Prof. Pincus (UNDP) - Greener Together Panel 02 Domestic Banking System - Resources Currently Available for Energy Transition in Vietnam

1. Panel 2: Resources Currently Available for Energy Transition in
Vietnam
Jonathan Pincus
July 20, 2023

2. Viet Nam is a balance of payments
constrained developing country
• Availability of
dollars is a key
constraint on
stability and growth
• Sudden inflow of
capital in 2007/08
destabilized Viet
Nam for 5 years
• Growth in recent
years associated
with current account
surpluses
-35.0%
-25.0%
-15.0%
-5.0%
5.0%
15.0%
25.0%
35.0%
%
GDP
Net goods and services Primary income Secondary income
Direct investment Portfolio investment Other investment
Net errors and omissions Reserves
Source: International Monetary Fund

3. Profit remittances rise as a share of GDP
as migrant remittances fall
• Foreign direct investment
creates liabilities just like bank
loans
• Heavy reliance on FDI for
energy transition will intensify
this trend
• Energy companies earn
revenues in VND and pay
remittances in USD—currency
mismatch will is a problem for
investors and their banks
• Cost of hedging currency risk
in Viet Nam is high
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
%
GDP
Primary income Secondary income
Source: International Monetary Fund

4. Rapid growth of trade and consumer credit
• Credit to GDP
levels exceed
120%
• Most rapid growth
in consumer loans
and trade
• Short-term
lending still
dominant
because banks
largely funded
from current
deposits
0%
20%
40%
60%
80%
100%
120%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Other Trade Industry Construction Agriculture Transport and telecoms
Source: State Bank of Viet Nam

5. Consolidation required if banks are to
sustain high rates of loan growth
0%
5%
10%
15%
20%
25%
30%
Capital adequacy ratios, June 2022
• $11 billion in capital needed to
cover NPLs and still achieve
CAR of 10% (2022).
• Averages conceal wide
variation, especially among
banks with large property
portfolios.
• Bank consolidation hampered
by opaque loan books and
balance sheets.
• Banks weak partly because of
over-reliance on monetary
policy during successive crises.
Source: Fitch Ratings

6. Weak banks increasingly rely on interbank
market for liquidity
0
50
100
150
200
250
300
350
400
0.0
5.0
10.0
15.0
20.0
25.0 1/4/2005
6/4/2005
11/4/2005
4/4/2006
9/4/2006
2/4/2007
7/4/2007
12/4/2007
5/4/2008
10/4/2008
3/4/2009
8/4/2009
1/4/2010
6/4/2010
11/4/2010
4/4/2011
9/4/2011
2/4/2012
7/4/2012
12/4/2012
5/4/2013
10/4/2013
3/4/2014
8/4/2014
1/4/2015
6/4/2015
11/4/2015
4/4/2016
9/4/2016
2/4/2017
7/4/2017
12/4/2017
5/4/2018
10/4/2018
3/4/2019
8/4/2019
1/4/2020
6/4/2020
11/4/2020
4/4/2021
9/4/2021
2/4/2022
7/4/2022
12/4/2022
Overnight
interbank
market
volume
(VND
trillions)
Overnight
interbank
interest
rate
Volume (VNDt) interest rate
Source: State Bank of Viet Nam

7. Public investment has declined, and is
increasingly local
• Viet Nam needs to
reverse fall in
public investment
to cope with
climate change
and energy
transition
• Centrally-managed
public investment
now makes a small
contribution to
GDP
0%
10%
20%
30%
40%
50%
60%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2016Q1
2016Q3
2017Q1
2017Q3
2018Q1
2018Q3
2019Q1
2019Q3
2020Q1
2020Q3
2021Q1
2021Q3
2022Q1
2022Q3
2023Q1
Central
government
share
of
public
investment
(%)
Public
investment
as
%
GDP
Central Local Share of central

8. A Viet Nam Climate Bank for Green & Just
Transitions
• A Viet Nam Climate Bank with a national mandate to catalyze the just
transition to a low-carbon, climate-resilient society.
• Learn lessons from existing institutions: focus on governance,
ownership.
• Involvement of international DFIs in capitalization and governance.
• Financing climate investments through traditional loans, mezzanine
capital, direct equity stakes, blended financing and others.
• De-risking private investment can help at the margin, but relying solely
on profitable projects will not “turn billions to trillions” as is often
promised.