Vietnam’s Businesses Leaving behind Tough Year

According to the General Statistics Office (GSO), bankruptcies are forecast to reach nearly 100,000 units in 2011 and 2012, equal to nearly 50 per cent of collapse cases in the past 20 years. In the first 11 months of 2012, as many as 62 794 businesses were established with a total registered capital of VND403 trillion. 39,936 enterprises ended operations and 8,807 businesses were dissolved in the period.

 

According to a survey conducted by the Vietnam Chamber of Commerce and Industry (VCCI), only over 6 per cent of domestic companies said their business operations were as good as expected. Specifically, 21.88 per cent of companies surveyed suffered losses (3.22 per cent incurred huge losses), 19.2 per cent made breakeven, 52.71 per cent had little profit, and only 6.22 per cent enjoyed profits as expected.

 

Foreign-invested enterprises even faced worse situations than domestic companies. According to the survey, 27.92 per cent of respondents reported losses in 2012 (equivalent to that 2011), 12 per cent made breakeven, and 33 per cent eked out a living.

 

Credit inaccessibility is the gravest difficulty against businesses in 2012. According to the survey, indebted companies accounted for 49.23 per cent, down from 54.45 per cent in the 2011 survey. Alarmingly, more than 3 per cent of enterprises surveyed borrowed money from the so-called “black” market where the average interest rate mounts to 38 per cent per annum. Small and medium enterprises (SMEs) see most hardships. Outstanding loans for SMEs accounted for 35 per cent of total outstanding loans of the whole banking system. Collateral assets remain a major barrier that blocks these businesses from accessing bank loans. Loans to SMEs guaranteed by the SME Guaranty Fund made up less than 1.1 per cent.

 

As regards measures and policies to unlock the gate to bank loans, 65.3 per cent of respondents in the VBIS survey said that credit easing had a positive impact on their business operations while 24.9 per cent said that this had no effect because they did not need to seek more capital for operation expansion because of contracting purchasing power of the market. Only 9.1 per cent of companies said that this move would make macroeconomic situation healthier. By the end of October 2012, credit growth of just over 3 per cent showed that companies hardly accessed bank loans.

 

With respect to interest rates, in the third quarter, 82.6 per cent of companies borrowed at an interest rate of 15 per cent or less per annum while 17.4 per cent paid higher for their loans. Although the government was making great efforts to bring lending rates to 15 per cent, only 0.6 per cent of companies said this level was reasonable at the time of being surveyed.

 

Inventory and bad debt are universal difficulties of businesses in 2012. According to the Vietnam Business Insight Survey, 63.1 per cent of businesses surveyed inventories were really alarming in this period, of which 34.7 per cent reported higher inventories in the third quarter than in the second quarter. Companies which made light of inventory concerns also include service companies. The gloomy real estate market caused construction material inventories to rise to a serious level.

 

Starting from April 2012, HSBC released monthly reports on Vietnam’s Purchasing Managers' Index (PMI) which is based on data compiled from monthly replies to questionnaires sent to purchasing executives in manufacturing companies. At 50.5 in November, up from 48.7 in October, the seasonally adjusted HSBC Vietnam Manufacturing PMI posted above the neutral 50.0 value for the first time in 14 months. Although the index pointed to only a marginal improvement in overall manufacturing business conditions, the latest reading was the highest since September 2011. This clearly reflected the moderate manufacturing trend due to decreased orders.

 

In general, according to VCCI, top concerns of investors and businesses are the stability of financial and credit system, especially bad debts of the banking system. In spite of their sharing and trust in administrative solutions adopted by the State Bank of Vietnam (e.g. the cap on deposit and lending rates, credit growth limit, restrictions in foreign currency loans, etc.), investors, particularly foreigners, expect the government and the State Bank, or the central bank, will remove temporarily applied administrative measures as soon as possible and quickly return to market-driven trends.

 

Some other solutions proposed by VCCI include reducing permission, licensing and reporting burdens, enhancing governance and risk management standards, increasing foreign ownership in domestic banks, strictly and consistently enforcing current regulations, boosting transparency of government bond issuance, and allowing exporters to borrow foreign currencies.

 

In addition, according to VCCI, many companies proposed State management agencies not make it more difficult for businesses, maintain the stability of policies, reduce burdens of taxes and fees, and further reform administrative procedures. Good experience has been drawn from good business supports in some localities.

 

VCCI also said that the Government should loosen up tax and fee rising or applying roadmaps, consider submitting corporate income tax reduction to 20 per cent to the National Assembly for consideration and ratification as some regional countries have lowered their taxes to support businesses. The Government should also instruct localities to lower land rents and ensure the stability of land rents for businesses in a few years ahead.

 

Regarding wages, VCCI together with some major business associations has asked competent authorities to raise minimum wages. With increased labour productivity, slowed inflation and realisable growth prospects, minimum wages are proposed to be increased 15 per cent a year in the next three years.

 

Particularly, although the economy is faced with difficulties, businesses still believe that the Government still needs to give a top priority to institutional reform and economic restructuring rather than be caught up in short-term solutions. The message of macroeconomic stability, resoluteness and consistency in institutional reform and economic restructuring is a prerequisite for businesses to have confidence and orientation for long-term investments.