Vietnam Economy 2013: Searching for Bright Spots

The year 2012 has closed amidst many concerns. Vietnam’s economic difficulties continue to appear in economic forecasts for 2013. The number of bankrupt companies is on the rise and business bailouts - an underlying drive for economic rebound - is smarting policymakers.

 

Currently apparent opportunity is the overall restructuring of the economy and businesses towards greater efficiency and sustainability.

 

In recent days, the problem of Mai Linh Group has caught the special attention of the public. Ho Huy, Chairman of Mai Linh Group, admitted that his company is insolvent to some 800 creditors and is negotiating to reschedule debts and convert debts into investments. The problem of Mai Linh Group is attributed to poor governance and investment diversification, especially its involvements in real estate, according to experts. For the time being, many big companies are in the same situation as Mai Linh since they overlook core businesses while exerting resources on hot and risky fields like real estate, finance and securities.

 

It is uncertain whether the Government rescues Mai Linh as it previously did for Huy Hoang Company by directing debt rescheduling and new capital access. Unfortunately, this is just a typical example for a bubble investment trend which is currently hurt by hardships, insolvencies and inventories among others.

 

The highly-respected banking world met with misfortune in the past year due to high-profile personnel reshuffle and flipside of bank capital usage brought to light after police inspections. The detention of banking tycoon Nguyen Duc Kien and other former executives of Asia Commercial Bank or Huynh Thi Huyen Nhu with the loss of some VND4,000 billion (US$200 million) are typical cases. Last year, banks put a brake on credit growth, leading to a sharp drop in profitability. Even, banking schools also quickly responded to the trend with a halt to new courses or shrinkage of personnel training scale.

 

Businesses were fraught with difficulties throughout 2012. Capital shortage remained an age-old problem. However, according to many experts, many companies were too weak to absorb fresh capital and they were “clinically dead”. Credit growth was only 7 per cent in 2012, equal to less than a half of initial target of 15 - 17 per cent - a surprisingly low growth.

 

Increased inventories and decreased purchasing power were major problems in 2012. Bad debts soared to over VND202 trillion (US$10 billion), most of which rested in real estate market. Given that 70,000 completed apartments unsold are valued VND2 billion each, as much as VND140 trillion had been "buried" there. Dr. Tran Dinh Thien said "Because of inventories, businesses cannot recover capital and cannot repay banks. This is the root of increased bad debts. It takes at least seven years to clear these "blood clots".

 

This outlook weighed on economic forecasts for 2013, particularly mentioning bright spots. The most significant bright spot is the time for businesses and the economy to reshuffle their performances and accept losses to restart a new cycle.

 

Nguyen Dinh Cung, Deputy Director of the Central Institute for Economic Management (CIEM), said that rush investments in heating fields like securities, real estate and noncore businesses are resulted from the pursuit of multiple targets. In the current context, big companies are both sinners and victims while small businesses are just victims. To save the entire economy, large enterprises with wrong investments must die or sacrifice more interests.

 

When big companies like Mai Linh are in jeopardy, they usually look for bailouts from the Government. Nevertheless, the current circumstance is far different from the time it saved Huy Hoang. The government is placing a weight on economic restructuring, especially the reshuffle of banking system, SOEs and public investment. It does not have enough resources to rescue such big troubled entities. Hence, according to many experts, operating restructuring must be considered a vital task of businesses in 2013. The first things they must take into account are to narrow operation scales, sell assets to pay debts, and reorganise management processes. In the current context of economic difficulties, they will have to accept to sell assets at a loss to strengthen financial health and withstand the crisis.

 

Economists said Vietnam must clear bad debts - the “blood clot" of the economy - in 2013. It is important to pump credits for capital-short manufacturing companies with good production capacity and good consumption markets. Banks should schedule bad debts for companies and grant new loans to do business to repay their debts.

 

Dr Tran Dinh Thien suggested authorities at all levels immediately pay outstanding debts worth hundreds of trillions of Vietnamese dong owed to businesses to save hundreds of thousands of enterprises in difficulty and on the verge of bankruptcy. This is a basic solution to "rescue" enterprises.

 

He said huge debts, high interest rates and increased backlogs have sent most companies to an extreme difficulty. It has become a "collapse trap" many companies cannot exit.

 

More and more companies are going bankrupt. According to the Vietnam Chamber of Commerce and Industry (VCCI), as many as 53,000 enterprises went to the wall in 2011 but 35,500 enterprises ended operations in the first eight months of 2012. The number of bankruptcies in the past two years equalled more than 40 per cent of total bankruptcies since Vietnam initiated the reform.

 

A big number of enterprises are facing hardships, narrowing production scales, shrinking markets and cutting personnel. The lunar New Year is coming with pessimistic information about remunerations for workers. Many companies reported to indebt wages to their workers, let alone bonuses. This is also a reason for shrinking purchasing power - a woe to any businesses.