Property Stress Would Test Vietnam’s Bank Buffers

In the event of a property downturn, developer-related exposures would pose the greatest risk for banks, in our view, but residential mortgage quality could also be affected in more significant market downturn scenarios.

Nonetheless, Fitch views the likelihood of a major real-estate downturn as low. Apartment prices in key cities have continued to rise in recent months and Fitch expect prices to remain supported by demand and slower completions, assuming no unanticipated macroeconomic shocks. The government has also proposed that issuers be allowed to extend outstanding bonds’ maturity by up to two years, which should alleviate developers’ refinancing risks.

Fitch believes Fitch-rated banks' pre-provision earnings and loan loss allowances would be sufficient to cover potential credit losses of about 3%-5% of their risk-weighted assets (RWA) from a moderate property-sector stress scenario. However, the potential loss could rise to 7%-10% of their RWA under a more severe scenario, assuming average write-off rates of 30%-40% on aggregate property-related exposures, likely pushing most banks' capital ratios below regulatory requirements.

Most rated local banks' Issuer Default Ratings are driven by Fitch’s expectation of government support and are linked to the sovereign’s rating (BB/Positive). A severe property downturn is not our base case, but Vietnam’s sovereign credit profile could be adversely affected under such a scenario.

Global economies faces to multiple headwinds including high inflation, supply chain disruption and thus may fall into recession if there is no supporting policies.

Recent developments: After a strong rebound in 2021, growth in the East Asia and Pacific (EAP) region slowed markedly in 2022 to an estimated 3.2 percent, 1.2 percentage point below previous forecasts. The slowdown was almost entirely due to China (which accounts for about 85 percent of the region’s GDP), where growth slowed sharply to 2.7 percent, 1.6 percentage points lower than projected in June. The country faced recurrent COVID-19 outbreaks and mobility restrictions, unprecedented droughts, and prolonged stress in the property sector, all of which restrained consumption, food and energy production, and residential investment. Fiscal and monetary policy support for domestic demand and an easing of restrictions on the real estate sector have only partially offset these headwinds.

In the region excluding China, the pace of growth more than doubled, rising to 5.6 percent in 2022. Activity was supported by a release of pent-up demand as many countries continued to lift pandemic-related mobility restrictions and travel bans. Growth in the region excluding China in 2022 was 0.8 percentage point above the June forecast, reflecting upgrades for Malaysia, the Philippines, Thailand, and Vietnam, most of which also benefited from a strong rebound of goods exports. Growth in Fiji was much stronger than expected, fueled mainly by a resumption of international tourism in response to a significant easing of travel restrictions. The recovery in tourism in many smaller Pacific Island economies has been generally slower than in the rest of the world because of recurring COVID-19 outbreaks and remaining border restrictions.

Consumer price inflation increased across the region in 2022. Notwithstanding this increase, price pressures have been generally more muted in EAP than in other regions. This partly reflects remaining negative output gaps due to a combination of relatively high potential growth and protracted recovery as well as widespread price controls and subsidies.