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Mitsuru Katagiri
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. This paper presents a theoretical and empirical analysis of the issue. An empirical analysis using corporate data indicates credit misallocation between state owned enterprises and private firms in Vietnam. On the theoretical side, a micro-founded banking model is embedded in a political economy setting to assess the factors determining the size of bank recapitalization and its effects on the efficiency of financial intermediation, economic growth and welfare. The analysis suggests that recapitalization depends on an array of factors, including the tightness of the government budget and the decision maker’s concern for the favored sector.
Mitsuru Katagiri

I. Introduction Credit misallocation between private firms and state-owned enterprises (SOEs) and other favored firms has been an important obstacle for economic growth in many countries making the transition from plan to market. Politically connected firms are often able to access economic resources at preferential terms, including bank credit from state owned commercial banks and land use rights from provincial and local governments. The low interest rates and implicit or explicit governmental guarantees enjoyed by such firms squeeze the resources

Siddharth George, Mr. Divya Kirti, Soledad Martinez Peria, and Rajesh Vijayaraghavan

misallocation could also be driven by credit market misallocation, with credit flowing to less productive firms, and more productive firms facing credit constraints that impede growth. Moreover, credit misallocation might give rise to a large presence of zombie—i.e., unviable—firms, which can be a barrier to the entry and growth of other firms. This phenomenon has been shown not only for Japan ( Caballero, Hoshi, and Kashyap 2008 ), and other OECD countries ( McGowan, Andrews, and Millot 2017 ), but also in the case of India ( Chari, Jain, and Kulkarni 2021 ). Since banks

International Monetary Fund. Asia and Pacific Dept

Credit Misallocation and Economic Growth in Vietnam 1 The legacy of non-performing loans (NPLs), scarcity of funds for recapitalization and resulting credit misallocation between the favored sector (proxied by SOEs) and the rest of the economy (non-SOEs) is an important policy issue in Vietnam, weighing on the efficiency of resource allocation and economic growth. This paper presents a theoretical and empirical analysis of the issue. A simple banking model is embedded in a political economy setting to assess the factors determining the extent of

International Monetary Fund. Asia and Pacific Dept

(WEO); and IMF staff estimates. 4. …while lagging on the credit side . High investment, together with credit misallocation, has led to falling efficiency: the credit intensity of output doubled compared to the pre-GFC period and has continued to rise. Credit misallocation has, to a large extent, been driven by financing of nonviable firms, especially state-owned firms in overcapacity sectors, such as construction and steel. Since 2016, there have been early signs of improving credit structure, with a shift of lending from overcapacity sectors to the “new economy