Statistics show that more than 50,000 businesses have suffered major losses and many of them are on the brink of bankruptcy. In HCM City alone, more than 3,100 fell apart or suspended their production during the first two months of 2012.
With a large number of projects being put on hold or cancelled, manufacturers of building materials such as steel and cement are now in limbo.
Other economic sectors also face stagnation in production as the economic slowdown is leading to an imbalance between supply and demand.
What is the real cause of inefficient business operations?
An abnormal phenomenon
In a recent interview granted to VOV, Cao Sy Kiem, chairman of the Vietnam Association of Small and Medium-sized Enterprises, described the current state of inefficient business operations as abnormal and warned that the number of businesses going bankrupt is likely to rise further.
According to the senior expert, stagnant production is not caused by businesses themselves, but by external factors such as policies, the environment, and State management, as well as the impact of the global economic downturn.
He said as most inefficient businesses rely heavily on bank loans, the recent rise in interest rates has limited their use of this important source of capital, putting them at high risk of bankruptcy.
“Business profits normally range between 10-15 percent. If businesses operate on bank loans, part of their profits will fall into the hands of banks,” said Kiem. “There is no denying this fact, but it is not the primary cause of business loss and bankruptcy.”
Though the credit market showed some positive signs of recovery in October 2011, its growth is not stable enough to shore up business production.
Vu Viet Ngoan, chairman of the National Financial Supervisory Committee, pointed out that in the first two months of this year the credit market grew by approximately 2 percent, far too below the target of 15-17 percent set for the whole year.
“Such a low growth rate makes it impossible for businesses to access bank loans,” Ngoan confided.
It is no easy task to achieve the credit growth target this year, as exports are grinding to a halt with businesses being at a loss what to do in the face of high bank interest rates. Even worse, many banks are unwilling to lend money for fear of high risks of bad debts.
“The issue of interest rates should be addressed soon. If not, the situation will be going from bad to worse,” warned Ngoan.
Many experts insisted on the need to restructure businesses and dissolve inefficient ones in order to create a healthier business environment.
However, Ngoan described this view as non-economic, explaining that it is the law of nature that in a stable economic environment, inefficient businesses are soon out of operation and only successful ones exist and develop.
He said that it is common knowledge that only 2-3 percent of businesses go bankrupt in a healthy environment. But it is unlikely to see the business sector falling apart when up to 30-40 percent of businesses face bankruptcy due to an unstable environment.
“This is a great chance, for not only businesses but also service and management agencies, even policymakers and the government, to review their performance to create a healthy and transparent environment for businesses,” said the chief finance supervisor.
Experts said businesses are in a fix due to the impact of slow reaction to policies. Many businesses are now on the verge of bankruptcy as they lack capital. Many businesses still find it difficult to get bank loans in the face of high interest rates.
Since July 2011 inflation has begun to fall steadily, creating a prerequisite for the State to adjust bank interest rates. However, lowering the rate depends heavily on the liquidity of the banking system.
According to Kiem, high interest rates put businesses at a disadvantage, and banks are no exception once they cannot take back loans from businesses.
“Banks are intermediary institutions. If businesses operate efficiently, they will pay back loans to the banks. By contrast, banks often run the risk of hitting the wall if bad debts are not disbursed,” said the senior expert.
In addition, he said, large numbers of employees will be directly affected if they fall victim to business collapse. Certainly, they would become unemployed, placing a heavy burden on the national economy.
“This is a serious challenge to not only businesses but also the entire economy,” said Kiem. “When a large number of businesses go bankrupt, the State will face a big loss in revenue collection, banks will run the risk of failing, employees will become jobless, and social security and order will be affected. Such happenings will have a negative impact on national economic development.”
Kiem said the crux of the matter is to restore trust in the business community by ironing out snags for them, generating jobs and easing inflationary pressure.
“Following the success of anti-inflation measures, the on-going policy of lowering the interest rates is expected to stimulate the national economy, and this is a necessary step toward addressing the country’s hot issues,” said Kiem.
Meanwhile, Ngoan said flexible policies should be put in place to support economic growth and businesses as well.
“This means we should loosen the monetary policy regularly and cautiously, not immediately” said the chief finance supervisor. “It is imperative to assist businesses by axing the interest rates and supporting their tax payment, and to remove gridlock in the inter-business market to facilitate the capital flow.”
At a recent February cabinet meeting in Hanoi, Prime Minister Nguyen Tan Dung instructed the State Bank of Vietnam to reduce the interest rates to help businesses better access bank loans.
The government has shown its strong resolve to ease pressure on businesses, and the central bank has applied lower interest rates as of March 13. Yet, it takes some time to see if this effort will pay off in the end.