Plugging Viet Nam's Trade Finance Gap
Trade finance support can help the country achieve its goal of becoming an upper middle-income economy by 2030.
Viet Nam’s economy has witnessed an impressive growth rate of 7% on average over the last 15 years. One of the main drivers of this growth has been international trade: major foreign companies have set up factories to take advantage of government’s foreign direct investment (FDI)-friendly policies and relatively low labor costs.
The country’s trade-to-GDP ratio, an indicator of relative importance of trade in an economy, is around 170%, much higher than the global average of 44%.
While Viet Nam has made economic progress, more needs to be done if the country is to reach its goal of becoming an upper middle-income country by 2035.
One of the major constraints to achieving that goal is the trade finance gap.
Notwithstanding Viet Nam’s recent economic success, Viet Nam’s sovereign rating is lower compared to regional peers like Philippines or Thailand. Given the relatively lower rating, international banks may not have adequate country limit/counterparty limit to take Vietnamese bank or corporate risk.
Vietnamese enterprises rely on local banks to meet their financing needs. But too often these businesses cannot obtain the credit they need to meet their pre-export and import financing needs. This prevents local enterprises from reaching their full potential.
The good news is that ADB’s Trade Finance Program (TFP) is working with Vietnamese banks, helping them secure the financing they require.
I witnessed a good example of these trade finance dynamics at play during a recent visit to a textiles factory in Ha Noi.
Ha Noi Industrial Textile Joint Stock Company (Haicatex) produces industrial textiles and garment products. Its two main products are tire-cord fabric, which is used to manufacture tires, and non-woven fabrics for road construction.
Trade finance loans help local businesses expand
Haicatex sells locally and also exports to Australia, New Zealand, Indonesia, Malaysia, and other countries. It sources its raw materials from Belgium, the People’s Republic of China, and the Republic of Korea.
To pay for its imports and manage its short-term financing requirements, Haicatex relies on loans from the Vietnam International Bank (VIB). In turn, VIB depends on credit from foreign banks to meet its corporate borrowers’ demand for hard currency loans.
Foreign banks are not always able to provide enough hard currency due to country (for Viet Nam) or bank (for VIB) exposure limits. This is where the ADB’s Trade Finance Program (TFP) steps in.
TFP provides guarantees to foreign banks, lending hard currency to VIB, which it uses to on-lend to local companies like Haicatex to support their importing and exporting activities.
Since 2011, TFP guarantees have enabled VIB to provide almost $6 million in loans to Haicatex. By tapping into TFP-guaranteed trade loans from VIB, the firm has expanded its operations, more than doubled its revenue, and hired more workers.
But Haicatex is not yet satisfied. It wants to scale up even more by tapping into growing demand both overseas and domestically. The firm is currently setting up a new factory, some of which is likely to be financed by VIB with a TFP-guaranteed loan.
The success story of Haicatex is a clear sign that if Viet Nam is able to fill its trade finance gap, the country can rely on trade to drive its journey to become an upper middle-income economy in less than two decades.
It was gratifying to witness the real and measurable impact of TFP in Viet Nam, one of our most active markets. Since 2009, TFP has supported 5,814 transactions in Viet Nam worth over $8 billion. In the process, over 1,400 Vietnamese companies have benefited from ADB-backed guarantees and direct loans.
Given the importance of trade for Viet Nam, TFP continues to expand and add new partner banks in the country to support local enterprises like Haicatex so they can obtain the financing they require to expand their operations and create jobs.