Standard Chartered Vietnam CEO Nirukt Sapru spoke with VET's Ngo Hai about the outlook for Vietnam in 2015 from his banking perspective.
|Mr. Nirukt Sapru
CEO Standard Chartered Vietnam
How would you comment on Vietnam’s economic achievements to date?
We’ve seen the early signs of transformation over the last few years. The government needs to speed up reform even further to continue to benefit from this.
The government adopted important measures last year to improve business conditions, which are expected to bear fruit from 2015 onwards. These include resolutions to shorten the time for administrative procedures for filing taxes, reduce administrative costs, and strengthen transparency and accountability in State administrative agencies. The revised Law on Bankruptcy, the Law on Enterprises and the Law on Investment are expected to improve corporate governance in enterprises and State-owned enterprises (SOEs).
I think that Vietnam is poised to become a new manufacturing hub in Asia. The country has recently received upgrades in both its economic outlook and banking system from multiple ratings agencies. This positive outlook will help promote Vietnam as an attractive destination for foreign direct investment (FDI). Vietnam is also becoming highly integrated into the global economy, with an impressive export record and focus on various free trade agreements (FTAs) such as the EU-Vietnam FTA, the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP), and ASEAN Economic Community (AEC). Vietnam and South Korea signed their FTA in December, paving the way for a deeper bilateral strategic partnership. These agreements, as well as Vietnam’s WTO commitment to eliminate all barriers to foreign retailers by 2015 make it a very attractive location in which to set up operations. Many big corporates have already incorporated Vietnam into their supply chains and many more are exploring the opportunity.
But we’ve also seen some key risks in 2015. Firstly, slow progress on banking sector reforms could adversely impact macro-financial conditions. Secondly, the declining global oil price is another risk to Vietnam given its potential impact on government revenue, which will influence public spending and investment. But we acknowledge the government’s recent efforts to mitigate the impact. The third area of focus would be the strength of the US dollar. On the back of ongoing US dollar strength and the prospect of interest rate hikes by the Federal Reserve in 2015, emerging markets face challenges and the weakness of Asian currencies may pose downside risks to the Vietnam Dong (VND) in the first half of 2015.
As a foreign banker, what do you think about Vietnam’s 2015 economic outlook?
We expect Vietnam’s GDP growth to accelerate to 6.0 per cent in 2015, slightly higher than our previous forecast of 5.8 per cent. FDI and exports are likely to accelerate during the year, leading to economic growth. We also expect some progress to be made on structural reforms in 2015; the last year of the country’s five-year socio-economic development plan. This should improve domestic sentiment.
FDI will gather pace in 2015, we believe, given the country’s rising profile in the global value chain. Multinational companies have expressed a keen interest in increasing investment in the country thanks to Vietnam’s geographic advantage, low labor and operating costs, and participation in regional trade pacts.
We expect exports to recover in 2015. Traditional exports, including textiles and footwear, performed well in 2014, reflecting Vietnam’s established competitiveness in these sectors. We expect traditional exports to remain robust, especially given Vietnam’s involvement in the TPP. The agreement should attract increased FDI, though negotiations are likely to take time to finalize and restrictions may be placed on the trade benefits to Vietnam under the pact. We also expect electronics exports, now Vietnam’s biggest export item, to accelerate in 2015 as FDI increases and more production lines start operations. Growth in electronics exports slowed in 2014, partly as an unfavorable base effect and weaker-than-expected global demand affected performance. Vietnam has been proactive in strengthening bilateral trade relations with neighbors other than China, which bodes well for the export outlook.
Inflation is unlikely to be a concern in 2015, in our view. Headline inflation fell below 3 per cent year-on-year in November, and core inflation (excluding food and energy prices) has been below 4 per cent since September. We expect this trend to continue in 2015. We have revised down our 2015 inflation forecast to 3.4 per cent year-on-year from 4.7 per cent.
What do you expect regarding structural reforms?
We expect some progress to be made in 2015 on structural reforms. In the banking sector, the Vietnam Asset Management Company (VAMC) plans to adopt a new method for calculating the value of bad debts, according to local media reports, stepping up its efforts to regulate debt pricing in the medium to long term. Stricter debt classification and provisions will be implemented, starting in 2015, after a one-year delay. These measures are positive steps towards the necessary regulation of the banking sector to rein in non-performing loans. The Prime Minister said at the opening session of the National Assembly in November that Vietnam aims to bring down the ratio of bad debt to bank loans to 3 per cent by the end of 2015 from the current 4.17 per cent.
We expect the government will push ahead further with SOE reform in 2015. Progress on this front was moderate in 2014. The Ministry of Finance originally planned to equitize about 200 SOEs in 2014, but only 75 were equitized in the January-October period. SOE restructuring and equitization is an important part of the economic restructuring laid out in the National Assembly’s socio-economic development plan for 2011-15. We expect this process to accelerate in 2015, the final year of the five-year plan. We remain concerned about the efficiency and governance of SOEs, which, if improved, would boost local sentiment and economic growth.
What is your view on the matter of cross ownership in Vietnam’s banking system?
Cross holding has been one of the root causes of many of the problems in the banking system. The regulation is there but compliance is the issue. It is encouraging to see that the State Bank of Vietnam is committed to taking measures to tighten controls over cross holding and related party lending.
In parallel, corporate governance and risk management within banks need to be upgraded significantly. The roles and responsibilities of the Board of Directors, as well as the management team, should be clearly established and separation of ownership and supervision rights should be strongly enhanced.
Standard Chartered assisted the Vietnamese Government in its offering of new ten-year global bonds worth $1 billion as part of a liability management exercise. What is the bank’s market outlook?
We are constructive on demand/supply dynamics for Vietnam Government Bonds (VGBs) and maintain a neutral duration outlook. We expect VGB supply to be higher in 2015 as fiscal requirements rise, but gross issuance of local-currency VGBs should be similar to 2014 given that the central bank may increase issuance of US dollar-denominated VGBs to meet extra funding needs. VGB supply should therefore be well received by local banks.