Unraveling Pakistan’s economic crisis

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Pakistan is on the brink of an economic meltdown that threatens the nation’s fragile financial credibility and paves the way for potential political, humanitarian, and social upheaval.

Marked by widespread civil-disobedience movements, dwindling foreign-exchange reserves, soaring prices of essential commodities such as wheat, onions, milk and meat, persistent power blackouts, and an upcoming election, Pakistan faces a perfect storm of challenges.

Prime Minister Shehbaz Sharif’s government is grappling not only with internal political turmoil resulting from the ousting of the administration led by Imran Khan but also external pressures from intergovernmental agencies such as the International Monetary Fund (IMF).

A struggling economy

The disruptions caused by the pandemic had a severe impact on economies worldwide, including Pakistan. Supply-chain disruptions affected various sectors, from retail to automobile manufacturing.

The resurgence of Covid-19 in China, the world’s second-largest economy and a significant player in global value chains across South and Southeast Asia, has added to the spillover effects on the global economy.

Consequently, by February, Pakistan’s foreign-exchange reserves hit an unprecedented low of US$3.19 billion, enough to cover only two weeks of import expenses, falling significantly short of the IMF’s mandated three-month import cover.

The situation is further aggravated by Pakistan’s daunting task of repaying a massive debt of $73 billion by 2025, amid a volatile political landscape and uncertain reliability of lending nations. The country’s total debt burden of $126 billion consists mainly of external loans obtained from China and Saudi Arabia.

Figure 1: Trends in Pakistan’s Foreign Reserves

Source: State Bank of Pakistan

Security concerns stemming from violent separatist groups in Sindh and Balochistan have strained the strong relationship between Pakistan and China, possibly causing the latter to suspend its developmental initiatives under the Belt and Road Initiative (BRI) and the China-Pakistan Economic Corridor (CPEC).

This further hurts Pakistan’s international reputation, as it is already considered a breeding ground for terrorism, hampering its prospects for foreign investment and assistance.

Saudi Arabia, on the other hand, has been a relatively stable supporter, except for occasional demands for immediate debt repayment.

While the relationship between the Saudi royal family and Pakistan has evolved into a strategic partnership, with Pakistan strengthening Saudi Arabia’s military and Riyadh making critical investments in Pakistan, the future of this friendship is undeniably based on geopolitical and religious interests.

Endless debt

Pakistan’s historical and cultural ties with its key allies, China and Saudi Arabia, run deep despite present circumstances suggesting otherwise.

China’s involvement in Pakistan’s development and trade dates back to the 1960s when Beijing extended interest-free credit of around $85 million (equivalent to several billion dollars today) for technological and infrastructural projects. Bilateral trade agreements were also signed to accelerate industrialization in Pakistan after the Sino-Indian war.

China and its commercial banks account for about 30% of Pakistan’s total external debt, exceeding $100 billion. This proportion surpasses the financial support received by debt-ridden Sri Lanka from China, which accounts for 20% of its total public external debt.

Moreover, the recent disbursement of an additional $700 million from the China Development Bank (CDB) in early 2023 further amplifies Pakistan’s burden of external debt obligations this year.

Figure 2: Pakistan’s Total External Debt (in US$ million) from 2006 to 2022

Source: CEIC / State Bank of Pakistan

Pakistan’s chances of defaulting on its foreign obligations this year are more imminent than ever. The nation’s dollar-denominated bonds have reached an all time low. This problem is exacerbated by the country’s low foreign-exchange reserves and upcoming repayments amounting to $7 billion in the coming months.

Additionally, negotiations with the IMF for a bailout have been slow and uncertain, leading to failure to avert a debt default and stabilizing sharply declining bond prices, which have fallen by about 60%.

Pakistan’s reliance on external loans, primarily from China and Saudi Arabia, has further compounded its economic challenges.

While these alliances have historically been strong, recent security concerns in such regions as Sindh and Balochistan have strained the relationship with China. The threat posed by violent separatist groups not only endangers the safety of Chinese nationals but also jeopardizes the future of key developmental initiatives under the BRI and CPEC.

Granting permission for Chinese security firms to operate within Pakistan would come at the expense of the Pakistan Army’s ability to protect foreign nationals.

On the other hand, Saudi Arabia has been a long-standing partner for Pakistan, providing critical support in various sectors. However, occasional demands for immediate debt repayment add to Pakistan’s financial strain, making it challenging to maintain a stable economic trajectory.

