More business shutdowns reported, inventories surge

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Workers unload steel pipes at a port in the northern city of Hai Phong. Steel production is among sectors with inventories growing at a fast pace.

The number of companies that closed or suspended operations rose 6 percent in the first quarter from a year earlier, but a government official said the development was not a cause for concern.

Company closures totaled 11,900 during the period, including 2,200 companies that shut permanently, according to official data released late last week. Those figures compare to 15,300 new companies that were established in the first quarter.

Vu Duc Dam, chairman of the Government Office, said the increase in closures was due to high borrowing costs and limited access to credit.

"Even as banks reduce interest rates, they remain at a high level and companies still have difficulties borrowing," Dam told a press briefing in Hanoi.

News website VnExpress cited Dam as saying that while it is necessary to conduct an in-depth study of the companies that shut down in the period, most of them were small- and medium-sized enterprises. Many of these licensed companies were not doing any business and they also had very few employees.

"Under such circumstances, their closures will not have much of an impact on employment," he said.

Dam also said that as Vietnam becomes a market-based economy, it is "absolutely normal" to see companies shutting down. "The number of companies is not as important as their quality," he added.

Ho Chi Minh City alone reported 526 cases of company shutdowns in the first three months, up 23.8 percent from the same period last year, Tuoi Tre newspaper reported Tuesday, citing statistics from the city investment department. The number could grow as more than 5,000 companies have informed tax officials that their operations have halted.

Business optimism in Vietnam fell dramatically in the first quarter, from 34 percent in the last quarter of 2011 to only 6 percent, a new survey by accounting and advisory firm Grant Thornton found. The decline was a contrast to an increase in optimism in the Asia-Pacific region.

"Lender support, cost of finance, lack of skilled labor, access to finance and red tape continue to be the major hurdles to improving confidence in Vietnam," said Ken Atkinson, Managing Partner of Grant Thornton Vietnam. "It is disappointing to see the trend in Vietnam does not match the positive uplift in confidence around the world."

He said a stable economy and a decline in interest rates should help rebuild business confidence over the next few quarters.

Vietnam's economy expanded 4 percent from a year earlier in the first quarter, the slowest pace since 2009, government data released late last month showed.

Growing stockpiles

Inventories of the manufacturing sector in the first quarter jumped between 34.9 percent and 87.2 percent from a year earlier, with stockpiles rising the most in vegetable production and processing, fertilizers, and steel production, VnEconomy reported, citing the Planning and Investment Ministry.

Economists said the market is now oversupplied with stockpiles due to slow sales. While inventories surged sharply in the first quarter, consumption rose a mere 0.5 percent from a year earlier.

Truong Phu Cuong, chairman of the Construction and Materials Association, said there is no way out for businesses now. Stockpiles grew while production costs
and salaries continued to increase, he said, noting that a heavy reliance on bank loans has created even more difficulties for producers.

The recent rate cut has not brought about any change or improvement yet, Cuong said.

The State Bank of Vietnam cut its policy rates and the deposit rate cap by 1 percentage point last month. It also ordered the nation's largest banks to lower borrowing costs.

Interest rates on dong loans now range up to 25 percent a year.

Former central bank governor Cao Sy Kiem, who now chairs the country's small and medium enterprise association, said measures taken by the government to control inflation and restore economic stability have proved effective, but at the same time they created some factors that hinder production and economic growth.

High interest rates and limited credit access are the biggest problems, and if they are not solved, there will be a large number of company closures and job cuts, he said.

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