ASEAN’s biggest risk taker – Vietnam – goes for growth at expense of corporate health

May 9, 2017

HO CHI MINH CITY - After years of deleveraging, Vietnam is turning back to the old formula for growth – increasing dependency on leverage, according to a new report by global asset manager Natixis, pointing out that economic growth is not rising as much as credit expansion.

“This begs the question of sustainability in the medium term, as Vietnam’s past is littered with periods of macro-economic instability thanks to inefficient allocation of resources,” Natixis says.

“The cracks are showing at the micro level – Vietnamese corporates are ranked worst in ASEAN, mostly due to their poor ability to repay debt, high leverage and dependency on short-term funding, according to our Natixis ASEAN Corporate Monitor 2017.

“But high interest rates and limited access to long-term funding have not deterred Vietnamese firms from rapidly growing their investment, even when global demand was weak in Q3 2016.

“The question is whether the recent capex is directed towards profitable projects (so that) the trade-off of poor corporate health in the short-term will be compensated by higher growth in the medium term.”

Natixis says that, while it is too early to estimate what the return on this capex binge will be, there are reasons to worry.

“One key issue is whether Vietnam’s dependency on leverage for growth will dampen medium-term debt sustainability,” it says.

“For one, the ICOR shows that credit efficiency is worsening yet again, proving that the old addiction is hard to kick.

“Against this background, a very positive aspect is that the return on assets is still better than that of Malaysia, Singapore and China. This means that, although Vietnamese firms are inefficient, there are worse offenders out there. (ATI).