The health of businesses has deteriorated too much because of prolonged inflation and macro- instability, plus growing inventories and rising production costs. Many companies are no longer strong enough to digest support policies to recover from the crisis. Selecting part of businesses to give access to development support to restore economic growth is as important as supporting other parts to undertake merger and acquisition, even dissolution or bankruptcy.
A company’s entry to or exit from the market is an absolutely normal phenomenon but it becomes abnormal when the business atmosphere is lacklustre and there is a rolling wave of bankruptcies or operating terminations. The Government issued the Resolution 13/NQ-CP on measures to ease difficulties against businesses and support the market in the wake of economic hardships. While the Government is comprehensively restructuring the economy, this bailout package aims to provide urgent support for businesses on the one hand and ensure long-term goal of economic restructuring on the other. Or in other words, beneficiaries will be selected, not all.
Who to rescue?
The Vietnam Chamber of Commerce and Industry (VCCI) and the Ministry of Planning and Investment (MPI) carried out a large-scale business survey in the country at the end of April 2012. Data showed that indicators of production and business operations tended to worsen, especially profits, sales, inventories, machine performance and employment. About 17 percent of businesses were suspended operations, 4.4 percent were dissolved to shift into other business lines, 4.7 percent were dissolved by M&A deals, and 10.3 percent were restructured to form other business entities.
Private businesses were affected most because most of them had small operating scales, weak financial capacity, and limited opportunities to access to basic resources like land and credit. Up to 9.2 percent of private businesses ended operations or dissolved. Meanwhile, only 2.6 percent of foreign-invested enterprises faced the same fate because they had operating networks beyond Vietnam, joined global value chains and had better governance.
Many business-support policies have been quickly introduced, from monetary policy with consecutive deposit interest rate cuts, lending rate ceiling and debt rescheduling to tax solutions like tax reliefs and deferrals. Enterprises will enjoy a 30 percent reduction in corporate income tax in 2012, and a deferment of six months for VAT payment arising in the second quarter. Besides, the Government asked People's Councils at all levels to slash land rents by 50 percent for commercial and service enterprises in 2012.
The Government also asked for some other solutions: Accelerating the implementation and disbursement of investment capital for projects; mobilising VND2,000 billion to supplement funding source for reinforcing watering canals and traffic road development in rural areas; allowing procurement of items specified by the Prime Minister using the unused budget allocated for 2011 in consequence of implementing the Resolution 11/NQ-CP and contributed to 2012, reviewing and proposing amendments and supplements to investment policies to competent authorities in a bid to eradicate barriers to investment and create most favourable conditions in infrastructure, space and administrative procedures, etc. to solve production and business troubles facing businesses and encourage investment of all domestic and foreign economic sectors, etc.
Even before the promulgation of the Resolution 13, there was a burning controversy between a side supporting loosened monetary policy and business bailout with another one in favour of tightened monetary policy on fears of recurrent of bad inflation as in 2008. But, with current difficulties against businesses and growing risk of stagnancy, the Government was forced to take policies quickly.
Sharing the objectives of supporting enterprises and stimulating economic growth, but the current situation is far different from 2008 when the Government launched the stimulus package. In 2009, apart from exemptions and reductions in corporate income tax and value added tax, enterprises were granted a 4 percent of interest rate subsidise in parallel with a big stimulus budget. Many companies passed through the time of crisis because of support policies but escalating inflation once again sent them to danger. Unlike in 2009, the current health of many companies is weaker and many were forced to go silently. Also unlike 2009, this is not a stimulus package but a support centred on tax reliefs. The package of VND29 trillion proposed by the Ministry of Finance is expected to add force for enterprises to live through this period.
Currently, restructuring the economy is a requirement set by the highest levels of the Party and the State. And, the restructuring process is also started very fast. The government demands a shift in growth paradigm driven by improved quality, efficiency and competitiveness. Many businesses will be forced to accept bankruptcy or acquisition because of their insufficient competing capacity. Some businesses are forced to shut down or accept new changes because they are no longer fit to the new model. Therefore, the successful implementation of business support package announced by the Government depends greatly on careful selection of beneficiary companies.
Restructuring accelerated
The survey released by the VCCI exposes urgent problems: Shrinking market, rising input prices and growing inventories that weaken the health of many enterprises. In particular, many enterprises have competing capacity but their temporary liquidity hardship is sending them to the brink of bankruptcy. If these enterprises are supported in time, they will quickly regain resilience. They are the very new driving force of the competitiveness-driven economy.
The severest disease is probably the huge amount of inventories and sluggish sales. Therefore, the support policy necessarily aims at stimulating demand, not supply.
The policy still gives priority to SMEs but it also needs to reach large-sized enterprises. Supported companies need to improve governance, especially in strategic and financial administration, focus on core business fields, build modern governance standards, implement cost-cutting measures, build and apply risk control mechanisms.
A series of companies went bankrupt. The number was 53,000 cases in 2011 and was forecast at 50,000 cases in 2012. A lot of companies will impossibly recover and the support only helps prolong their ailing existence. For that reason, the implementation of the solution package at the request of the Government must be based on thinking of necessities and requirement of economic restructuring. Incapable businesses must leave the market to leave the space and resources for more capable ones.
Restructuring is a way-out for financially weak and poorly competitive businesses. In reality, companies are under the pressure of restructuring and improving competitiveness. A part of businesses are doing this well. Therefore, the support package needs to be introduced soon to step up economic restructuring and orientate national industrial policies to direct business operations.
The country’s resources are limited and the State Budget always faces a deficit; therefore, the Government needs to direct support resources to right addresses and accelerate the reshuffling of each enterprise in line with general objectives of the entire economy.
Bao Chau
Vietnamese
