In an economist’s note released on March 2, Mr. Michael Kokalari, Chief Economist at VinaCapital, noted that real estate developers are facing liquidity issues despite strong demand for housing.

He said that the liquidity issues have been mounting for Vietnam’s real estate developers over the last year, culminating with last week’s announcement that Novaland, one of the country’s largest developers, missed a payment on one of its outstanding bonds.

Emerging markets are notoriously prone to real estate boom and bust cycles, characterized by the overbuilding of new housing units, but Vietnam’s housing market is undersupplied. Developers’ current cash flow problems are not caused by insufficient demand for their products. Demand for new housing units in Vietnam by prospective owner-occupiers vastly outstrips annual supply, and mortgage penetration in Vietnam is still modest at around 20 per cent per GDP.

Consequently, the primary problem developers are facing is difficulty rolling-over their outstanding debts, which they need to do in order to complete their outstanding projects and repay loans. This “liquidity gap” problem will likely be solved with government policies but not with government money. "We do not expect a significant increase in bank NPLs since there is limited room for a fall in Vietnamese housing prices given the enormous discrepancy between demand and supply of new housing units," said Mr. Kokalari.

Real estate developers in Vietnam have been having difficulties accessing credit for months and some are now facing difficulties refinancing their maturing bonds. The problem largely stems from difficulties developers face securing approvals for their projects because banks require proper approvals / documentation in order to extend loans collateralized by those projects.

That said, some developers overextended themselves by taking on too many “high-end” development projects that are not suitable for emerging middle-class homebuyers. Liquidity in Vietnam’s banking system is particularly tight at present, and developers are facing structural issues accessing liquidity.

Vietnamese real estate developers do not have access to sufficient long-term funding to support their “land banking” activities. Said differently, the raw land that developers own does not become “bankable” until that land has been rezoned for residential use and project approvals have been secured.

Mortgage rates in Vietnam are currently above 12 per cent, which is too high for some prospective homebuyers, while deposit rates at private sector banks are over 8 per cent for one-year deposits. Investors who would typically purchase apartments to earn an investment yield are instead parking their money in bank deposit accounts.

The report notes that a circa 2 percentage point decrease for 6 to 12-month deposit rates to nearly 6 per cent, coupled with a 1-2 per cent depreciation in the value of the VND, could prompt savers to move money from bank deposits into rental properties and stocks, but it may be difficult for deposits to fall much in 2023 since credit growth has outpaced deposit growth by about 3 percentage points annually over the last three years, leaving Vietnam’s system-wide loan-to-deposit ratio (LDR)  (as it would be calculated in most jurisdictions) near 100 per cent at end-2022.

The report also noted that the government could help lower the system-wide LDR by injecting more liquidity into the economy, by rebuilding the State Bank of Vietnam (SBV)’s FX reserves, which could inject circa $20 billion into the economy this year, and funding the abovementioned circa $10 billion government-backed loan packages via the SBV’s refinancing window, while the government currently has over $20 billion of undisbursed infrastructure funds sitting at the central bank and could run down some of the balance in order to meet its target of spending $30 billion on infrastructure development this year.

“Finally, we expect Vietnam’s nominal GDP (i.e. including inflation) to grow by about 10 per cent this year, which would likely result in an organic increase of circa $40 billion of bank deposits this year,” Mr. Kokalari said. If the government were to inject $40-50 billion of new liquidity into the country’s economy, it is likely that bank deposit growth could outpace system-wide loan growth by circa 3 percentage points, which would lead to somewhat lower deposit rates in Vietnam (i.e., 13 percentage point loan growth versus 16 percentage point deposit growth).