Interest rate hike puts pressures on businesses

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A recent spike in interest rates has put Vietnamese businesses in survival mode

A staff member arranges stacks of cash at an Asia Commercial Bank branch in Ho Chi Minh City. Interest rates on dong loans are now as high as 20 percent a year.

In recent weeks, interest rates have increased sharply, creating further difficulties for manufacturers and businesses.

Current interest rates resemble the numbers seen during the 2008 global financial crisis, when Vietnam's credit supply plummeted.

Due to the thin supply, commercial banks are now locked in fierce competition. In an effort to mobilize capital, many have increased deposit interest rates to 15-16 percent, which has pushed lending rates up to 20 percent.

Cao Sy Kiem, former governor of the State Bank of Vietnam, said that tightened monetary policies have created a race among commercial banks to mobilize capital by increasing deposit rates. In the meantime, he said, cash supplies everywhere are strained.

Kiem blamed capital hoarding for the credit shortage. Many fear that the dong could be devalued again, and inflation could continue to rise, he said.

Tran Hoang Ngan, a member of the National Monetary and Financial Policy Advisory Council, said that interest rates on corporate loans should be lowered while rates on consumer loans should be raised.

In Vietnam, 90 percent of the credit supply is set aside for businesses.

Business owners are now complaining that higher lending rates have eaten into profits.

Some firms have had to curtail their production and business to avoid losses.

"Given the spike in interest rates, profits have fallen to an extremely low level," said Nguyen Van Ry, chairman of the Management Board of the Vietnam Animal Feed Corporation. "In fact, interest rates of 12 percent are considered high by most businesses."

Ry worries that rising production costs will ultimately lead to losses. His firm hasn't imported production materials since last December.

"We will review our business plan in the second quarter when a new pricing level is established," he said.

Despite his willingness to pay high interest rates, securing a loan has not proven easy for Ry.

His firm planned to borrow VND75 billion (US$3.57 million) to cover production and operations

in 2011, but banks have repeatedly turned them down. Ry attributes the denials to the limited credit supply.

Kiem said narrowed production will slow down economic development, cause product shortages, increase unemployment and cause economic instability.

Dao Duy Kha, vice general director of the Vietnam Plastic Corporation, said his firm borrows capital from banks to do business only. Kha says they don't dare borrow money to purchase more machines and equipment to improve production.

"Production and business growth will slow down in the next several years, if investment is not strengthened," he said. "For 2012, alone, we're not sure whether or not we should strive to maintain 18 percent growth, like some previous years."

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