High interest rates could drive small companies bankrupt

A tenth of Vietnam’s 350,000 small-and medium-sized enterprises may go bankrupt in the first quarter of next year as high lending rates wipe out profits, according to a business association.

The companies are typically paying as much as 16 percent to borrow money, more than their profit margins of 14 percent, Cao Sy Kiem, president of the Vietnam Association for Small- and Medium-Sized Enterprises, said on Monday. “These companies may not survive for long,” Kiem said. “With lending rates remaining high, the main reason their business is struggling lies in their over-reliance on bank capital.” Faltering smaller enterprises may add to pressure on the central bank to lower interest rates from the second-highest in Asia to support economic expansion. The companies generate about 40 percent of gross domestic product, and use half the labor pool, according to the Vietnam Chamber of Commerce and Industry. “With the majority of these companies’ source of capital coming from banks, and given the high lending rates at the moment, they really aren’t making any profit,” said Kiem, who was governor of the State Bank of Vietnam (SBV) from 1989 to 1997. While the central bank has twice lowered rates by a percentage point in the past month, Vietnam’s benchmark interest rate of 12 percent is still the highest in Asia after Pakistan. More than half of Vietnam’s small- and medium-sized companies owe money to commercial banks, Vu Tien Loc, chairman of the Hanoi-based chamber of commerce, known as VCCI, said on Monday, citing data from the SBV. ‘Barely making profit’ Almost 60 percent of Vietnam’s small- and medium-sized exporters reported a slowdown in their business in recent months, the VCCI report said. “Given high rates and other inflationary costs, we are barely making profit from many export contracts at the moment,” said Nguyen Duc Cuong, deputy director of Hai Duong Agricultural and Seafood Export Joint-Stock Co. “But we have to keep up our exports in order to maintain business contacts.” The company, based in the northern province of Hai Duong, often needs to borrow as much as 80 percent of the value of export contracts, Cuong said. Profit may fall by a third to US$30,000 this year, he said. Seafood is Vietnam’s third-largest export by value after petroleum products and textiles, according to the General Statistics Office. Exports have slumped in recent months because of the global credit crisis. Vietnamese banks have reduced lending rates to about 15 percent after the central bank’s rate cut, according to a statement by the SBV. The maximum interest they can charge is now 18 percent, compared with 21 percent previously. However, Nguyen Tuan Anh, director of Ut Xi Seafood Company in Soc Trang Province, said businesses could only operate if banks’ annual loan rates stood at 10-12 percent. Further deposit rate cuts Interest rates paid to depositors by Vietnamese lenders will decline as the central bank pursues monetary policies to support economic growth, SBV Governor Nguyen Van Giau said. “In a situation where inflation is constrained, banks shall reduce deposit interest rates to a reasonable level,” Giau said, according to a statement posted on the government’s website. “The macro economy has been stabilized and inflation is under control, but enterprises’ production and businesses still have difficulties.” The government forecasts economic expansion of 6.7 percent this year, from 8.5 percent in 2007. Year-on-year inflation slowed for a second month in October to 26.7 percent, from 27.9 percent in September. The central bank’s actions are “necessary” and aim “to enable companies to maintain and expand their operations,” the statement said. Prime Minister Nguyen Tan Dung also said last week that Vietnam should keep lowering interest rates next year and manage the exchange rate flexibly in the face of a worsening global economy. On November 6 the SBV widened the trading band for the dong to 3 percent on either side of a daily fixed rate, from 2 percent previously, allowing a weaker currency to boost exports and narrow the country’s trade deficit, according to the statement. Bonds rise Vietnam's benchmark bonds rose Wednesday after the central bank governor’s statement. The yield on five-year notes dropped 8 basis points to 11.94 percent, according to a daily fixing price from 10 banks, compiled by Bloomberg. A basis point is 0.01 percentage point. “In a situation when the economy is slowing down and corporate earnings are threatened like now, we don't want to make more loans but put our money in bonds," said Nghiem Ngoc Minh, Hanoi-based head of the capital-management department at Agribank, Vietnam’s biggest bank by asset. The local currency traded at VND16,977.50 to the dollar as of 4:20 p.m. Wednesday in Hanoi, versus VND16,977 on Tuesday, according to data compiled by Bloomberg. Source: TN, Agencies