Bloomberg News

Vietnam Economic Slowdown Seen in Cobweb-Covered Crates

May 21, 2012

A worker pushes a cart of ceramic tiles at the Quang Minh Ceramics Porcelain Co. factory. Photographer: Justin Mott/Bloomberg

A worker pushes a cart of ceramic tiles at the Quang Minh Ceramics Porcelain Co. factory. Photographer: Justin Mott/Bloomberg

Nguyen Thi Ha sighs as she looks at the dust and cobwebs covering crates full of colorful, enameled tiles in her factory by Hanoi’s Red River.

“We’re struggling to keep our business alive,” said Ha, who laid off more than half of her 60 employees this year as luxury hotels in the beach resort of Danang halted orders. “If the situation doesn’t improve, it will be hard for us to hold out beyond this year.”

Ha’s factory is among thousands in Vietnam that cut production or closed this year after policy makers curbed a lending spree and bad debts mounted. As demand also slows from Europe to China, the shakeout of businesses that mushroomed during the 2002-2007 boom is slowing economic growth and may temper a stocks rally that made Vietnam the world’s third-best performer this year.

“There’s no way we can meet the economic growth target of 6 percent this year when so many companies are in serious trouble,” said Le Dang Doanh, an economist who has advised Prime Minister Nguyen Tan Dung and who estimates 2012 expansion may slow to as low as 5 percent, the least since 1999. “Many businesses are on their last breath.”

With almost 18,000 companies idled in four months and the government stepping in to prevent a banking collapse, Vietnam is trying to find a sustainable path to growth after years of easy credit funded makers of cheap goods and triggered Asia’s highest inflation. Parliament meets this week to debate an economic plan that would draw more investment from foreign manufacturers such as Samsung Electronics Co. (005930), better regulate banks, and foster more domestic demand from its 88 million people.

Shuttered Plants

In the first four months of 2012, 17,735 companies halted production -- including more than 400 with overseas investors -- about 10 percent more than a year earlier, according to a report from the Ministry of Planning and Investment. Pledged foreign direct investment fell 32 percent.

Vietnam’s National Assembly will hold a session this week to discuss proposals by the planning ministry to restructure the economy, said Nguyen Si Dung, the parliament’s deputy secretary- general. The plan was drawn up after bad debts mounted, Standard & Poor’s and Moody’s Investors Service cut Vietnam’s credit ratings in December 2010, and inflation as high as 23 percent sparked wage protests at factories across the country.

Parliament Addressed

The benchmark VN Index (VNINDEX) rebounded from last week’s 9.4 percent decline, gaining 3 percent today after Deputy Prime Minister Nguyen Xuan Phuc said the government will take steps to aid companies that are facing difficulties repaying bank loans and the Finance Ministry signaled a second cut this month in fuel prices. The index has risen 27 percent this year, after falling 27 percent in 2011.

The economy is showing signs of a “slowdown” as domestic consumption has significantly dropped this year and businesses face difficulties, including accessing bank credit and high interest rates, Phuc told the legislature in Hanoi.

Vietnam’s growth may be slower than the government had planned in the next few years, Minister of Planning and Investment Bui Quang Vinh told parliament today. The economic restructuring plan will reorganize state companies and banks and will favor quality over pace for economic growth, Vinh said.

Financial Strength

Government efforts to boost the economy may help the nation’s biggest companies recover from the recent slump because they are financially stronger, said Ngo The Trieu, head of public investment at Eastspring Investments Fund Management Co.

Six firms account for more than half the weighting in the VN Index, including Vingroup JSC, Vietnam’s largest listed real- estate company by market value, and Vietnam Dairy Products JSC (VNM), the country’s biggest dairy producer.

Emerging-market stocks fell partly on concern Greece’s debt crisis is worsening and amid a deeper slowdown in China. The MSCI Emerging Markets Index lost more than 6 percent last week.

“Most companies are operating on money they borrowed from banks with debt-equity of nine or 10 times -- it’s not sustainable,” said Trieu. “Companies that are having financial challenges will stumble. Those that can survive will be good investments in the long run.”

He said Vietnamese stocks could rebound as much as 30 percent this year if there are more central bank rate reductions and banks reduce lending rates to reasonable levels and improve their non-performing loan ratios.

‘Speed Up’

The prime minister told the central bank to “speed up” rate cuts to help businesses, the government said on May 9. State Bank of Vietnam Governor Nguyen Van Binh said in March the monetary authority would cut rates by 100 basis points in each of the second, third and fourth quarters. The central bank reduced benchmark rates in both March and April and capped some lending rates this month for smaller businesses at 15 percent.

“The country’s economy is slowing quite sharply,” Art Woo, director of Fitch Rating’s Asia-Pacific sovereign ratings group, said on a May 14 conference call. “The economic slowdown can still have some collateral impact on the banking sector, which remains a source of weakness. Asset quality is deteriorating.”

