Facing the Risk of Recession

2011 was a tough year for Vietnamese economy. GDP growth was lower than in 2010, slowing to 5.89 percent. The number of bankrupt companies soared. At the end of 2011, as many as 79,014 enterprises were dissolved, including 2,082 private companies, 15,748 one-member limited liability companies, 18,826 limited liability companies with two members onwards, and 41,357 joint stocks companies.

While production and business operations are surrounded by difficulties, especially credit shortage and high interest rates - despite recent reductions, many companies have to scale down production. Many suffered losses.

 

In early 2012, the situation has exacerbated as many sectors start to fall into stagnation and witness sluggish sales, leading to mounting debts. They lack existence and development orientations.

 

The indefinite slump of the real estate market leads to the shrinkage of steel and construction material markets. At present, many steel mills are running at only 50 - 60 percent of designed capacity. Worse, at least six steelmakers shut down production because of sales failure. Steel inventories are at a very high level.

 

Cement has the same fate as steel. This year’s consumption is forecast to be equal or less than that in 2011. Cement supply is estimated to surpass the demand by 8 - 10 million tonnes in 2012, thus making competition fiercer and fiercer. Because of asynchronous production lines and poor-quality equipment, most new plants encounter operational problems. Excessive energy costs push up general production costs. Slow sales cause many cement makers like Hoang Mai, Tam Diep, Thai Nguyen and Dong Banh to suffer losses.

 

The hardship is regarded at the starting stage as cement projects borrowing foreign investment capital from 1998 to 2007 are facing repayment dates. According to a report submitted to the Government by the Ministry of Finance, in the next 3 - 5 years, more cement projects will confront difficulties in loan repayment because gloomy business operations dent repayment sources.

 

The freezing real estate market has forced hosts of investors to seek external partnerships or to resell to restructure debts with banks, giving rise to a steep slump of construction industry. A report by the Ministry of Industry and Trade shows that the worst concern is the very high inventory index. Sales volume is less than half of production output. This inhibits producers from recovering capital and continuing production. Consumption indices of many commodities plunge. As of March 1, the stockpile of fertilisers and nitrogenous compounds rose 62.7 percent; iron and steel inventory climbed 59.1 percent; beer and malt inventory increased 48 percent; cable and insulated wire inventory surged 29 percent; and yarn and fabric inventory was up 6.6 percent.

 

Processing industry is still confronting most difficulties. The production index in the first three months was much lower than the growth rate of 13.4 percent from the corresponding period of last year, according to the Ministry of Industry and Trade.

 

Black spots of the economy show the fact that production is stagnant and enterprises are experiencing more difficulty than ever. Indeed, excessive borrowing costs are burdening businesses. Average lending rates of Vietnam are 2 - 4 times higher than competitions in the region. Meanwhile, most Vietnamese enterprises have small and medium sizes, which have little capital and weak competitiveness.

 

Dr Tran Dinh Thien, Director of Vietnam Institute of Economics, said: The business sector is bearing a heavy burden of borrowing costs which are ballooning as a result of exorbitant interest rates. High financial costs not only decline profitability but also weaken the revitalisation of this sector.

 

Banks signalled another rate cut in place. However, the reduction roadmap was unclear because lenders are in the process of restructuring. Moreover, all their steps are closely attached to threats of inflation return. Interest rates remain high while credit growth is negative from the start of this year. This is indicative of difficulties of enterprises and the economy. Thien said production stagnation diminishes capital absorption of the economy and many companies. Financial situations of many enterprises aggravate seriously, making themselves disqualified for new bank loans. He said that this tendency signals that more companies are facing bankruptcy.

 

However, failed enterprises are the tip of the “production stagnation” iceberg. To survive, most contract production, narrow operations and restrict new investments. To date, there are no specific data about this situation on a large scale but persistent hardships are threatening the existence or disappearance of businesses.

 

According to experts, this reality will make it hard to achieve GDP growth of 6 - 6.5 percent in 2012 as approved by the lawmaking National Assembly. This will give rise to higher unemployment rate, weakening social confidence in economic prospects, and economic and social instability.

 

According to experts, Vietnam will choose policies to drive the economy out of stagnancy, to revive growth and to stabilise macroeconomic condition. The key is to support for the business sector.

 

The SBV indicated easing monetary policies and lowering interest rates. The central bank is studying the Circular 13 where risk ratio of securities and property loans will be brought down from 250 percent to 150 percent.

 

Aside from interest rate cut, other supporting policies are unclear. To rescue businesses, Vietnam should slash corporate taxes from 25 percent to 20 percent, reduce or revoke other taxes, avoid collecting sudden fees. Besides, it needs roadmaps and methods to quicken rate cuts rather than wait for better opportunities.