In conclusion, Pakistan finds itself at a critical juncture, with its economy on the verge of collapse. The country’s fragile financial credibility is at stake, and the consequences could be far-reaching, affecting not only the economy but also the political, humanitarian, and social fabric of the nation.

It is imperative for the government to address the internal political turmoil and effectively navigate the external pressures from intergovernmental agencies.

Additionally, a thorough evaluation of Pakistan’s foreign partnerships, particularly with China and Saudi Arabia, is necessary to determine their viability and ensure a sustainable path forward.

A more detailed article by this author can be found here: Debt ad Infinitum: Pakistan’s Macroeconomic Catastrophe.

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US to slap new sanctions on Myanmar state-owned banks

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Zaw Min Tun told the state media channel MWD on Tuesday evening that the country has experienced sanctions before and they will not face losses if there are new sanctions on Myanmar state-owned banks. He said the US was “just doing this to cause difficulties in economics and politics”. “TheseContinue Reading

Yuan is internationalizing more than meets the eye

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China has made clear its discontent with the role of the US dollar in the international economy and its intention to internationalize the RMB as an alternative international currency.

A popular narrative tells us that as China is now the world’s second-largest economy, the largest trading nation and the largest trade partner to 120 countries, it is inevitable that the RMB will play a larger role in the international economy. A side effect of the move to a more RMB-centric international economy will be the loss of US economic power. 

If the United States continues to weaponize its dollar hegemony, this is only bound to accelerate the diminishment of the dollar. The United States would be best served by refraining from using economic statecraft to pressure countries to adhere to its wishes.

China has already developed the “financial plumbing” required to facilitate the internationalization of the RMB. The country has developed an alternative cross-border payments system (CIPS) to rival Fedwire and the Clearing House Interbank Payments System. China’s Alipay and Tencent pay have also now been widely adopted abroad. 

And since 2020 China has been trialling its Digital Currency Electronic Payment network, which has the potential to accelerate international use of the RMB.

Perhaps more telling than what China has done to facilitate the international use of the RMB is what it has not done. As China has internationalized its own balance sheet, it has remained decidedly dollar-centric. 

China is still wedded to a policy of exchange rate targeting and requires large dollar reserves of its own — in part because of the high propensity for domestic capital flight — which is problematic when it’s promoting the greater international use of the RMB. China is yet to liberalize its capital account to make the RMB freely exchangeable — a prerequisite for reserve currency status.

China’s capital markets remain underdeveloped with both regulated and limited foreign participation. Foreign issuances denominated in RMB remain small.

Nor has China shown a willingness to become a net supplier of RMB to the world by running current account deficits, preferring instead to lend RMB to other central banks through swap arrangements. 

While China has facilitated the use of the RMB in trade, it remains a long way from having the overarching macroeconomic structure that would make it a contender for reserve currency status.

This is important because it is through trade that countries earn the foreign exchange required to service their foreign currency-denominated liabilities. Earning RMB through trade is a risky way to earn income to service a dollar-denominated debt. 

China wants its currency to rival the dollar in international trade and settlements – but it’s not that simple. Image: iStock

There is no sustainable dichotomy between the currency denomination of trade and the currency denomination of a country’s foreign assets and liabilities. The majority of the world’s foreign currency debt is denominated in US dollars and very little is denominated in RMB.

These observations strongly challenge the narrative that the dollar is in decline and the RMB will replace it in the international economy. Many of China’s largest trading partners, such as Hong Kong and Saudi Arabia, continue to operate on a de facto dollar standard. The RMB has gained the greatest traction among countries, such as Iran, that have strong geopolitical reasons for abandoning the dollar.

With the ratcheting up of Western sanctions against Russia, many countries in the southern hemisphere have expressed a desire to reduce their dollar dependency. Not least among these has been the disclosure that Saudi Arabia and Brazil will use the RMB for bilateral trade with China. In both cases, China enjoys considerable monopsony power, being the largest importer of hydrocarbons, soy products and iron ore.

Despite the speculation, China’s progress appears limited. According to SWIFT data, transactions denominated in RMB accounted for less than 1.5% in December 2022 — slightly more than those denominated in Australian dollars and less than those denominated in Swiss francs. This puts RMB in a distant 7th place. The US dollar accounts for nearly 48% of the total.

