Businesses agonise over 20 percent interest

Published: 16/05/2011 05:00


Businesses are facing a million-dollar question these days: whether to continue to borrow from banks since interest rates have gone through the roof.

Businesses are facing a million-dollar question these days: whether to continue to borrow from banks since interest rates have gone through the roof.

A garment businessman in HCM City says he went to several banks this month for a loan and the lowest rate offered was 23 per cent. At these rates, even if he toils hard, he may not break even.

A rubber industry executive says not only has he had to delay several long-term investments but also slash output this year by around 20 per cent due to lack of funds.

“How can enterprises dare borrow at such high interest rates?” asks Huynh Van Minh, chairman of the HCM City Business Association.

Without being able to borrow, businesses will not invest in modern equipment, he says, and as a result, soon their competitiveness will be weakened.

Le Xuan Nghia, deputy chairman of the National Financial Supervisory Commission, blames high inflation for the high interest rates. The year-on-year inflation in the first four months was 17.5 per cent, meaning the official cap of 14 per cent for dong deposits is not appropriate.

Many small banks have, in violation of the regulation, pushed up the rate to 18-19 per cent, but even that is lower than the 22-25 per cent bigger banks offer them on the inter-bank market.

Yet, dong deposits as of April 21 were down by 1.84 per cent from a month earlier, according to the State Bank of Viet Nam.

The Viet Nam Asset Management, in its April report, predicted that, given the continuing inflationary pressures, interest rates will not come down at least till the end of the third quarter.

But it also sees some positives. For instance, the Government has repeatedly sent clear signals that inflation control is a higher priority than growth. It has revised the GDP growth target for this year down to 6-6.2 per cent from the earlier 6.5-7 per cent.

This time the Government has also shown strong determination that it will not prematurely ease policy as it did in the past. “We expect further tightening of credit and public spending if inflation [does not ease],” says the report.

“Hence, we think inflation will eventually be controlled but it will take more time.”

Analysts expect to see improvement in inflation towards the end of Q3 when the Government’s measures show clearer effects.

Making fuel from cassava

Targeting a reduction in the consumption of fossil fuels, Viet Nam has rolled out a number of projects to produce ethanol from dried cassava that can be mixed with petrol.

But this has had a negative impact on the sugar industry since, in the 2010-2011 crop, a ha of cassava has doubled in price since the last crop to VND35 million (US$1,700). This has prompted farmers to switch en masse from sugarcane to cassava, according to Nguyen Quoc Huan, an analyst at the Sacombank Investment Joint Stock Company.

The sugar industry is facing a serious shortage of sugarcane as a result.

There are now six major ethanol plants totally producing 100 million litres a year. They require an average of 250,000 tonnes of dried cassava or 600,000 tonnes of fresh plant.

Viet Nam’s bio-ethanol development plan for 2015 envisages production of 750 million litres, or 4.2 million tonnes of fresh cassava. That is without even considering the potential demand from China.

The problem becomes clear in Quang Ngai Province. Its agricultural development plan required cassava to be grown on 13,500ha by last year but in reality farmers grew the crop on more than 21,000ha. But yet they managed only to meet half the demand from ethanol factories in the province.

Area under sugarcane fell to 5,300ha from 7,350ha the previous year. This prompted the Quang Ngai Sugar Co to move its Quang Phu factory to Gia Lai Province in the Central Highlands.

Equitisation process stalls

The stock market is the barom-eter of the economy and has an impact on the economy. The current slump in the equitisation of State-owned enterprises is a reflection of the recent gloom in the stock market.

The weak stock market and poor liquidity mean it is hard for businesses to float their shares.

The chairman of the Viet Nam Steel Corporation, Mai Van Tinh, is unable to confirm his company’s IPO will go ahead this month as scheduled though it has already been approved by the Government.

The mobile network MobiFone is in a similar situation. Though the Ministry of Information and Communications has announced its equitisation will be completed this year, no progress has been made in its equitisation plans.

However, the firm cannot wait for the stock market to recover because this will need major efforts from relevant authorities and businesses and also depends on other factors.

Quach Duc Phap, chairman of the Viet Nam Association of Financial Investors (VAFI), says it is too ambitious to expect many major enterprises to equitise in a short time even if the stock market improves.

Rather, a more modest plan to equitise some SOEs within a year should be drafted and executed on schedule to gain investors’ confidence.

Authorities should define which SOEs will be selected for the first batches. The criteria could include a chartered capital that is neither too big nor too small and easy asset valuation.

The State does not need to hold majority stakes in these companies either, according to the VAFI chairman.

A new decree to replace Decree 109 on turning 100 per cent State-owned enterprises into joint-stock companies was planned to be issued by 2010 end but has yet to materialise.

Source: VNS

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