Credit Misallocation and Economic Growth in Vietnam

IMF Working Papers, September 6, 2019

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The legacy of non-performing loans and high opportunity cost of government financing of bank recapitalization impeded the efficiency of financial intermediation and are an important policy issue in Vietnam.
The paper presents both a theoretical and an empirical analysis of credit misallocation in Vietnam.
Empirical analysis using corporate data indicates credit misallocation between state owned enterprises and private firms in Vietnam.
Theoretical analysis embeds a micro-founded banking model in a political economy setting to assess factors determining the size of bank recapitalization and its effects on:
- the efficiency of financial intermediation,
- economic growth,
- welfare.
The analysis suggests that recapitalization depends on an array of factors, including:
- the tightness of the government budget,
- the decision maker’s concern for the favored sector.

Evidence of credit misallocation between state owned enterprises and private firms in Vietnam is reported based on corporate data.

A micro-founded banking model is embedded in a political economy setting.
The model is used to assess determinants of bank recapitalization size and its effects on financial intermediation efficiency, economic growth, and welfare.
Recapitalization outcomes are linked to:
- government budget tightness,
- policymakers’ preference or concern for the favored sector.

Non-performing loans and government-funded bank recapitalization carry a high opportunity cost that impedes financial intermediation efficiency.
Recapitalization policy choices are influenced by fiscal constraints and political economy preferences, affecting growth and welfare outcomes.