Wednesday, October 15, 2008

Subprime Problem in Vietnam?

This blog is mostly about the food that we eat in Vietnam, my quest to find a really decent martini and playing some bad golf in some beautiful settings. To feed all those cravings, in my non-blog life I'm usually thinking about how to make money.

As an inveterate New Yorker, some of those ideas have been of the illegal kind - such as taking advantage of all the young local idiots who have no concept of online fraud and therefore they post their personal information and bank account numbers (!) all over the internet. But thankfully I'm preoccupied with morals to proceed any further.

Given the current world economic climate, I've pondered a bit about the problems in the US (Overselling the Subprime Problem, Market Meltdown Hysteria), which, for all intents and purposes is a confidence issue. Banks do not trust each other, so they do not lend to one another = no money sloshing through the system to lubricate the economic engine. All this talk of doom and gloom in the US is fun and games, sorta like the perverse pleasure of picking at a scab, but optimism will prevail as more people will make more money selling optimism. I'm confident enough to have recently put my 2 cents behind XLF - check back in 6 months to see how that goes.

Spurred on after reading B. Hawkins Pham's post, "The New Look of Saigon," on Saigon Blues, I thought more about why at this point I'm not as optimistic in Vietnam. There are a host of reasons, the main one being that the down global market, and in particular the down US market, makes Vietnam comparatively less compelling. Life is relative, and so are economic opportunities.

As part of the doom-and-gloom trade, business commentators in the US are quick to cite thing such as the WSJ's estimate that 1-in-6 homeowners are underwater (i.e. owe more on the mortgage than the current fair market value of the house). While this is certainly not a good thing, is this really that bad? Surely, housing occupies a certain mindspace for housing consumers - likely a combination of being the largest purchase, the largest asset, the largest debt for the average person - it is still a purchase.

As long as folks can make payments, being underwater affects their psyche, but it does not mean that everyone will suddenly become homeless. "Underwater" - sounds scary and threatening, and meant to evoke the idea of drowning, but for nearly all purchases on credit you will be underwater.

Did you just buy an iPhone with a Visa card, or that shiny new aluminum Macbook? Guess what, you're underwater. Does that matter to you in that setting? No, not really. So too housing. 

Or take a look at most folks' second largest consumer purchase, an automobile. The auto trade is tanking right now, but historically (I'm young and naive enough to mean the past 15 or so years), 90+% of the folks who buy a car finance, and they on average put about 15% down. For the average consumer in the average car, with the well known phenomena of 'drive off the lot depreciation,' that means that the auto is instantly underwater. Where was that doom-and-gloom talk over the past decade? Non-existent. 

As a business/investment climate, the worse America gets hammered, the worse Vietnam becomes.

But that's not to say there are no issues here. As a relatively closed economy, Vietnam is not directly affected by the supposed US Subprime issue because banks here did not buy US debt and derivative instruments. The effect is an indirect one, caused by lowered FDI commitments and, more importantly, lowered actual FDI inflows.

But the banks here have a Vietnamese style subprime problem - that of non-performing loans (NPLs). The credit system here is relatively rudimentary and is based more on an antiquated asset-based lending standard than a modern cashflow-based lending standard.

If I was a lender, I would favor the cashflow outlook, because at the end of the day I want to know if you'll have the money to pay me back. I would not want to have an asset-based lending outlook, because I am in the business of making money on interest and fees, not on foreclosures.

Banks here that do asset-based lending typically have the infamous "red book/document" - the red deed book issued by the government and used to confirm use rights or ownership of property - as collateral. With local property price declines, and more importantly, an illiquid market, these asset backed loans quickly devolve into NPLs.

A reason for the rudimentary credit system here is a lack of credit ratings agencies. There is no such thing as a FICO score, so effectively most (all?) individuals and businesses are subprime borrowers. The indifferent legal environment makes it easy for borrowers to stiff the lenders - at worst, the borrower would walk away from an underwater property, and that action has little impact on their ability to get a subsequent loan from another bank using a different piece of collateral.

As the saying goes in the US, 'if you owe the bank a million dollars , it is your problem; if you owe the bank a billion dollars, it is their problem.'  The same is true in Vietnam, except you replace "dollars" with "dong" - and a billion dong is low barrier, so the banks are holding a lot of problems.

But I am an optimist, and I see good things going forward for the Vietnamese economy and like elsewhere, as an economy improves the financial sector will lead the gains. It's just that the American financial sector will make more gains in the near future. So why deal with the Vietnamese issues?

1 comment:

B. Hawkins Pham said...

Hey D!

I was searching for something with my byline on it and much to my surprise a link to this article was one of the first to appear.

One of the more interesting links that you have in this piece (no, not to my infrequently updated blog) was to the Dong Nai golf "resort." I was just talking about going out there for the weekend.

We'll have to get together for a round of golf...