To rescue or not to rescue property sector?

November 23, 2022 | 04:12 pm PT
Ho Quoc Tuan Lecturer
I was in Vietnam for a few days during a recent business trip and was asked repeatedly about the problems the country's economy was facing.

Things had gone bad within just a few months, and the current number one bottleneck for the economy is that businesses are running out of money.

According to the Private Economic Development Research Board under the Prime Minister's Advisory Council for Administrative Procedures Reform (Board IV), the lack of funds and systemic problems have put most businesses in a situation where they are struggling to even maintain partial operations.

What attracted my attention in the Board IV report was the allusion to "trust."

It says the "drop in trust" is a matter of concern. The obstacles faced by real estate businesses in the bond market after the events related to Tan Hoang Minh, Van Thinh Phat and SCB Bank are spreading to all industries, making investors afraid of buying bonds and wanting to redeem prematurely even those issued by strong enterprises.

Even solidly performing businesses are unable to mobilize money through bonds or from banks. Businesses without enough money will find it difficult to operate, leading to unemployment and loss of tax revenues. The economic and social burdens will pile up in 2023.

A colleague of mine working at a foreign investment fund had an interesting analogy: the economy is like a car on a wide road that suddenly finds itself in a narrow alley and at risk of hitting a wall.

He said, like Vietnam, South Korea is also on the verge of hitting a wall. The international media uses phrases like "liquidity exhaustion" or, more directly, "corporate debt crisis" when talking about the state of that country. South Korean companies are also struggling to raise capital through the bond market as investors' trust has been shaken after a default by a company guaranteed by a local government.

News agency Nikkei Asia cites the experience of Korea Electric Power Corp., South Korea's biggest power company, which despite having a credit rating of AAA, only managed to raise half the money it aimed for in the bond market last month.

The term "loss of trust" could be found in most articles about the South Korean bond market. When investors no longer have trust and want to sell bonds, the prices will drop even further. Which in turn means businesses, regardless of whether they are good or bad, can no longer raise funds through bonds.

And what about banks? Banks and insurance firms are also more or less affected since banks also issue bonds and insurance companies also buy bonds.

These institutions, though largely much stronger than they were in 2007, remain not trusted. As investors decided to hold on to their money, banks needed to reduce lending to shore up liquidity.

Businesses have thus lost the ability to raise capital through bonds as well as from banks. In Vietnam, there are also informal channels. But a friend of mine, who owns several coffee shops, told me that lending in these channels has also "suddenly stopped" or their interest rates have become very high.

This is only to be expected when banks raise their 12-month lending rate to 16%.

With such high interest rates, the economy will not be able to develop normally. What can businesses do to pay 12-16% interest on borrowings? Besides, even at such rates they cannot get access to funds. The pressure to ensure liquidity in the capital markets is immense.

But for this to happen, a big clash of opinions has to be resolved, and many solutions must be carried out in parallel. It would be difficult to avoid the solutions of injecting capital into the real estate market, one of the major bond issuers, adjusting regulations on bond issuance and investment as well as loosening the credit channel for home loans.

The trust bottleneck in the bond market lies with real estate bonds.

Real estate projects in Hoai Duc District of Hanoi, July 2022. Photo by VnExpress/Ngoc Thanh

Real estate projects in Hoai Duc District of Hanoi, July 2022. Photo by VnExpress/Ngoc Thanh

Besides companies that committed wrongdoing like Tan Hoang Minh and Van Thinh Phat, even those with good, clean projects have been affected.

Property accounts for a lion’s share of collateral in the banking system. The fact that many real estate companies are raising a lot of money at whatever cost to redeem bonds or prepare for their maturity in 2023 has sucked out a large amount of money like a black hole.

More importantly, the chaos associated with real estate companies’ bonds and the liquidity problems faced by the companies have caused investors to hold on to their cash and wait for further developments.

So, to remove the capital bottleneck in the market, resolving the capital issues faced by real estate companies is imperative. This is being interpreted as a simple question of whether or not to rescue real estate.

My brother was vehement when we met in Hanoi earlier this month: "When millions of people are still in need of housing, house and land prices are being blown up. Why then must we spend resources to rescue real estate?"

I realized that the simplistic understanding of the economy's current liquidity issue has led to it being turned into a debate over whether or not to rescue real estate and bond investors.

At the root of this is not "rescuing" real estate but finding ways to ensure smooth flow of capital through channels such as bonds and banks to the manufacturing sector, to capable property developers with a big influence on the economy.

To untangle capital flows for them is to untangle capital flows for the whole economy. If theirs are stuck, it can affect many other areas of the economy.

For example, why did China have to come up with a 16-point plan to rescue its real estate market at this time? It was because there was analysis saying that it would otherwise affect loans worth US$1.6 trillion (some others say over $2 trillion) for businesses, including those owned by central and local governments.

There are government-backed organizations that have acquired land from badly performing real estate companies such as Evergrande to develop public infrastructure in Guangzhou, but they suddenly found themselves unable to borrow and even faced bad debts though their projects would have created many jobs and infrastructure and stimulated the economy.

This is to say no one wants to rescue the real estate market just to push up house prices and make the super-rich even richer.

But if we keep sticking to such dogma, we would all fall to the bottom following a liquidity meltdown.

Therefore, what needs to be eliminated now in society is the "to rescue or not" mindset, whether it is to do with real estate or bonds.

Whatever needs to be done to mitigate the liquidity difficulties faced by the economy as a whole must be done, and done urgently.

The impact of falling liquidity caused by the U.S.’s sharp interest rate hikes on global financial institutions is not over yet, and this quarter and the first quarter of next year might see more liquidity "accidents" on a global scale.

If Vietnam is not decisive, those accidents, if they occur in some other countries, would worsen its liquidity as investors lose even more trust.

It is necessary to regain market trust before it is too late.

*Ho Quoc Tuan is a lecturer at the University of Bristol, England.

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