31 percent and 6.7 percent in 2010. It is quite clear that economic growth depends on capital from banks.

Vietnamese businesses are used to using loans to run their business operations. The total outstanding debts now account for 50 percent, savings 30 percent, and investment 40 percent of GDP.

Judging from this fact, Managing Director of Credit Suise Investment Bank (France) in Singapore and Vice Chairman for Asia Pacific, Jose Isidro Camacho argued that Vietnam is still at a loss to deal with thorny problems related to its policies, especially runaway inflation and the devaluation of the domestic currency.

The Governor of the State Bank of Vietnam (SBV), Nguyen Van Giau, attributed the weakness of the Vietnamese financial system to poor communications and lack of openness and transparency in banking performance. In addition, there should be a harmonized combination of financial and monetary policies to control inflation and ensure sustainable development.

On the right track

Vietnam is now on the right track to curb inflation and limit trade deficits.  It is increasing interest rates and devaluating domestic currency in a bid to help stabilise the macroeconomy in the long run, Mr Camacho said. But he was afraid that the Vietnamese economy may suffer some damages in the short run.

Brett Krause, Managing Director, Citi Country Officer for Vietnam, said that Vietnam has overcome numerous obstacles over the past decade to build a legal framework and necessary regulations to boost the development of the financial service sector. However, he said, the country’s financial system should be strengthened to ensure that the banking sector plays a vital part in achieving sustainable economic growth.

Mr. Camacho underlined opportunities for medium-and-long term investments in Vietnam, saying that Vietnam has a young labour force, political stability, an abundant source of natural resources and a favourable geographical position. The country has succeeded in shifting from a command economy to a market economy, adding fresh impetus to the process of economic restructuring and modernisation, he stated.

What to do next?

According to Mr Brett, to improve the domestic financial market, it is essential to create powerful “players” and a strong playing field based on the management capacity of banks and the central bank, which can exercise more power in a strict legal framework.

To this end, he said, the focus will be on developing the capital market to offer higher deposit interest rates in the current context that a great source of capital is being invested in gold and real estate.

Mr Brett suggested Vietnam build a more effective bond market by regularly issuing national bonds and bonds of big State-owned enterprises (SOEs), as well as encouraging the establishment and operation of credit rating companies. The Government of Vietnam should concentrate on building larger capital markets by encouraging big businesses and SOEs to list their bonds.

“In other new fledging economies, the private sector plays a key role in achieving sustainable and flexible economic growth. “In Vietnam it will see both opportunities and challenges,” said Mr Brett, as the State-owned sector will continue to play an important part in realizing the government’s economic targets.

“I think, a stronger private sector will help Vietnam attract more foreign investors and create a great source for the whole economy,” he stated.

 According to Dr. Tran Du Lich, Vietnam needs to restructure its financial market in the context that the country is facing an imbalance between short-term and long-term investments, between the capital market and the monetary market, and between the banking and non-banking sectors.

At regional and international levels, ADB Chairman H. Kuroda said that financial and monetary reforms are necessary to help Asia achieve strong and comprehensive growth. “We should reform the current global monetary system, which has failed to deal with problems such as unstable capital resources, increasing pressure for high exchange rates, and poor capacity for cash payment on the global market”, he said.