There are two reasons why the RMB’s diminutive market share in cross-border payments using SWIFT might not be a fair reflection of the RMB’s use in trade. First, not all cross-border transactions use SWIFT. Estimates by ANZ’s China research team suggest that about 20% of transactions settled using China’s own CIPS system do not use SWIFT.

Second, the total size of the cross-border payments market — around US$170 trillion per year — is about eight times larger than world merchandise exports at $22 trillion. 

If one assumes the vast majority of international RMB usage is trade-related and not asset related — which seems reasonable given the low foreign participation rate in RMB-denominated asset markets and China’s dollar-centricity when it comes to their foreign assets — it might be that about 5-7% of world trade is already denominated in RMB, though such estimates need to be treated with caution. CIPS itself saw a 75% growth in settlement volume in 2021 to about 80 trillion RMB or US$13 trillion.

Some might interpret this level of RMB usage as disappointing. But if a collateral purpose of RMB internationalization is to immunize China from potential Western sanctions while providing sanctioned countries with a workaround and to provide efficiency gains in bilateral trade, then it is highly satisfactory from a Chinese perspective. 

The US has extended its sanctions on Russia to countries that support or sell to its military. Image: Facebook

The return of Russian oil exports to above 2019 pre-war levels demonstrates that sanctions, though supported by countries representing more than half the world’s GDP, have lost some of their efficacy even while the US dollar remains hegemonic.

The ability to cut selected institutions out of the SWIFT system is a powerful tool of economic statecraft. But it must be remembered that trade took place before SWIFT was established and it is still possible — albeit more inconvenient and expensive — to conduct trade without SWIFT today. 

If China is outside the sanctions, an RMB-based financial ecosystem helps facilitate and reduce the costs of sanction circumvention — as it was, in part, designed to do.

Stewart Paterson is Research Fellow at the Hinrich Foundation and Head of Economic Risk at Evenstar. This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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RHB recognises top fintech innovators at inaugural RHB Xcelerator demo day

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Startups received 8 weeks of mentorship, consultations from RHB Group units
Program mentored startups in micro banking, customer experience & insurance 

RHB Banking Group announced the graduation of seven growth-stage startups from its inaugural RHB Xcelerator programme.
In a statement by 1337 Ventures, RHB’s partner for RHB Xcelerator, the firm said the accelerator programme…Continue Reading

What China must do to revive its fading recovery

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About the only thing falling faster than China’s economic prospects is the yuan.

China’s sliding currency is but the latest indicator pointing toward a year that could be the hardest yet of the Xi Jinping era. That seemed clear enough last week, when the People’s Bank of China surprised the world with a rate cut.

The PBOC eased again today, cutting the one-year loan prime rate by 10 basis points from 3.65% to 3.55% and the five-year loan prime rate by 10 basis points from 4.3% to 4.2%. Investors’ attention is now on how quickly and aggressively Xi’s government might act to pump additional stimulus into Asia’s biggest economy.

The PBOC moves reveal “growing concerns among policymakers about the health of China’s recovery,” says Julian Evans-Pritchard at Capital Economics.

Even those betting China could well exceed this year’s 5% economic growth target are lowering their forecasts. Case in point: Goldman Sachs cut its forecast to 5.4% from 6%, citing already elevated debt levels and Xi’s determination to limit property speculation. 

Xi’s team now faces questions on two key fronts. One is whether Beijing’s slow stimulus rollout so far puts it behind the curve. Two, whether officials risk incentivizing bad behavior that Xi’s team spent the last few years trying to discourage.

“It’s clear China’s policymakers have shifted back to supporting growth after the recovery disappointed, but less clear if they can do so without worsening old problems,” says economist Xiaoxi Zhang at Gavekal Research.

So far, Zhang argues, China’s “pivot to more dovish policy was less well telegraphed” than investors would prefer. “Though expectations for a shift had been building over the last two weeks after early indicators for May continued the disappointment of April,” Zhang says.

The latest full set of monthly data “confirmed that a sharp reversal in the property sector and a decline in exports had opened up a hole in aggregate demand,” Zhang notes.

“By cutting its short-term policy rate in response, the People’s Bank of China sent a powerful signal, as it moves interest rates only rarely. Still, there is a strong consensus domestically that more direct support for demand is necessary through fiscal policy,” Zhang says.

On June 16, at a State Council meeting, Xi’s leadership team discussed a package of measures, but has kept the details close to the vest.

