Nguyen Thi Ha sighs as
she looks at the dust and cobwebs covering crates full of colorful, enameled
tiles in her factory by Hanoi’s Red River.
“We’re struggling to
keep our business alive,” said Ha, who laid off more than half of her 60
employees this year as luxury hotels in the beach resort of Danang halted
orders. “If the situation doesn’t improve, it will be hard for us to hold out
beyond this year.”
Ha’s factory is among
thousands in Vietnam that cut production or closed this year after policy
makers curbed a lending spree and bad debts mounted. As demand also slows from
Europe to China, the shakeout of businesses that mushroomed during the
2002-2007 boom is slowing economic growth and may temper a stocks rally that
made Vietnam the world’s third-best performer this year.
“There’s no way we can
meet the economic growth target of 6 percent this year when so many companies
are in serious trouble,” said Le Dang Doanh, an economist who has advised Prime
Minister Nguyen Tan Dung and who estimates 2012 expansion may slow to as low as
5 percent, the least since 1999. “Many businesses are on their last breath.”
With almost 18,000
companies idled in four months and the government stepping in to prevent a
banking collapse, Vietnam is trying to find a sustainable path to growth after
years of easy credit funded makers of cheap goods and triggered Asia’s highest
inflation. Parliament meets this week to debate an economic plan that would
draw more investment from foreign manufacturers such as Samsung Electronics Co.
(005930), better regulate banks, and foster more domestic demand from its 88
million people.
Shuttered Plants
In the first four months
of 2012, 17,735 companies halted production -- including more than 400 with
overseas investors -- about 10 percent more than a year earlier, according to a
report from the Ministry of Planning and Investment. Pledged foreign direct
investment fell 32 percent.
Vietnam’s National
Assembly will hold a session this week to discuss proposals by the planning
ministry to restructure the economy, said Nguyen Si Dung, the parliament’s
deputy secretary- general. The plan was drawn up after bad debts mounted,
Standard & Poor’s and Moody’s Investors Service cut Vietnam’s credit
ratings in December 2010, and inflation as high as 23 percent sparked wage
protests at factories across the country.
The benchmark VN Index
(VNINDEX) fell 9.4 percent last week, compared with a 5.1 percent decline in
the MSCI AC Asia Pacific Index. That’s trimmed a rebound in Vietnam’s stocks
this year to 24 percent after a 27 percent decline in 2011.
Financial Strength
Government efforts to
boost the economy may help the nation’s biggest companies recover from the
recent slump because they are financially stronger, said Ngo The Trieu, head of
public investment at Eastspring Investments Fund Management Co.
Six firms account for
more than half the weighting in the VN Index, including Vingroup JSC, Vietnam’s
largest listed real- estate company by market value, and Vietnam Dairy Products
JSC (VNM), the country’s biggest dairy producer.
Emerging-market stocks
fell partly on concern Greece’s debt crisis is worsening and amid a deeper
slowdown in China. The MSCI Emerging Markets Index lost more than 6 percent
last week.
“Most companies are
operating on money they borrowed from banks with debt-equity of nine or 10
times -- it’s not sustainable,” said Trieu. “Companies that are having
financial challenges will stumble. Those that can survive will be good
investments in the long run.”
He said Vietnamese
stocks could rebound as much as 30 percent this year if there are more central
bank rate reductions and banks reduce lending rates to reasonable levels and
improve their non-performing loan ratios.
‘Speed Up’
The prime minister told
the central bank to “speed up” rate cuts to help businesses, the government
said on May 9. State Bank of Vietnam Governor Nguyen Van Binh said in March the
monetary authority would cut rates by 100 basis points in each of the second,
third and fourth quarters. The central bank reduced benchmark rates in both
March and April and capped some lending rates this month for smaller businesses
at 15 percent.
“The country’s economy
is slowing quite sharply,” Art Woo, director of Fitch Rating’s Asia-Pacific
sovereign ratings group, said on a May 14 conference call. “The economic
slowdown can still have some collateral impact on the banking sector, which
remains a source of weakness. Asset quality is deteriorating.”
Economic expansion in
the first quarter was the slowest since 2009, while inventories in processing
industries, including beverages, clothing, textiles and pharmaceuticals, grew
32 percent this year from 2011, according to April figures from the General
Statistics Office in Hanoi. In 2007, annual GDP growth peaked at 8.5 percent.
The government must
“prioritize macroeconomic stability,” Tran Hoang Ngan, a member of the National
Financial and Monetary Policy Advisory Council, said by telephone on April 24.
“Prolonged high inflation rates in the last few years have exhausted businesses
and consumers.”
