VietNamNet Bridge – The HSBC Global Research team has expressed concern over Vietnam’s recent move to loosen credit to stimulate private sector and government spending.

A teller of a commercial bank counts U.S. dollar notes. The HSBC Global Research team has expressed concern over Vietnam’s recent move to loosen credit – Photo: SGT

A report which HSBC released last Friday says credit easing suggests the Vietnamese Government’s pro-growth bias.

The Government has confirmed the original 2016 gross domestic product (GDP) growth target of 6.7%. In early May, new Prime Minister Nguyen Xuan Phuc instructed ministries and agencies to do whatever it takes to achieve the growth target while reining in inflation.

“We think this is going to be difficult to achieve, given the weakness of the first-quarter growth number and larger-than-expected headwinds to exports. That means the onus will fall on domestic demand to pick up the slack,” says the report.

But larger-than-expected headwinds to trade mean that domestic demand, in particular investment, will have to rise strongly to make the growth target a reality. The Government’s pro-growth stance suggests the central bank is likely to let credit growth, which had reached 17.3% year-on-year as of April 2016, to run closer to 20% in the second half of the year.

 “Authorities will try to loosen credit conditions further to stimulate private sector spending. The other risk is increased government spending,” HSBC wrote in the report.

HSBC added the concern is that greater pump-priming will lead to a build-up of risks when Vietnam’s macro buffers are still running relatively thin. The Government’s fiscal policy space is particularly constrained.

The bank forecast the public debt-to-GDP ratio to approach the National Assembly’s limit of 65% in 2016.

HSBC quoted data of the International Monetary Fund (IMF) as showing that Vietnam compares favorably to the region in terms of tax revenue productivity but the base has been eroded.  For example, the standard corporate tax rate was reduced to 20% from January 1 this year, following a cut to 22% in January 2014 from 25%.

Moreover, preferential tax treatments can be obtained in high priority sectors such as healthcare, education, high-tech, infrastructure development, software, and in special economic zones. Meanwhile, tariff revenues have been under pressure, reflecting Vietnam’s increased participation in various free trade agreements.

Vietnam will adopt enhanced fiscal reporting standards under which off-budget capex will be included in the State budget. However, these reforms will likely take time. In the interim, slower but ultimately more sustainable growth may be preferable, according to the report.

“In the medium term, administrative measures to reduce tax evasion, disclosing incidents of tax fraud, and streamlining VAT refund procedures could help plug the gap opened up by extensive tax cuts and tariff reductions,” said the report.

SGT