Li Qiang has his work cut out for him. Image: Screengrab / NDTV

There, the council, led by Premier Li Qiang said that “in response to the changes in the economic situation, more forceful measures must be taken to enhance the momentum of development, optimize the economic structure and promote the continuous recovery of the economy.”

As Zhang sees it, “more spending on infrastructure would be the easiest and quickest way to stimulate growth, although this would disappoint advocates of structural reform.”

No reform is more important than addressing a growing crisis in China’s property sector. Since data show a critical mass of mainlanders are reluctant to invest in anything other than real estate, stabilizing the market is key to boosting household confidence.

Getting China’s 1.4 billion people to save less and spend more is the top goal for Xi’s third term. If Xi is serious about mobilizing savings, then revitalizing property, which can account for as much as 30% of gross domestic product (GDP), requires urgent attention. This means ending boom-bust cycles in the longer run.

The fragile state of the property sector is warping the underlying mechanics of China’s economy, warns US policy research firm Rhodium Group. Its analysts found that, thanks to cratering property values, more than 100 Chinese cities had difficulty servicing debts last year.

This alone risks deadening the impact of any fiscal stimulus that either the PBOC or Xi’s team might unleash in the months ahead.

In a recent report, Rhodium looked at trends in 205 mainland cities and financial data of nearly 2,900 local government financing vehicles (LGFVs). These schemes raise money to drive giant infrastructure projects aimed at boosting local GDP.

In a report last month, S&P Global Ratings warned that “China property is set for another year of softening.” Even as conditions are coming “close to normal” in some richer, upper-tier cities, S&P argues that “weaknesses in China’s tier three and four cities will keep the property recovery on an ‘L-shaped’ path. Conditions will hit the developers with heavy exposure to lower-tier cities the hardest.”

S&P notes that “we view this as the latest stage of a crisis that resulted in US$52 billion in offshore bond defaults last year, with about one in four developers brushing against insolvency. The downturn in lower-tier markets will hit a large section of the industry.”

Bottom line, S&P says, is this “strained environment will require a hard look at entities’ liquidity, especially declarations of unrestricted cash, and cash-generating capabilities. About 40% of rated developers could experience rating pressure if sales in tier-three/tier four cities fell 20% this year.”

In November, Xi’s team began telegraphing a series of measures – 16 in total – to promote the “stable and healthy development” of the sector.

China is having property troubles. Image: Twitter

Key among them was credit support for highly indebted property developers, looser purchasing rules on first homes by new city dwellers, assistance for deferred-payment loans for homebuyers and financial support to ensure completion and handover of projects to homeowners.

The plan “is much more comprehensive, ranging from addressing the liquidity crisis faced by developers to a temporary easing of a signature restriction on bank lending, from equally treating private and state-owned housing developers to re-initiating the financial funding channels for them,” notes economist Jinyue Dong at BBVA Research. “It marks all-round efforts to bail out the real estate market to secure a ‘soft landing’ after recent data showed some mild improvement.”

But it’s imperative that Beijing remembers that “sentiment matters,” Dong says. The 16-point plan, which aims “to avoid a real estate hard-landing, is still lagged behind the stimulus measures back to 2015 while the easing of zero-Covid policy is still slower-than-expected.”

“That means, without the deluge of massive stimulus on real estate to help rebuild the housing price increasing confidence, whether and how long the ongoing housing stimulus could bring the housing market out of quagmire is still questionable. 2023 might witness some mild recovery, but the long-term robust recovery needs more stamina ahead,” Dong says.

Economist Zongyuan Zoe Liu at the Council on Foreign Relations notes that “a healthy housing market is critical to China’s economic growth and financial stability, but slowing home sales, driven by pandemic restrictions and demographic shifts, has unsettled both real estate developers and home buyers.”

That’s why the PBOC over the last year “has taken a series of policy actions aimed at lowering mortgage interest rates in a bid to spur buyer demand and shore up home prices,” Liu notes. It’s taken the form of Chinese banks being allowed to offer adjustable-rate mortgages subject to a nationwide minimum interest rate floor.

Under normal circumstances, Liu explains, the mortgage interest rate floor is equal to the loan prime rate, or LPR, for first-time homebuyers and LPR plus 60 basis points for all other borrowers.

