Firms Remain Optimistic about Business Prospects

Most industries have experienced a revenue decrease. Retailing is the brightest spot, with revenue growth of 120%. In addition, transport and logistics recovery amid economic reopening and the rise of mining, petroleum and steel industries, driven by high oil prices and steel prices, also enjoy the limelight.

These remarks are based on VNR500 Ranking (the list of the 500 largest companies in Vietnam) released by Vietnam Report Joint Stock Company in 2022. Taking business performance indicators of all VNR500 companies into account, return on equity (ROE) declined sharply from the previous year, from 16.4% down to 11.2%. Return on assets (ROA) and return on sales (ROS) advanced in overall rankings but varied significantly among industries.

The foreign direct investment (FDI) sector had a much better asset turnover ratio than the other two sectors, reaching 8.4%. FDI firms were also good at cost control, thus raising their return on sales (ROS) from 8.1% to 8.5%. The private sector witnessed significant progress, with growth higher than before the pandemic, specifically ROA from 4.3% to 5.4% and ROS from 5.2% to 6.5%, although ROE had not returned to the pre-pandemic level, it remained highest of all, reaching 15.2%. The state business sector was forced to sacrifice business benefits in order to support people and communities to overcome pandemic-caused difficulties through social security activities. As a result, its ROE was minus 8%.

Difficulties and challenges

Given that the world economy is complicated and unpredictable, even beyond forecasts of other countries and international organizations, the path to growth and recovery has become steeper. Enterprises have to continue to face pandemic consequences and have to deal with new difficulties from rising prices of commodities, supplies and input materials, as well as supply chain risks. In addition, Vietnam's economic openness with other countries in the world is very large; potential global economic recession and high inflation will negatively affect the business performance of Vietnamese companies, especially importers and exporters.

The survey conducted by Vietnam Report highlighted the five biggest hardships against VNR500 companies: Volatile prices of energy and input materials; Peer competition; Supply chain risks; Pressure from rising exchange rates; and Weakening consumer demand.

Volatile prices of energy and input materials are the biggest difficulty currently faced by companies. According to the latest statistics, in the first nine months of 2022, input prices annually climbed 6.0%, the highest in 10 years. Notably, the import index also increased as high as 10.7% over 2021, with input imports for production accounting for 90%. Over-dependence on imports caused companies to confront high obstacles from rising prices of inputs for production. According to the survey, 78.8% of respondents saw higher input costs and 19.7% of them reported significant growth in this expenditure. Nearly 50% forecast this trend to continue until the end of 2023. Up to 38% thought that this situation would last beyond 2023.

Emerging world political uncertainties as well as China's Zero COVID-19 Policy caused 77.9% of businesses to worry about supply chain risks, which could extend to 2023 and beyond.

Furthermore, global financial and monetary instability has produced a significant impact on the Vietnamese business community because Vietnam's economic openness is as high as 200% of its GDP, while its resilience and competitiveness are limited. The survey showed that 70% of businesses said they have been pressured by rising exchange rates, with nearly 60% of respondents facing difficulties because of difficult access to capital sources and high interest rates. Stabilizing interest rates and exchange rates has enabled businesses to continue their steady business operations. However, as most central banks in the world have raised policy rates, the State Bank of Vietnam (SBV) decided to widen the USD/VND exchange rate band from 3% to 5% in the second half of October and raise the policy rate by 1 percentage point. This expanded margin has helped the SBV actively adapt and gain more room to manage unpredictable movements of the international market and to continue tightening monetary policy and rate hikes with the U.S. Federal Reserve (Fed) as well as more than 90 other central banks around the world.

Along with challenges from exchange rates, interest rates and inflation, demand in major economies has weakened sharply; hence, Vietnam's exports may be weakened and export orders of enterprises may be reduced. Natural disasters and epidemics are no longer top problems as a year ago but they still affect the operations of 64.1% of businesses.

Optimistic business prospects next year

With domestic monetary policy being tightened and global demand slowing, Vietnam's economic growth is forecast to slow down steadily in 2023. According to an expert survey by Vietnam Report in November 2022, GDP is expected to grow 7.5% in 2022 and 6.4% in 2023.

Notably, most companies are optimistic about their business prospects in 2023 as compared to 2022, with up to 40.3% of respondents saying that the outlook is slightly better and 26.0% saying it is much better. They also believed in Vietnam’s rapid economic growth in 2023, with 35.1% being clearly confident in Vietnam’s economic recovery and development in 2023.

As the Fed is reportedly ready to hike policy rates to 4.5% by this year-end, the SBV will face high pressure to tighten policies to ensure monetary and financial stability. Rising inflation will likely prompt the central bank to further hike policy rates. Inflation has been contained throughout much of 2022 but it is now approaching the SBV's target of 4.0%, most recently accelerated from 2.9% year on year in August to 3.9 % in September. Inflation is likely to rise further in the coming months and is forecast to peak in the second quarter of 2023. With signs of a global economic slowdown next year, Vietnam's export-oriented economy will be under pressure. Many economic experts in prestigious international organizations such as Fitch and EIU also believed that the continued expansion of the export-oriented manufacturing sector will create the foundation for economic growth in 2023, but the recession in key destination markets will restrict the pace of economic expansion, even as Vietnam continues to increase its share of global exports.

Some economic sectors are forecast to have very strong growth in 2023, including telecommunications - information technology, tourism - entertainment, and transport - logistics. In contrast, industries that rely heavily on exports such as seafood, textile and garment and leather and footwear will have poorer growth prospects. Real estate-construction sectors, which have suffered a lot of hardships from the pandemic and credit policy tightening, are expected to continue to be lackluster.

By Quynh Chi, Vietnam Business Forum