Supporting Businesses to Get through Hardships

The enforcement of tightened fiscal and monetary policies has helped curb inflation and restore macroeconomic stability but this has also caused grave difficulties to businesses, especially small and medium-sized enterprises (SMEs). The central importance is now to gather forces to resolve difficulties against businesses and the Government of Vietnam adopted a support package worth of VND29 trillion (US$1.4 billion) to support enterprises to pass through difficulties in production and business and support the market. Vietnam Business Forum would like to introduce the article to this effect by Dr Doan Duy Khuong.

 

Major economic development indicators in 2011 and in the first quarter of 2012 presented difficulties and challenges that Vietnam’s economy has been facing. In 2011, GDP and CPI growth prospects had to revise several times (towards worsening direction) to match the actual situation. And, although GDP growth was close to the plan (5.9 percent versus 6 percent), inflation nearly doubled from the plan, reaching 18.53 percent. Also in 2011, deposit and lending interest rates were abnormally high. Indicators of production and business performances of enterprises like profitability, sales, machinery performance and employment decreased while inventories rose over 30 percent. All these points demonstrated shrinking production because of enterprises’ slowing sales and rising costs.

 

In 2012, the objectives of inflation curbing and macroeconomic stability continued to be deployed aggressively. As a result, inflation was kept in check in the first five months of 2012.

 

Vietnam’s consumer price index (CPI) in May rose 0.18 percent against April. With the new rise, the CPI rate has increased only 2.78 percent over December, 2011, while the Government target is to curb the CPI of 2012 lower than 10 percent. However, GDP growth was only 4 percent in the first quarter of 2012, much lower 5.57 percent and 5.84 percent in the same period of 2011 and 2010, respectively. Notably, industry and construction expanded only 2.94 percent.

 

The enforcement of tightened fiscal and monetary policies has helped curb inflation and restore macroeconomic stability but this has also caused grave difficulties to businesses, especially small and medium-sized enterprises (SMEs). Interest rates remain high; thus, many businesses hardly access and absorb capital. Rising input costs, slowing sales, growing inventories (inventory index marked up 32.1 percent year on year as of April 1, 2012) are leading to production contraction, temporary halt of operations or even bankruptcy. Rising unemployment is putting pressures on social stability. Nearly 54,000 companies went to the wall in 2011, an increase of 24.8 percent over 2010. And, over 17,700 enterprises went bankrupt in the first four months of 2012, representing a rise of 9.5 percent over the same period in 2011.

 

According to statistics by the Vietnam Chamber of Commerce and Industry (VCCI), Vietnam had more than 600,000 enterprises, some 1 million business households and above 130,000 cooperatives and farms at the end of 2011. Businesses make huge contributions to economic development and employment. Contributing more than 70 percent of the State Budget’s revenues and generating about 10 million jobs, which account for above 80 percent of non-farming workforce and more than 20 percent of total workforce, they play very important roles in socioeconomic development. Therefore, the health of the business community is genuine concern of the entire society.

 

A company’s entry to or exit from the market is an absolutely normal phenomenon but recent statistics exhibit abnormalities that herald a very difficult economic time the business community in Vietnam is facing. The current reality of Vietnam’s economy is partially attributed to following reasons: Global economies have not really recovered from drawn out difficulties rooted from the financial crisis in 2008-2009, the world is facing daunting eurozone debt crisis, plus natural calamities like earthquake and tsunami in Japan, social and political turmoil; Growth model is full of uncertainties as it relies too much on investment and poorly productive investment; Economic regulatory policies are not really effective; Tightened credit in couple with exorbitant lending rates increases difficulties against enterprises. Furthermore, they still have a lot of shortcomings like poor governance, ineffective business plans, backward technologies and poor human resources.

 

Despite objective and inherent difficulties, there are a lot of opportunities for Vietnamese businesses. Vietnam has escaped from the status of underdevelopment, entered the group of middle-income nations, with socio-political stability and in the process of industrialisation and modernisation, and the domestic market with nearly 90 million people with growing purchasing power will be a great opportunity for businesses. Besides, the Government resolutely introduces economic restructuring policies which focus on public investment restructuring, SOE restructuring and banking system restructuring. With these long-term changes, forecasts are sketching rather a bright picture of Vietnamese economy. Systematic problems have been identified and appropriate remedies, have been introduced, thus creating a good premise for macroeconomic stability and an opportunity for enterprises.

 

Countries around the world are stepping up economic restructuring based on domestic demands and new contexts. Social responsibility and environmental protection are pushed forward. That process creates opportunities for Vietnamese enterprises to acquire new environment-friendly technologies and paves the way to build a green economy. And, in this changing process, early birds will have an enormous chance of success.