Beginning in May 2022, the PBOC “broke this convention by lowering the nationwide floor on new mortgages to 20 basis points below LPR for first-time buyers,” she says. Later in September, the PBOC announced it was “relaxing” the nationwide interest rate floor in some cities where housing prices had been trending down for the previous three months.

Yet more than fresh stimulus, China needs comprehensive property market reforms that alter incentives and make investments more stable and productive. This responsibility falls to newish Premier Li, who took China’s No 2 job in March.

His balancing act: loosening fiscal policy to stabilize growth without fueling new bubbles in unproductive borrowing and leveraging.

“China has plenty of room to boost stimulus if it so chooses,” says Michael Hirson, China economist at 22V Research LLC. “The key obstacles are concern over financial risks and the reluctance so far to leverage the central government’s balance sheet to expand fiscal stimulus.”

Analysts say China has room to pump up economic stimulus. Photo: Facebook

Ting Lu, Nomura’s chief China economist, says it’s reasonable to expect “more easing and stimulus measures.” Lu stresses that “amid a deteriorating property sector, its potentially devastating impact on government finance and the rising risk of a double-dip, we do not expect Beijing to sit idle.”

One priority needs to be working faster to get toxic and potentially sour assets off property developers’ balance sheets.

In recent years, Beijing has indeed created a network of funds that borrow some features from the Resolution Trust Company mechanism the US used to clean up the savings and loan crisis of the 1980s. Japan did the same in the 1990s to end the 1980s bad-loan crisis.

Li’s charge will be to intensify efforts to ensure that financial institutions are limited in their ability to create fresh “moral hazards” that increase reliance on public bailouts in the longer run.

For now, even the International Monetary Fund thinks China has room to ramp up its stimulus-industrial complex.

“China has the policy space to keep monetary policy accommodative because inflation is very much muted,” says Krishna Srinivasan, the IMF’s director for Asia Pacific. “It also has the fiscal space to provide support.”

Yet the important thing, says Citigroup economist Xiangrong Yu, is a stimulus burst “centered on the property sector, with expansionary monetary and fiscal policies to keep up growth momentum.”

Yu adds that “we think the overall policy tone for this sector could transfer from stabilizing to cautious stimulating. More efforts would be needed to stop a downward spiral.”

Follow William Pesek on Twitter at @WilliamPesek

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Proposed special economic zone could strengthen special Singapore – Malaysia ties

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It takes five minutes for Emily Ma to leave the country. 

Perched on a long bench in Singapore’s Woodlands Station, the slight elegant retiree doesn’t seem in a rush. The close links between her home country and neighbouring Malaysia allows her to build a base across both sides of the border. 

A shuttle train leaves 13 times a day from Singapore’s Woodlands station and arrives in the Malaysian city of Johor Bahru just five minutes later. A bus takes one hour, and non-residents are currently allowed to stay in each country for up to 30 days without a visa.

“I go for a holiday, to see friends, or just to relax,” Ma said. “These links are important because [Singapore and Malaysia] used to be one family. In a way, we still are one family.”

Once part of the same country, these neighbours remain close trading partners with increasingly intertwined economies. As ASEAN states deepen their connections through schemes like the bloc’s Single Window customs programme and cross-border QR payments arranged through central bank collaborations, Malaysia and Singapore may soon draw even closer together with a transnational special economic zone between the city-state and the state of Johor 

The combined GDP of their two intertwined economies is already predicted to exceed $1 trillion within the next five years, more than a quarter of the total ASEAN bloc. The special zone is still in tentative stages, first proposed unofficially by Malaysia’s Economic Minister Rafizi Ramli in May, but could mark a significant step in the countries’ integration. 

Rafizi Ramli, Malaysia’s economic minister, has spoken about the potential of an economic zone between the two countries. Photo: Saeed Khan/AFP

While details of what such a collaboration would entail remain scarce there are plans to raise it at an upcoming Malaysian Cabinet meeting before bringing it to the annual meeting of a Malaysia-Singapore joint committee for economic cooperation, expected to be held in mid-July.

“Malaysia and Singapore enjoy strong ties in terms of trade and investment flows, tourism and labour movement,” said M. Niaz Asadullah, a professor of development economics at Monash University Malaysia. “But there is untapped potential for mutual economic gains if Singapore can leverage its close proximity to natural resources rich Malaysia.”

Thousands of Singaporeans cross into Malaysia every day by the 1,056-kilometre rail and motorway causeway that has linked the two over the Johor Strait since 1924. Bus fare for the crossing starts from about $1.48 (SGD 2).

