Last updated: Thursday, May 23, 2013
Finding the Cure for Vietnamese BusinessesPosted: Friday, September 07, 2012
During the recent 2012 Investment Conference, many economic experts analysed and pinpointed deep-rooted problems among Vietnamese businesses, of which the most outstanding are the over-reliance on bank capital and financial leverage, as well as the race to pursue profits by investing in industries that are outside of the companies' expertise.
Causes of inherent weaknesses in Vietnamese businesses
Mr Nguyen Xuan Thanh, Director of the Public Policy Department under the Fullbright Economic Teaching Programme, said that many businesses are currently counting on bank capital to survive. More specifically, according to the 2012 second-quarter financial reports of 647 publicly listed companies, the total liability to shareholder equity ratio is 1.53. He thought that this is a high ratio, compared to both developed and developing countries. This ratio was 1.2 in 2011 in the US and 1.06 in China. Besides large publicly listed corporations, many small and medium enterprises (SME) (representing 95 percent of Vietnamese businesses) are suffering from loans with astronomical interest rates. This is the reason that, despite their small size, they still have a high debt ratio because of their relatively low shareholders' equity.
Also according to Mr Thanh, out of the 647 publicly listed companies (excluding banks and financial firms), construction and real estate businesses have the highest debt ratio. The total liabilities of these groups are twice as much as shareholders' equity. Another contrasting picture that Mr Thanh offered is that not only publicly listed companies, but leading businesses and state-owned enterprises in the construction and real estate sectors are also shouldering huge debt and liabilities. Song Da Corporation and Housing and Urban Development Holdings (HUD) have high liability to shareholders' equity ratios of 9 percent and 6.36 percent, respectively.
Regarding slow credit growth, Mr Thanh thought that this is a natural occurrence in the economy, because banks have to collect previous debts from businesses and financial organizations Accordingly, during the first seven months of 2012, money supply increases at a 8.58 percent rate compared to 2011, while the credit growth rate remains almost stagnant at 0.57 percent. "After the credit boom, many countries go into a period of slow credit growth and both businesses and banks have a high debt ratio," Mr Thanh shared.
Mr Nguyen Nam Son, a board member of Thien Viet Securities Company and CEO of Vietnam Capital Partners Investment Fund, revealed statistics showing that real estate businesses in Vietnam have the highest financial leverage ratio in Asia. This results in Vietnamese businesses having an extremely weak endurance when the Central Bank decides to tighten credit in fear of bad debt, Mr Son suggested.
Also according to Mr Son, this is a "multi-industry death" due to an abuse of multi-industry investment in order to improve the bottom lines of numerous businesses. Probably the most typical examples are problems in Vinashin and Binhanfishco due to investment in industries outside of their expertise. While the capital and business management expertise are lacking, there is no escaping the fact that investment in industries outside of the company's expertise will lead to absolute failure. The picture is even clearer when, for the last seven years, many big companies in Vietnam have continually expanded their investment in the financial and banking sectors, as well as securities companies and the real estate industry. Consequently, in the next two years, 90 percent of securities companies will most likely be out of business; together with a high failure rate for real estate companies. "In order to survive, they have to quickly merge with one another to expand their scale and build up their core competence," Mr Son forecast.
What is the solution?
According to economic expert Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management, the above challenges are not unique to Vietnam, but are present in many countries all over the world. The main causes are the fact that the Government has decided to focus on growth and a high credit growth rate, and that banks have relaxed their risk management procedures and tried to extract short-term profit from businesses relying on easy money.
The most effective cure is closely related to macroeconomic policies, as well as the target that the Government aims towards economic development. The solution that is expected the most is the cleaning up of the banking system and adjustment in behaviour of businesses: they must know how to collect their debts from other businesses. This requires a quick fix while avoiding the domino effect. "The Government and central planners need not only some level of effort, calm and patience, but aggressiveness from the administration, banks and businesses," Mr Thanh commented.
Mr Truong Dinh Tuyen, former Trade Minister and a member of the National Financial and Monetary Policy Advisory Council, said that the Government often puts too much focus on growth. This might be the reason the economy recently encounters several issues. Mr Tuyen also emphasized the need for the Government to implement strict measures to prevent state-owned enterprises from investing in industries outside of their area of expertise. He cited the Korean economy in the aftermath of the financial crisis as an example. The Korean Government forbid companies from investing in industries not within their circle of competence; and in fact they did achieve some kinds of success.