Economic expansion in the first quarter was the slowest since 2009, while inventories in processing industries, including beverages, clothing, textiles and pharmaceuticals, grew 32 percent this year from 2011, according to April figures from the General Statistics Office in Hanoi. In 2007, annual GDP growth peaked at 8.5 percent.

The government must “prioritize macroeconomic stability,” Tran Hoang Ngan, a member of the National Financial and Monetary Policy Advisory Council, said by telephone on April 24. “Prolonged high inflation rates in the last few years have exhausted businesses and consumers.”

No Debate

Vietnam’s legislature won’t consider a reduction in the 2012 growth target when it meets this week, Nguyen Hanh Phuc, the parliament’s secretary general, said on May 17.

Exports fell to $8.6 billion in April from $9.48 billion in March. The growth in garment shipments, the country’s biggest export, slowed to 15 percent through April after expanding 33 percent in the same period last year, according to preliminary figures from the statistics office.

Shipments of footwear, Vietnam’s fifth-biggest export, rose 9 percent through April after jumping 26 percent last year, according to unrevised figures from the statistics office. Vietnam ships most of its footwear and apparel to the U.S. and Europe. Sales to those two regions account for more than 20 percent of the economy, according to London-based researcher Capital Economics Ltd.

Taming Inflation

Vietnamese companies are caught between slowing export orders and high borrowing costs after the government passed a resolution last year to restrain credit growth and tame what was then Asia’s highest inflation. While commercial lending rates have since fallen from the peak of 27 percent last summer, they are still as high as 20 percent. Vietnam’s annual inflation, now Asia’s highest after Pakistan, slowed to an 18-month low of 10.5 percent in April, from 14.2 percent in March, according to the statistics office.

Of 700 companies on the country’s two stock exchanges, 11 percent posted losses last year and 62 percent saw profit fall, according to data compiled by Bloomberg. Among 473 that have reported results in the first quarter, 14 percent lost money.

At Hanoi-based Viet Hung Real Estate, Garments & Embroidery Co., owner Luong Thi Kim Oanh laid off more than half of her staff and cut prices of her T-shirts, table cloths and bedding by 50 percent to get cash to pay her 70 remaining workers. Sales to Europe and the Middle East fell by half last year and haven’t improved, she said.

Loan Sharks

The business, started in 1992, defaulted on loans and now can’t get credit from banks to buy raw materials, she said. Desperate for cash to pay wages, she turned to unlicensed lenders who charge more than three times the bank rate, or an annualized equivalent of more than 70 percent.

“I’m exhausted,” said Oanh in an interview at her factory. “My family and I had to mortgage all our properties but we still don’t have enough cash to fund the factory’s operations. We are in desperate need of government help.”

The government’s response this month was to reduce corporate income tax for small- and medium-sized companies by 30 percent, defer sales tax payments by six months and halve government land leases.

“The tax breaks and tax delay for companies are like putting a wet towel on someone’s forehead when they have a very high fever -- the medicine needed to cure the illness isn’t there,” said Vu Thanh Tu Anh, director of research of the Fulbright Economics Teaching Program in Ho Chi Minh City, a partnership of the city’s University of Economics and the Harvard Kennedy School.

Not Enough

The government measures are worth about 25 trillion dong ($1.2 billion), according to the Finance Ministry.

“The tax break and reduction in land lease are good, but still far from enough to save businesses like ours,” Viet Hung’s Oanh said.

Commercial banks’ bad-debt ratio has risen to 3.6 percent from 3.2 percent at the beginning of year, Vietnamese central bank Governor Binh said on April 12.

“Asset quality is likely to deteriorate further,” Fitch Ratings said in a March report. “Non-performing loans are significantly understated under the country’s accounting standards and could be three or four times higher.”

“Given the current economic situation, more investors are opting for the relatively safe government bonds these days,” said Vu Anh Duc, a senior fixed-income dealer at Vietnam Joint- Stock Commercial Bank for Industry and Trade in Hanoi.

Falling Yield

The yield on the government’s benchmark five-year notes this year fell about 300 basis points to 9.5 percent, the lowest since June 2009, according to a daily fixing from banks compiled by Bloomberg. Ten-year yields dropped 170 basis points to 10.28 percent, the lowest (GGVN10YR:US) since October 2009.

Business conditions “continued to be weak” in April, Trinh D. Nguyen, a Hong Kong-based economist at HSBC Holdings Plc., said at briefing in Hanoi. “Domestically, conditions are tough due to tightened credit and limited access to capital.”

At Bat Trang Ceramics Village, where pottery has been made for more than six centuries amid rice fields along the Red River, Ha’s factory and more than 500 other businesses making everything from glazed bowls to power cable insulators are showing the strain. More than half the kilns in the village have shut down, she said.

“I wouldn’t be so excited about the corporate income tax cut since there are many businesses which don’t have any income,” Ha said. “There are thousands of companies dying.”

To contact Bloomberg News staff for this story: Nguyen Dieu Tu Uyen in Hanoi at uyen1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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