Weighing up risks of a bubble from bond squeeze

The concerns being expressed with regards to the current perception of credit tightening only relate to the private credit space and senior bank lending.

With regard to bank lending, the intent of the State Bank of Vietnam (SBV) to keep credit conditions tight in Vietnam on a sector specific basis is not reactionary and has not been driven by recent events in the market although, of course, these add to the reasons.

The SBV has been telegraphing that they wish to carry out a review of how capital is raised and used by the real estate sector for the past few years. A pivot away from perceived risky lending such as speculative real estate projects has been countered by a clear drive to expand credit and target production and priority industries such as rural development, agricultural production, trade services, and logistics.

This is demonstrated by the current SBV target of 15 per cent plus credit growth for 2022 and they are on target to achieve this, even with the slow down in lending in real estate.

The first quarter of 2022 has seen 5 per cent growth in lending and this is up 2.84 per cent improvement on Q1 2021. What is clear is that there is plenty of capital available to lend and the slow down of lending into release is not a ‘credit crunch’ driven by a lack of money within the Vietnamese banking system. This is not a liquidity issue. What this slowdown is being driven by is that lending in real estate over the years has been, in some cases, secured against highly speculative projects and in some areas, compounded by poor underwriting standards.

This is an issue that needs to be resolved and the SBV are rightly taking steps to protect the market from systematic risk that could present itself if the real estate market were to suffer a severe slowdown.

Looking to private credit, the issue is not how the capital is being raised or used. There is nothing fundamentally wrong with over-the-counter asset-backed securities or corporate bonds.

The issue has been the lack of transparency around the offerings that are being invested into, specifically around disclosures made by some bond issuers.

Real estate accounts for over 44 per cent of the corporate bonds issued in 2021 with 193 companies securing over $14 billion in credit.

The growth of this has been astounding, with 2021 being up 66 per cent over 2020, and a review of this space is long overdue. The argument that investors in this part of the bond market should be sophisticated enough to understand the risks is of course relevant. That said, the disclosure required from the bond issuer has to be held to a very high standard and this must be regulated.

We are seeing the real-time effects of the slowdown of lending in real estate from the banks and from the bond markets effectively shutting. Real estate groups are being advised they cannot, temporarily, access credit and this is causing them to stop work on some projects.

The reactionary view of the market is that there is the risk that this will reduce the amount of product coming to market for sale, and this may force prices up at a faster pace than is readily sustainable. This would then cause a bubble and, therefore, both the bond markets and the banks should turn on the taps and keep lending.

The counter to this is that more stringent lending criteria and a more robust policing of existing legislation around disclosures will force out the bad actors in the market who have been able to inflate prices on land. The direct result of which has been end users having to pay more for their end product, which in turn could lead to a bubble.

We are of the opinion that we are not in bubble territory, and that the review of the two credit mechanisms is positive for the overall market.