The convenience of travel has created a longstanding symbiotic exchange of labour, trade and people between the two regions. As of 2014, it was estimated that about 5,000 Singaporeans live and work in Johor Bahru. The ringgit’s recent depreciation against the comparatively stable Singaporean dollar has made the cost of living in the Malaysian region comfortable compared to the expensive city-state. 

But while more casual travel is a breeze, the closeness for commercial purposes is still marred by long queues, traffic bottlenecks and customs checks. Recent complaints reveal some Singaporean bus passengers spent up to seven hours waiting at the Johor-Bahru customs checkpoint, a delay a special economic zone could ease.  

Motorists coming from Malaysia’s state of Johor form a queue as they approach the immigration checkpoint to enter in Singapore on 31 March, 2023. Photo: Roslan Rahman/AFP

Strengthening inter-ASEAN ties

The announcement of the proposed region comes as part of a concerted push by Malaysian Prime Minister Anwar Ibrahim to strengthen his country’s inter-ASEAN ties and reduce reliance on Western economies. 

As its closest neighbour, the city-state is a regional economic hub and a natural trading target for Malaysia. 

The two countries have deep historical connections – Singapore was originally part of the Federation of Malaya after the two countries achieved independence from the U.K. but split in 1965. A January meeting with Singaporean leaders secured $4 billion in foreign direct investment from the Lion City. 

“[Anwar’s] latest effort to renew bilateral ties with Singapore could be motivated by … a ‘look 

East’ philosophy,” said Asadullah. “By strengthening economic ties with Singapore, this can help Malaysia accelerate its transition to a high income nation status by 2028.”

For its part, Singapore benefits from the resources and labour available in the Malaysian state, with many Singaporean companies already choosing to locate their assembly and production lines in Johor.

People board a bus in Singapore on 29 November, 2021, under the vaccinated travel lane (VTL) for border-crossing passengers to Malaysia’s southern state of Johor. Photo: Roslan Rahman/AFP

Johor: a cornerstone of trade

Johor’s role as a cornerstone in the regional trade between Singapore and Malaysia has been a longstanding part of both countries’ economic history. In 1988, the border state announced a policy ‘twinning’ with Singapore that led to a 200% increase in investment from its neighbour that same year. 

Since then, the relationship between the two has only deepened – especially amidst broader economic recovery efforts after two years of pandemic-related border issues. 

“The two-year Singapore lockdown really had an impact on Johor,” said James Chin, professor of Asian studies at the University of Tasmania. “Now people are really looking for new impetus to push this Johor-Singapore growth triangle.”

Another motivating factor of this deepening network of economic relations would be renewable energy, as announced by minister Ramli.

This follows a May announcement to lift a Malaysian ban on renewable energy exports, part of the government’s ambitious aims to double renewable energy capacity by 2050. But the country’s renewable energy sector is still nascent, with coal and natural gas currently meeting 75% of Malaysia’s power demands. 

Over the border, Singapore is also trying to boost its renewables with limited success. Experts believe a symbiotic partnership between the neighbours could unlock new potential for both.

“The limited land area is a big challenge for Singapore to develop large-scale renewable energy projects,” explained Kim Jeong Won, research fellow at Energy Studies Institute of National University of Singapore. “Importing renewable electricity through regional power grids can help Singapore’s energy transition and the deployment of low-carbon solutions in the region.”

Professor Asadullah also hopes the new proposed economic region will help meet growing regional demand for energy while encouraging a mutually beneficial trade between Malaysia and Singapore.

“Land and natural resource-poor Singapore is particularly keen to develop a sustainable pan-ASEAN power grid,” she said. “This will not only pave the way for greater bilateral trade in clean energy, it’ll also encourage FDI from Singapore into Malaysia’s renewable energy sector … and overall development of green infrastructure.”

Smoother trade and transactions

The practicalities of how the two countries’ different economies, currencies and markets would interact could raise hurdles to seamless trade within the region. For Asadullah, the success of the economic region would rely on lowering cross-border transaction costs and harmonising labour and environmental standards. 

Singapore and Malaysia’s central banks have linked their countries’ smartphone QR systems to facilitate cross-border financial transactions.

“The key challenge is to coordinate the necessary institutional reforms,” said Natalya Ischenko, CEO of Robocash Group, an international financial lending platform, adding that the effects of the QR developments should be “significantly manifested” in the coming year. 

