Bad Bank Plan Could Lift Vietnam ETF
Up 10.3 percent year-to-date, the Market Vectors Vietnam ETF (NYSE: VNM) is something of a standout among emerging markets ETFs this year.
While some major diversified emerging markets funds have been laggards, VNM has stood tall, though it should be noted the ETF is lower over the past month and Vietnam is classified as a frontier market by index providers.
Still, the ever-volatile VNM has upside potential on the back of Vietnam's plan to form a TARP-esque debt asset management company to absolve Vietnamese banks of scores of sour loans.
The bad debt management company could be set up as soon as this month and will issue bonds to finance the acquisition of debt from lenders, Bloomberg reported, citing a member of Vietnam's National Financial and Monetary Policy Advisory Council.
The plan has been in the works for several months and some market participants could argue it is already "priced in" when it comes to VNM.
Still, there is no denying any positive steps toward bolstering Vietnam's fragile banking sector could directly benefit VNM. The lone ETF tracking the Southeast Asian nation features a 42.1 percent allocation to the financial service sector, more than double its exposure to energy, the ETF's second-largest sector weight.
That large sector concentration, a familiar theme with many ETFs tracking developing world countries, has previously proven troublesome for VNM. The ETF plunged in the second and third quarters of 2012 as news broke regarding arrests of multiple Vietnamese banking scions.
Even a rumor to that effect lead to a glum one-day performance for VNM in late February.
At issue for the government and the bad loan management company is figuring out exactly what the bad-debt ratio is at Vietnamese banks. The government said late last month the ratio fell to six percent from eight percent a year earlier, but Fitch Ratings pins the number at higher than percent, Bloomberg reported.
Clearly, it is possible that the bad-debt ratio for Vietnamese banks could turn out to be far worse than the market is willing to stomach on a near-term basis. The higher the cost of capitalizing Vietnam's banks, the bigger the drain on GDP in a country that in 2012 saw its slowest rate of GDP growth since 1999.
On the other hand, the bad loan company is a "necessary evil." Arguably, the sooner the firm becomes a reality, the sooner Vietnam can go about informing global investors about the extent of its bad-debt ratio.
That may sound simplistic, but consider this: Foreign investors, including Japanese banks, have recently shown an appetite for acquiring stakes in their Vietnamese counterparts.
In fact, the State Bank of Vietnam is considering boosting foreign ownership limits in Vietnamese banks, which currently cannot exceed 30 percent of the bank's charter capital. Should the bad-debt management plan progress smoothly and not spook global investors with any negative surprises, the program could provide a spark to VNM later this year.
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