 

The recently published report on provincial competitiveness index (PCI) 2011 shows that enterprises express concerns about growth prospects in 2012. Respondents are looking for further improvement in site clearance, land compensation price, dynamism of the government and business support services. PCI report authors every one point increase in transparency index requires an increase of 13 percent of businesses on 1,000 residents, an increase of 17 percent of investment capital per head and an increase of VND62 million of profit on each enterprise. Every one point increase in labour training index requires an increase of 30 percent of businesses on 1,000 residents, an increase of 47 percent of investment capital per head and an increase of VND58 million of profit on each enterprise. So, what general solutions are needed to support businesses to surmount difficulties and create confidence for enterprises to stabilise production and business activities and look to sustainable development? We need to focus on five groups of solutions:

 

Macro- regulation: Flexibly regulating monetary and fiscal policies for long-term macroeconomic stability objective and create confidence to attract investment capital directly and through capital market; Controlling inflation and introducing flexible monetary policies to support businesses to develop, quickly lower deposit and lending interest rates, and facilitate their borrowings; flexibly regulating foreign exchange rates to stimulate exportation; Restructuring the banking system to enhance financial capacity and competitiveness.

 

Public spending: Carrying out public investment projects as planned to bring them into use, quickening capital disbursement to troubleshoot capital difficulties for projects, create jobs and boost sales.

 

Tax and fee: Continuing tax deferral and reduction solutions to support businesses to get through this difficult period, particularly VAT reduction, land tax deferral, and income tax reduction for enterprises, especially SMEs. The application of fees needs to be carefully considered to apply in good time and good context, aiming to avoid bad effects on macro economy.

 

Price controlling and subsidising: Enhancing the efficiency of price management and control to ensure prices of commodities, especially inputs for production, restrict speculation and hoarding of goods for market price manipulations; reviewing and implementing subsidies for oil and electricity prices for important fields if prices these items escalate.

 

·  Then, we need to quickly reduce corporate income tax to 20 percent, or a lower rate to SMEs from the current 25 percent. In this tough time, the rate of 25 percent is quite high given rising input costs and very difficult access to capital sources as well as bank loans. Therefore, the tax cut will create opportunities for enterprises to accumulate capital, reinvest in production and stimulate growth.

 

·  Promoting the role and position of the State Bank of Vietnamas a central bank, especially in the responsibility of announcing policy objectives, information transparency and accountability. Since its establishment, the State Bank is an agency of the Government and is administratively governed by the Government. Therefore, its authority in monetary policy building and regulation is limited. Its independency has been improved to a certain extent but remained not high, thus cushioning the expected effect of monetary policies. To enhance its operational efficiency, boosting its independence is essential.

 

·  Increase the accessibility to capital bearing reasonable interest rates for SMEs, exporters, agricultural product processing enterprises, and consumer goods producers to serve the people. Quickly set up SME Support Fund in accordance with the Decree 56/2009/ND-CP to create trust funds for commercial banks to lend SMEs.

 

·  Corporate restructuring towards more joint stock companies, especially public companies to better exploit bank loans.

 

 · Enterprises develop in association with corporate social responsibility (CSR). This means a business needs to attach social responsibility to its production and business activities, not only product and profit. Social responsibility is the company’s commitments made by ethical behaviours in a bid to contribute to economic development, protect the environment, and improve the living quality of its workers and the society. With these commitments fulfilled, CSR helps enhance its reputation in relation with customers and partners, and engender competitive advantage in investment attraction. Understanding the importance of CSR and its benefits for enterprises, in 2005, VCCI launched CSR Award as a means to raise awareness of enterprises and encourage them to attach social responsibility to business operations. In 2010, VCCI established the Vietnam Business Council for Sustainable Development (VBCSD). This gathers leaders of businesses, organisations and agencies involved in sustainable development, and encourages its members and the business community to participate in. It popularises best CSR practices and applies international business standards good to ecosystem and environmental friendliness, towards sustainable development.

We need to consistently apply tightened monetary policies that generate good effect and support long-term macroeconomic stability objectives. Fiscal policies have been significantly amended to reduce budget deficit and public investment. Inflation is kept in check in recent months, with very low growth rates. However, at present, enterprises are facing negative effects from these policies but they are good for long-term objectives that will create the Vietnamese economy of dynamism, competitiveness and sustainable development where the business community is both a driving factor and a beneficiary.

 

Together with the entry to the WTO and many other bilateral and multilateral "playgrounds,” deepening international integration will change behaviours of Vietnamese enterprises. The uprooted “give and take” mechanism is replaced by a mechanism that enterprises give scores to the government by joining the annual provincial competitiveness index surveys. Local administration is improved year after year. Provinces and cities with low rankings adopt best practices of top-ranking localities to improve their business environments. Hopefully, with proper policies and market opening, behaviours of enterprises will dramatically change after 10 years joining the WTO. “Asking- giving” relationship will be replaced by “Please let us know what we can contribute to the Government and to the nation.”