No Debate
Vietnam’s legislature
won’t consider a reduction in the 2012 growth target when it meets this week,
Nguyen Hanh Phuc, the parliament’s secretary general, said on May 17.
Exports fell to $8.6
billion in April from $9.48 billion in March. The growth in garment shipments,
the country’s biggest export, slowed to 15 percent through April after
expanding 33 percent in the same period last year, according to preliminary
figures from the statistics office.
Shipments of footwear,
Vietnam’s fifth-biggest export, rose 9 percent through April after jumping 26
percent last year, according to unrevised figures from the statistics office.
Vietnam ships most of its footwear and apparel to the U.S. and Europe. Sales to
those two regions account for more than 20 percent of the economy, according to
London-based researcher Capital Economics Ltd.
Taming Inflation
Vietnamese companies are
caught between slowing export orders and high borrowing costs after the
government passed a resolution last year to restrain credit growth and tame
what was then Asia’s highest inflation. While commercial lending rates have
since fallen from the peak of 27 percent last summer, they are still as high as
20 percent. Vietnam’s annual inflation, now Asia’s highest after Pakistan,
slowed to an 18-month low of 10.5 percent in April, from 14.2 percent in March,
according to the statistics office.
Of 700 companies on the
country’s two stock exchanges, 11 percent posted losses last year and 62
percent saw profit fall, according to data compiled by Bloomberg. Among 473
that have reported results in the first quarter, 14 percent lost money.
At Hanoi-based Viet Hung
Real Estate, Garments & Embroidery Co., owner Luong Thi Kim Oanh laid off
more than half of her staff and cut prices of her T-shirts, table cloths and
bedding by 50 percent to get cash to pay her 70 remaining workers. Sales to
Europe and the Middle East fell by half last year and haven’t improved, she
said.
Loan Sharks
The business, started in
1992, defaulted on loans and now can’t get credit from banks to buy raw
materials, she said. Desperate for cash to pay wages, she turned to unlicensed
lenders who charge more than three times the bank rate, or an annualized
equivalent of more than 70 percent.
“I’m exhausted,” said
Oanh in an interview at her factory. “My family and I had to mortgage all our
properties but we still don’t have enough cash to fund the factory’s
operations. We are in desperate need of government help.”
The government’s
response this month was to reduce corporate income tax for small- and
medium-sized companies by 30 percent, defer sales tax payments by six months
and halve government land leases.
“The tax breaks and tax
delay for companies are like putting a wet towel on someone’s forehead when
they have a very high fever -- the medicine needed to cure the illness isn’t
there,” said Vu Thanh Tu Anh, director of research of the Fulbright Economics
Teaching Program in Ho Chi Minh City, a partnership of the city’s University of
Economics and the Harvard Kennedy School.
Not Enough
The government measures
are worth about 25 trillion dong ($1.2 billion), according to the Finance
Ministry.
“The tax break and
reduction in land lease are good, but still far from enough to save businesses
like ours,” Viet Hung’s Oanh said.
Commercial banks’
bad-debt ratio has risen to 3.6 percent from 3.2 percent at the beginning of
year, Vietnamese central bank Governor Binh said on April 12.
“Asset quality is likely
to deteriorate further,” Fitch Ratings said in a March report. “Non-performing
loans are significantly understated under the country’s accounting standards
and could be three or four times higher.”
“Given the current
economic situation, more investors are opting for the relatively safe
government bonds these days,” said Vu Anh Duc, a senior fixed-income dealer at
Vietnam Joint- Stock Commercial Bank for Industry and Trade in Hanoi.
Falling Yield
The yield on the
government’s benchmark five-year notes this year fell about 300 basis points to
9.5 percent, the lowest since June 2009, according to a daily fixing from banks
compiled by Bloomberg. Ten-year yields dropped 170 basis points to 10.28
percent, the lowest since October 2009.
Business conditions
“continued to be weak” in April, Trinh D. Nguyen, a Hong Kong-based economist
at HSBC Holdings Plc., said at briefing in Hanoi. “Domestically, conditions are
tough due to tightened credit and limited access to capital.”
At Bat Trang Ceramics
Village, where pottery has been made for more than six centuries amid rice
fields along the Red River, Ha’s factory and more than 500 other businesses
making everything from glazed bowls to power cable insulators are showing the
strain. More than half the kilns in the village have shut down, she said.
“I wouldn’t be so
excited about the corporate income tax cut since there are many businesses
which don’t have any income,” Ha said. “There are thousands of companies
dying.”
Bloomberg
Business &
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