Business Bailout: Two Policies Together

"It is important that the Government needs a detailed assessment on causes, types and businesses of bankrupt or inactive companies to adjust policies reasonably," leading economic specialists said at an event on measures to bail out businesses.

Looking into causes of bankruptcy

DrTran Hoang Ngan, Member of the National Advisory Council for Financial and Monetary Policies, expressed his real concern about the number of bankrupt companies announced recently by the Ministry of Planning and Investment. It is extremely alarming to see some 14,000 companies go bust or stop operations in the first four months of this year. However, he is not pessimistic because one of the targets of the Government’s Resolution 11/NQ-CP in favour of tightened fiscal and monetary measures is to force weak enterprises to go to the wall.

He remarked that, for a long time, the Vietnam’s economy ran after high and extensive growth, fiscal deficit constantly exceeded 5 percent of GDP, public investment was ineffective and scattered, public debt quickly ballooned to over 52 percent of GDP, etc. With loosened monetary policies, credit growth stayed at 29.4 percent a year on average in the 2000 - 2010 period, trade deficit exceeded 20 percent of exports, foreign exchange reserves seriously declined, inflation spiralled in five straight years, and local dong currency severely devalued, etc.

Thus, when the Government gives priority to macro-economic stability rather than growth, a number of enterprises sponging on public investment projects went out of business or stopped operations when public investment was shrunk said Ngan.

According to economist Vo Tri Thanh, as tight monetary policy is aimed at curbing inflation and stabilising exchange rate, money supply and credit growth are limited (about 12 percent in 2011) and interest rates rise. This approach leads to high debt ratio, growing borrowing costs, restricted new loans, contracted purchasing power in domestic and global markets and rising inventories. These woes have sent many enterprises to loss and bankruptcy. Meanwhile, the prolonged slump of real estate market has seriously hit companies in connection with construction material and property sectors.

Besides, many companies are formed for specific deals, characterised by poor governance and mistaken investments. Many even fail to anticipate macroeconomic fluctuations and competition from goods from China and other countries on the domestic market. Repeated hikes of electricity and petroleum prices cause production costs to rise in the midst of slowing purchasing power.

How to bail out?

Mr Ngan said that it is high time the Government had timely support solutions for businesses, especially small and medium businesses and labour-intensive businesses. Proposed measures include continued reduction in corporate income tax, VAT payment deferment till the end of 2012, and reduced or ceased collection of fees and charges.

Attending the workshop to this effect, director of Donex Sports Co., Ltd proposed the State Bank Governor boldly announce further interest rate cut policy oriented for the upcoming period. Deposit interest rates should be directed to 7 - 8 percent per annum and lending rates will be then lowered to 10 - 12 percent. Then, businesses will have better access to capital sources to expand operations, renovate equipment, and enhance productivity. If the Government has to raise regulatory interest rates due to objective reasons, it should offset the additional rates. By doing so, businesses will borrow money to invest, people feel assured in borrowing money to buy houses, he said.

According to statistical figures, the economy fell into stagnation and posed to potential instability in the first quarter of 2012. However, the Vietnamese economy is facing contradictions of two major problems to solve these threats. Firstly, to control inflation, credit growth and money supply must be kept low, or, in other words, continue to tighten monetary policy. Businesses will confront more difficulties in mobilising capital to meet production and business needs. Secondly, it is urgently vital to rescue businesses.

Macroeconomic solutions adopted by the Government achieved important results: Macroeconomic stability, inflationary slowdown, reduced budget deficit, narrowed trade deficit (only US$176 million in four months), improved overall balance of payments, fixed exchange rate, higher confidence in local dong, guaranteed banking liquidity, etc.

To resolve these two contradictions, according to experts, the Government essentially launches two policies at the same time. The first policy is to promote the process of economic restructuring where banking restructuring is necessarily quick and effective to deal with weak banks and unfreeze capital flows. When there are favourable conditions, the State Bank will continue lowering deposit and lending interest rates. In addition, banks have to reschedule debts for viable enterprises. Investment restructuring, particularly public investment, will be stepped up. Privatisation of State-owned enterprises will be accelerated and financial transparency of State-owned corporations is enhanced. This will help reduce State budget spending - a move to slash budget deficit as long expected. By carrying out the above solutions synchronously, we can simultaneously achieve two objectives: Macroeconomic stability and reasonable growth of 5-6 percent a year.

The second policy, according to Mr Vo Tri Thanh, is a new investment incentive policy to encourage businesses to maintain and expand operations and consumers to spend reasonably.

In addition to tax support packages, monetary policies will be applied more flexibly and interest rate policies will be regulated in accordance with basic target inflation as the SBV Governor has said, Mr Thanh added.