Lending squeeze stymies Vietnamese manufacturers

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Businesses are facing greater difficulties in accessing bank loans in the fourth quarter as rising labor and material costs eat into profits.

Nguyen Ton Quyen, secretary general of the Vietnam Timber and Forest Products Association, said only 30 to 40 percent of woodwork firms' requests for bank loans have been filled.

"Accessing bank loans is still hard due to limited capital supply at commercial banks," Quyen said.

The government has called for local lenders to cut their lending interest rates to 12 percent at maximum. But Quyen said most of local woodworking firms now have to borrow at 15 percent.

Despite booming business, it has been difficult for firms to borrow enough capital from banks to fill the rising orders. Firms often seek advanced payments from customers, he added.

Many other firms are in the same situation. Nguyen Tien Nghi, vice chairman of the Vietnam Steel Association, said many steel firms could not borrow as much capital as they needed.

"Some trade partners offer unfavorable terms to us when they recorgnize that our firms don't have enough capital to purchase production materials to fill signed contracts," he said.

Cao Sy Kiem, chairman of the Association of Small- and Medium-Sized Enterprises, said credit growth has been sluggish this year due to tightened lending procedures and high interest rates.

Loans are estimated to have risen 19.5 percent from January to September. Vietnam has set an annual target of 25 percent credit growth for this year, according to the State Bank of Vietnam.

Besides, the US dollar price hike has been a big blow to firms as up to 70 percent of steel scrap and some 40 percent of steel billet for domestic production is imported, Nghi said. The central bank has devalued the dong three times since November. In August, the government devalued the dong by 2 percent.

Some association members have already increased their prices, with an average increase of 1 to 2 percent, Nghi said. The firms have not increased their prices sharply because current purchasing power in the market is still low.

"With the increasing input cost, it is very difficult for firms to gain bigger profits from now to the end of this year," he said.

Material and labor cost hikes have also created more pressures on firms. Pham Thi Anh Hoa, deputy general director of Hanoi Textile and Garment Joint Stock Company, said her firm's salary spending has risen some 20 percent over the last year.

However, the salary increases have not proven enough of an incentive to retain employees. The firms lament that many of these factory workers simply quit, remain in rural communities or take jobs as itinerant construction workers. The trend, they say, has lead to labor shortages which have stifled production in the remaining months of 2010.

Imported material price hikes have also put the brakes on corporate profits.

Hoa from the Hanoi Textile and Garment Firm said her company has had to import all cotton for its production and the material's price has increased to $2,600-2,800 per ton now - from only $1,800 several months ago due, in part, to unexpectedly low output in China and Pakistan.

Her firm, which manufactures both cotton thread and garments, has raised the price of thread to match the inflated cost of raw cotton materials. Hoa claimed she could not raise her garment and textile prices because she is afraid of losing customers.

"Our production cost has risen 7 percent, while we only managed to increase sales prices by 5 percent," said Quyen, from the Vietnam Timber and Forest Products Association. "Firms will have to accept slimmer profit margins, if they want to survive in this difficult market."

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