Bankruptcies, unemployment set to rise as economic conditions get tougher
A woman works at a private factory which produces blankets outside Hanoi. Small companies are hurt by tough economic conditions and need to be supported by the government, experts say. Photo: Reuters
Experts have raised the specter of a serious economic crisis marked by thousands of firms going bankrupt and millions of people losing their jobs, saying the situation warrants urgent government attention and intervention.
A recent report by the Vietnam Chamber of Commerce and Industry (VCCI) said more than 7,600 Vietnamese companies shut down last year. There were 622,977 licensed companies in Vietnam at the end of last year, but 12.6 percent of them have closed, it said.
Cao Sy Kiem, chairman of the Vietnam Association of Small- and Medium-Sized Enterprises (SMEs), said: "The situation is unusual. The number of companies, which shut down their business is too big, and is expected to continue to rise as the economy remains sluggish."
The firms' difficulties are mainly caused by policy shortcomings, unfavorable business environment, and fluctuations in the world economy, he said.
Most of the firms that are facing bankruptcy or stagnancy are those heavily dependent on bank loans. At current interest rates, firms are unable to earn profits and are even suffering losses, he said. "High interest rate is an important cause of the bankruptcy of some enterprises."
Many companies have said they are paying interest rates of up to 20 percent when taking loans from some small banks.
The Ho Chi Minh City Entrepreneurs Association said in a recent report that many businesses were struggling with rising production costs and low sales. About 60 percent of SMEs in the city cannot find enough funds to keep going, and are calling for urgent support from the government, it said.
The report said only 20 percent of companies in the city are capable of surviving difficult economic conditions. Around 3,000 companies have already halted operations during the first two months of 2012, it noted.
Economist Pham Chi Lan said the rising number of enterprises facing bankruptcy or shutting down their business is a consequence of prolonged macroeconomic instability, a situation that has persisted since 2008.
Based on a local company employing 20 people on average, the closure of thousands of firms could see millions unemployed, she said. "Thus, we should take reasonable measures to rescue not only the firms, but also workers."
The bankruptcy of firms in a sector could have a domino effect on others, experts say. For instance, when the business of property companies narrows, it creates difficulties for construction firms and construction material producers as they cannot sell their products. Meanwhile, commercial banks will face the situation of bad debts.
In fact, they say that the numbers mentioned above do not reveal the seriousness of the situation, as many enterprises have not yet shut down business or announced bankruptcy, and have suffered losses for many years.
At least five listed firms, which operate in the fields of seafood, beverages, plastic and shipping, are facing the risk of being delisted from the Ho Chi Minh Stock Exchange as they have suffered big losses for three consecutive years, and the losses have exceeded their own capital.
Unwise investment in some non-core sectors is also a big reason for the business failure of many firms, experts say, pointing to the case of Binh An Seafood Joint Stock Company.
The seafood company in the Mekong Delta city of Can Tho has been assessed to face debts totaling at least VND1.27 trillion ($61.4 million), which include bank loans and debts to local farmers.
According to the company, its operations had been stable for the first nine months of last year before banks pulled the plug on the company.
Meanwhile, analysts have said the company's problems are rooted in gross mismanagement rather than the global economic crisis, high inflation and high interest rates.
They blame the company for unwise investments in real estate, the stock market and short-term projects, as well as purchasing US dollars instead of investing in its core activity seafood processing and export.
Kiem said the situation will be more difficult in 2012 given the high inflation, tightened monetary policy, slow development of the world economy and increasing prices of many products in the international market.
"Although we are trying to reduce interest rates, they still stand high, resulting in higher production costs and lower sales in the domestic market."
The central bank has lowered the dong deposit interest rate cap by one percentage point to 13 percent, paving the way for reductions in lending rates.
However, Kiem said the reduction is not big enough to be of real help to firms. Firms can survive and develop their business only when lending rates are below 15 percent, he said.
The central bank has said that lending interest rates now range from 13.5 percent for the agricultural sector to as high as 25 percent for non-production companies.
Lan said apart from the high interest rates, firms have been dealt a big blow by the recent gasoline price hike, which would raise their input costs further.
Given the economic situation in the world as well as in the domestic market, many firms are not optimistic about their business in 2012.
According to the VCCI report, 52 percent of respondent firms said they will keep their business scale unchanged this year, while 15 percent said they will narrow their production and business scale.
Now 95 percent of operating companies in Vietnam are small firms which have 200 employees or fewer and capital of less than VND20 billion ($968,280), the report said. Of these small firms, 66 percent employ less than 10 workers.
The percentage of small firms with 10 workers and less is increasing, while those of medium and large-sized enterprises have decreased. Medium companies, for instance, now account for only 1.9 percent of all enterprises, down from 2.8 percent in 2005.
Economist Nguyen Minh Phong of the Hanoi Socioeconomic Research Institute said the trend of bankruptcy and mergers and acquisitions will persist in the coming time.
"Bankruptcy is common under the market mechanism. It opens chances for firms to change their management and ownership model," he said.
Kiem of the Small- and Medium-Sized Enterprises Association said restructuring efforts among businesses are likely to rise.
He said firms that operating ineffectively because of their own weaknesses should be dissolved, while those facing "temporary, objective" difficulties should get support from the state.
The government should deal with obstacles in production and business, ensure transparency and issue policies that will facilitate the development of enterprises, he said.
Lan said the government should help SMEs access bank loans, while strengthening control over the prices of essential commodities and services like electricity and gasoline, which contribute a lot to the production costs of many sectors.
Vietnam's economic growth eased to 5.9 percent last year from 6.8 percent in 2010. The government is targeting a growth of 6 percent for 2012.
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