Inflation: Small Enterprises - Big Concerns

Inflation and the trade deficit are causing serious impacts to all aspects of economic and social life. To earn a living is getting more difficult because of price rises, unemployment and bankruptcy.

Opening the seminar on “Tackling inflation from business administration angle,” Dr Han Manh Tien, Chairman of Vietnam Business Administrators Association, said: “Above all, we, business administrators, feel the most direct and deepest impacts from this situation.”

More than 100 Vietnamese and international business administrators, experts and state officials attending expressed their common concern about inflation.

Mr Truong Thanh Duc is the president of Consultant Council of Basico Law Company. The difficulty for him and other business administrators is how to deal with inflation.

Duc said that all honest enterprises want to reduce production costs but input prices keep going up. When inflation rises, enterprises race to hike prices. It is easy to increase the price but selling products is a problem because of empty purses of consumers. Without money, there is no business. Therefore, enterprises seek capital from banks. But, banks are also enterprises and their operations are for profit. It is worthless if a product is of premium quality, at a low price with a good design if it is unmarketable.

Duc analysed, banks reluctantly raced to increase the interest rate because they lacked cash. And, enterprises have no money as a result.

At last, Duc said: The prime rate had been kept at a rational rate for many years but suddenly increased by 37 percent. Petrol prices had been kept at rational rate for a long time but suddenly went up over 30 percent. When the capital source and liquidity of the banks was under pressure, the central bank decided to withdraw over VND20,000 billion.

Duc hopes the Government will manage the economy with consistent and balanced measures. Applied policies need a rational roadmap to avoid causing shocks to enterprises.

On the sidelines of the seminar, Ms Tran Thu Huyen, General Director of Asia Paint Joint Stock Company, sadly said that: Not long ago, a high-ranking official announced that petrol, electricity and coal prices would remain unchanged until the end of 2008 to stabilise the market. Her company then planned the pricing policy for the whole year without any doubts.

Suddenly, oil prices rose by over 30 percent and her company’s plan was redundant. Her company like other small firms had to set up a new pricing policy without any peace of mind.

Huyen said “We are now always worried about the inconsistent policies and inaccurate forecasts from the competent organs. Several decrees, circulars or resolutions have only reached enterprises recently; competent organs issued other ones with some changed by 50-70 percent or even contradictory to the previous ones.”

She wondered why there was nothing to ensure that the prices of essential commodities like electricity and coal would not increase.

Small enterprises like hers are managing their assets under the 40-30-30 formula: 40 percent of the owner’s equity, 30 percent of bank loans and 30 percent from other capital sources, she continued. Meanwhile, the lending rate has surpassed 20 percent per annum and suppliers now demand cash on delivery.

As a last resort, her company had to suspend its long-term investment and business expansion. Her company is even considering transferring big projects to other firms and cutting administrative costs and advertising expenses. However, her company still has to offer discounts and commissions to distributors. Without a better choice, her company requires distributors to make quick payments to lessen their reliance on the banks.

Huyen added that small and medium sized enterprises have to seek ways of escaping their reliance on banks if they want to survive in the current circumstances. They should seek support and cooperation from regular partners to overcome difficulties in specific situations.

She concluded: “Basically, private enterprises should be treated as fairly as state-owned enterprises. We need a stable legal framework and consistent economic management policies from the State.”