She estimated that cross-border QR payment systems could facilitate trade between the two countries of at least 0.5% and e-commerce in Singapore by at least 2% a month.

“[If so], the foreign trade between Singapore and Malaysia will be between $136.9 billion and $147.3 billion by the end of 2024,” she said. 

For Chin, the latest proposed economic tie is a continuation of a history of two countries linked by politics, geography and ambitious economic goals. 

“Of course this is good for the region. It is a win-win situation,” he said. “[But] the way to understand the economic relations between Johor and Singapore is that they are tied to each other. Whether they like each other or not, it really doesn’t matter, they have to work together for prosperity.”

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Vietnam’s boom looking like a property bust

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HANOI – Vietnam’s once-thriving real estate sector is under stress as developers default on their bonds, a market downtrend set in motion last year by a government crackdown on dubious property deals. That, in systemic turn, is putting new strains on the banking sector.

With economic growth projected to fall from 8% in 2022 to 6.3% this year – a figure that could be optimistic with rising economic uncertainty in Vietnam’s top global export markets – property sector troubles could deteriorate before they ameliorate in the months ahead. 

The property market clampdown was launched in part to curb land speculation and slow the rampant construction of luxury condominiums, where the returns are higher for developers but largely out-of-reach to average Vietnamese investors and buyers.

The market turned last October when Ho Chi Minh City-based property tycoon Truong My Lan, chairwoman of the Van Thinh Phat Holding Group, was arrested on charges of bond market fraud. Her arrest sparked a run on the Saigon Commercial Bank (SCB), where Truong allegedly has a close lending relationship.

A State Bank of Vietnam (SBV) intervention, which guaranteed to cover all SCB deposits, prevented a potential systemwide run on banks. But the central bank intervention did not, however, stop an eventual rout on Vietnam’s nascent, property-oriented bond market.

The central bank turned back a run on Siam Commercial Bank deposits. Image: Facebook

Truong was arrested due to her company’s alleged abuse of a bond issue, which banking sources say diverted funds away from its designated capital-raising purpose for land speculation.

Truong was not the only high-profile victim of last year’s anti-corruption drive, which saw the sacking of former state president Nguyen Xuan Phuc and two now ex-deputy prime ministers.

The timing of the clampdown couldn’t have been worse. The SBV was forced to raise interest rates by 200 basis points shortly after Truong’s arrest, a monetary tightening that sought to contain galloping inflation, bolster the falling dong currency, and replenish sagging foreign exchange reserves.

The interest rate hikes were a further blow to property developers and buyers and added pressure on banks. Local banking sources say there was near zero credit growth in the first three months of 2023, a reflection of enduring trouble in the property sector.   

Faced with declining sales and uncertainties about the legal status of several projects (the corruption campaign targeted questionable deed titles for urban land where several high-rise, luxury condominiums were built), property companies have defaulted on their bonds as cash flows have dried up.

In February, Novaland Investment Group, Vietnam’s second-largest property group, defaulted on a 1 trillion dong (US$43 million) bond issue.

According to a S&P Global Ratings report, as of March 17, 2023, at least 69 Vietnamese bond issuers were unable to meet their debt obligations on maturity, with a total default value of 94.43 trillion dong, representing 8.15% of the bonds’ outstanding value.

“By sector, 43 issuers are enterprises in the real estate industry with a total value of defaulted corporate bonds at 78.9 trillion dong, accounting for 83.6% of the total default value,” said the report.

Unless the tide somehow turns on the property sector, many more defaults could be on the horizon. “The real estate sector has the largest outstanding bond value of 396.3 trillion dong, which accounts for 33.8% of the total outstanding bond value,” noted S&P.

The bond market slump – new bond issues fell more than 90% year-on-year in the first quarter and there were none issued in May – has hit Vietnam’s stock market, which has underperformed the region. There are some 20 listed private property firms on the two stock exchanges, some among Vietnam’s top companies.

Novaland Investment Group is among the Vietnamese developers to default on their bonds. Image: Twitter

To be sure, credit rating analysts see upside to the government’s actions.

“Government policies were to discourage property speculation and support the affordable segment of the market,” said Fiona Chan, an assistant-director at S&P Global Ratings.

