Economic development in the doldrums

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The corporate picture in the year ending September is generally in a gloomy tone. More than 5,140 businesses went bust in August alone and names of struggling firms became apparent publicly after recent releases of 2012’s first six month audited financial statements.

Notably, some big-name companies are bogged down in losses. For instance, the leading civil constructor Vinaconex counted VND757 billion ($36 million) losses in the first six months of 2012.

Its outstanding loan amounted to VND5.048 trillion ($240 million) which approximated its owner capital VND5.243 trillion ($249 million). The PetroVietnam Construction Joint Stock Corporation (PVC) abruptly reported VND293 billion ($14 million) losses in the period.  

In the export processing field, Long An Export Processing Joint Stock Company (Lafooco) noted VND124 billion ($6 million) losses in the year’s first half.

Information relevant to changes in firms’ top management posts and business plan downward revisions was announced in the past months. Most recently, the realty market trembled after several property developers offered large price discounts.

Firms had attributed sinking local demands, difficulties in getting loans as well as sourcing input materials the main causes leading to this dark business landscape.

Economic experts assumed these causes, directly or indirectly, stemmed from repercussions of government management solutions.

Apart from the unfavourable global market, member of National Assembly’s Economic Committee Tran Hoang Ngan pointed out that part of firms’ current woes came from macroeconomic policies’ unpredicted changes. Firms’ problems were foreseen right after the government promulgated Resolution 11/2011/NQ-CO dated February 2011 presenting solutions to stabilise macro-economy and curb inflation.

Although it succeeded in taming inflation pace which spiked to 23 per cent in August 2011, the tightening of fiscal, monetary and credit policies’ side effects had placed a number of firms in the woods.

Monetary policies then showed signs of being loosened after inflation slid at a pace more swiftly than expected. Vietnam Institute of Economy director Tran Dinh Thien had recently voiced concerns over possible return of inflation.

Let’s look at why economists claimed current bottlenecks in part coming from repercussions of management policies.

In December 2008 the government introduced Resolution 30/2008/NQ-CP presenting urgent measures to avoid economic recession and maintain growth pace and social well-being.

Shortly after that, businesses benefited from a broad array of tax incentives and got more chances to take loans. The capital line for many of out nearly 3,000 public investment projects earlier suspended was resumed. Total bailout package reportedly reached $9 billion  covering interest rate subsidy, tax reductions, capital advancements to public investment projects and so on.

“Candidly speaking, this is part of the cause leading to the birth of above said Resolution 11/2011/NQ-CP. An easy approach in promoting investment and credit growth led to market bubbles and mislead market demand and supply situation,” said Nguyen Dinh Cung, deputy head of Central Institute for Economic Management.

Cung noted this practice was particularly apparent in the realty market.

At this time the economy is in a fix with firms going bust and production standstills are expected to further go up. Once again, diverse solutions including tax preferences, increasing public spending, credit growth expansion and even easing lending requirements are under consideration.

Unlike in the previous times, this time discretion and strict control was considered crucial under the guideline of supporting but not rescuing firms. However, a recent report by Vietnam Chamber of Commerce and Industry’s Economic Information Centre (Bizlink) shows that current on-going tax policies had yet to help firms get rid of current woes. Corporate tax reductions have yielded little returns as it targeted only firms generating revenue whereas a huge number of firms submerged in hardships had yet to be supported.

More proposals are being sent to the government asking for a ramping up of measures to support business.

“Traditional support measures, if implemented at current low degree, would entail tiny effects. If support degree was expanded, firms might feel it easier to breathe but it is almost certain inflation would come back,” Cung said.

“Economic problems stemmed from production structure, so remedies need to begin with production structure, then ways to distribute resources. Our target is prioritising providing development resources to economic sectors with high pervasion, low import pressures and using low energy,” said General Statistics Office senior expert Bui Trinh.

“In my view, fisheries and export-oriented sectors need urgent support to boost development,” Trinh added.