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Businesses hit from all sides at end of 2010
High capital costs, risk from exchange rate fluctuations and higher material prices are all obstacles at the end of the year for domestic businesses. They may have to raise prices, even while inventory volumes rise.
To prepare for the year-end production season, Hoang Kim Food Company in Hanoi needs to borrow four billion dong to purchase materials. They applied for a loan one month ago, but the company has not received a reply.
Ngo Thi Hong Hanh, Chair and General Director of Hoang Kim Company remarked that, to speed up disbursement, her company must spend one percent of the loan as a “service fee” to credit officers.
Hanh also heard that her company would be able to borrow two billion dong with an interest rate of 13 percent, making the total cost 15 percent of the loan. However, Hanh still believes that they must borrow now. If they do not, the company cannot buy materials for production. Material prices are also forecast to go up sharply.
Other businesses are facing the same situation. Pham Chi Cuong, Chair of the Vietnam Steel Association, confirmed that most steel enterprises can arrange 50 percent of the capital needed for production in the next quarter. “Enterprises are really lacking capital, but they dare not complain. They have signed contracts with partners already, and if they hear of capital difficulties, the partners may set unfavourable conditions,” Cuong explained.
He went on to say that, though the State Bank of Vietnam has been taking necessary steps to slash lending interest rates, to date, no steel maker can access loans with “soft rates.”
“Most steelmakers must borrow capital at interest rates of 15-16 percent,” Cuong maintained, adding that they fear they cannot increase profits from now to the end of the year, when materials cost more, the dollar price rises, and commissions for credit officers also increase.
As for a rapidly growing economy like Vietnam, the demand for loans is always high. Yet the ability to offer capital seems to be limited this year. According to Kieu Huu Dung, Chair of ACB Securities Company, in the first eight months, outstanding loans increased by 16.27 percent, lower than the capital mobilization growth rate of 17.75 percent. In the same period of 2009, the credit growth rate was 24.51 percent, far exceeding the capital mobilisationi rate of 21.9 percent. The figures show that the capital flow to the production sector has slowed, which in turn may stunt economic recovery in the fourth quarter.
“The consumption demand remains low, while the inventory volume at many enterprises remains big. Lending interest rates are still high, and banks have tightened lending. This explains why credit growth has slowed,” revealed Cao Sy Kiem, Chair of Small and Medium Enterprises.
Kiem added that some big banks with high financial capability regularly have opportunities to purchase and hold a certain proportion of Government bonds (Bond interest rates now stand around 10 percent per annum). Banks can use Government bonds to borrow from the State Bank (The current interest rate is eight percent per annum). They can then use these loans to buy bonds again and then use them as collateral or remit them on the interbank market.
After every capital rotation, big banks get a profit of nearly two percent per annum. Meanwhile, smaller banks can only mobilize capital from businesses and the public. Therefore, banks must offer high interest rates to attract more capital. This has hindered the process of lowering interest rates.
Ho Huu Hanh, Director of the HCM City Branch of the State Bank, expressed his concern that banks face higher risks. “As business revenue and profit are dropping, solvency is not high, which means more risks for banks,” Hanh stated.
He went on to say that, to ease interest rates, it is necessary to curb inflation. If so, Vietnam must endure a slowdown in its economic growth rate.
vietnamnet, SGTT
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