“This approach may help the Vietnam property market progress towards a more sustainable growth in the long term, but the market will need to sustain some short-term pain. For pre-sales, we estimate that aggregate sales will decline by 15-20% this year,” Chan told a recent webinar

The wave of defaults also reflects regulatory failings in the bond market, which has only taken off in the past five years, driven to a great extent by the fast-expanding property sector. All bonds are sold domestically in dong currency to mostly private investors and local banks.

“I think the bond market got ahead of the regulators, a bit,” said Barry Weisblatt, an investment strategist at SSI Asset Management Company. “They hadn’t really developed the rules so people were gaming the system,” he said.

Realizing they had been too lax on bond issuances, authorities last September issued Decree #65, which suddenly tightened regulations and required more disclosure for the private placement of corporate bonds.

The result was dramatic with a more than 90% reduction in bond issuances thereafter. In March this year, authorities essentially retracted Decree #65 and replaced it with Decree #8, which postponed the tighter regulations for at least a year. 

While the delay was welcome, in the longer term authorities will need to more vigilantly regulate the bond market, analysts say.

“The government has responded in a way which I think is conducive for the long-term development of the bond market,” said Xavier Jean, senior director/corporate sector for S&P Global Ratings. “It is a process that can take years, but I think it is a necessary first step,” he added.

Meanwhile, Vietnam’s corporate sector and small and medium-sized enterprises (SMEs) have over time become even more reliant on banks, which are suffering from their own constraints this year.

Vietnamese banks have grown their assets at 15-30% over the past decade, with a high percentage of the system’s loans going to real estate – one of the few business sectors in which the local private sector has taken off in a still largely communist-controlled economy.

“Exposure of state banks to real estate is about 27% of their books, compared to 37% for private banks – developers, construction companies and residential mortgages,” said Tamma Pebrian, an analyst for Fitch Credit Ratings in Singapore.

Vietnam’s four largest state-owned banks, which account for more than 40-45% of the banking system’s assets, have the advantage of being the exclusive source of funding for the country’s still numerous and powerful state-owned enterprises (SOEs).

Many of the more successful private banks have cultivated close ties with private property developers over the years, which allowed them to grow their books and profits in tandem with the property boom.

As developers sought more funding, and because banks face strict single-client lending ceilings, banks and their affiliated security firms helped many developers issue debt on the bond market, acting both as buyer and agent for selling the issuances to the public. There are no institutional investors such as endowments, funds or insurance companies in communist-run Vietnam.

The banks then helped real estate companies by issuing mortgages to investors interested in buying their condominiums and other property developments. This bank-client relationship was a win-win until the government intervened last year.    

In March, Moody’s Credit Ratings downgraded its outlook on Techcombank, one of Vietnam’s most profitable private banks, from “stable” to “negative.” Moody’s said the downgrade reflected an expectation that negative impacts from the real estate market will affect the bank’s “independent credit strength.”

Vietnam’s banks are highly exposed to the property sector. Image: Facebook

Techcombank is one of the main creditors to VinGroup, whose affiliate Vinhomes is the largest property group in Vietnam with developments in over 40 cities across the country. VinGroup has not defaulted on any of its bonds, yet.

SBV, instead of forcing defaulted bond issuers to pay up or go bankrupt, leaving the public out of pocket and the banks with massive non-performing loans in the form of bad bonds on their books, has taken a softer approach.

Issuers and holders have been encouraged to restructure bond repayment periods, or in some cases accept condominium units in lieu of payment.

Earlier this year, the central bank also allowed banks to lower their interest rates by 100 basis points while raising the system’s credit growth ceiling to 16%, which is still low by Vietnam’s historical standards.

After years of rapid growth and impressive profits, this year is expected to be a comedown for Vietnam’s banks. That said, most analysts do not foresee a systemic collapse in the cards.

“Vietnam’s domestic banks benefit from their external net asset position, with still-limited linkages to global markets,” S&P said in a May press release.

“However, thin capital buffers, elevated indebtedness in the economy, cross-ownerships, connected lending, and the current property market, including the wider impact on upstream construction and downstream services, could affect the banks’ asset quality,” S&P said.

Many of the better-run private banks boosted their capital adequacy ratios during the boom times, and while the big state banks still need to do so, they are in little to no danger of going under, analysts say.

“Last year the banks saw 30% profit growth, so it was a real boom period,” said Fitch’s banking analyst Pebrian. “This year we are expecting about 13% profit growth for the sector,” he said – a fallback, to be sure, but not a collapse.

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