▪ HOANG THU13:19 (GMT+7) - Tuesday, January 17, 2012
Bankruptcy has become an all-too-real possibility for a large number of Vietnamese enterprises, especially SMEs
Bankruptcy has become an all-too-real possibility for a large number of Vietnamese enterprises, especially SMEs.
In market economies an enterprise with low productivity and/or poor management going bankrupt is a perfectly natural occurrence. But a recent announcement by the Ministry of Planning and Investment (MPI) relating to the number of businesses in Vietnam facing bankruptcy is viewed by many as a negative sign for the country’s economy.
In the first nine months of this year some 5,800 businesses went bankrupt, 11,500 ceased operations, and 31,500 stopped paying taxes to the State. By the end of the year the number of such companies is predicted to account for 10 per cent of the 600,000 businesses operating nationwide, of which small- and medium-sized enterprises (SMEs) will account for the majority.
Bleak outlook
According to a representative from the Association of SMEs, the actual number of enterprises could go much higher. “The have been reports that the number of local bankrupted enterprises could be as high as 40-50 per cent of the total,” he said. “The number of bankruptcies as we speak has doubled compared with the 20 per cent declaring bankruptcy in July.”
This means that the actual number of bankrupted enterprises could reach 30-50 per cent. SMEs seem to be following three trends: going bankrupt or temporarily closing down and waiting for better times, moving to another business field, or undergoing a merger.
When asked about his company’s business situation over recent months, Mr Nguyen Van Luong, Deputy Director of the Hung Phuc Joint Stock Company, which specialises in IT equipment, said that they have decided to change their business activities. “In recent months our profits have been rather modest because it has been hard for us to find customers, while salaries and other costs have mounted up,” he told VET.
The company, he added, is unwilling to access banks loans when interest rates are 17-19 per cent. “We decided to shift our business towards purchasing second-hand IT equipment from other companies, then reselling them,” he explained. “We recently acquired 60 tons of used home phones from Viettel.
Although we only earn a profit of about VND1,000 ($0.02) per kilogram, the total profit is more than from selling new equipment. However, this is only a temporary measure for us.” The company is waiting and hoping for better times in 2012.
For the Kim Bai Beer JCS, its merger with the Hanoi Beer Alcohol and Beverage Joint Stock Corporation to become the Hanoi - Kim Bai Beer JSC is a necessary but still bitter means of survival. In merging with Hanoi Beer, they had to change almost all of their equipment and technology and bring in new people for the production process.
“At present we must pay a high monthly interest rate on our bank loans, but we cannot increase our sale prices,” the Director of the Hanoi - Kim Bai Beer JSC, Vu Van Tien, said. “We are trying to maintain production through this difficult period and can’t really think about developing our scale.”
Unpredictable consequences
The tough times may well present an opportunity to identify strong enterprises and cull the poor performers, but senior financial expert Bui Kien Thanh warned that companies going bankrupt or ceasing production have damaging consequences for the country, including unemployment, equipment going to waste, and bad loans.
A typical case is the Van Loi Steel Joint Stock Company in Hai Phong city, which recently announced at a extraordinary shareholders meeting that it would sell the company’s assets in an attempt of to pay banks and other creditors.
When the company ceased production, its workforce of more than 2,000 people became unemployed. Valuable equipment and machinery may simply become scrap metal, because almost all other steel producers are facing similarly tough times.
According to an official from the city’s electricity department, Van Loi owes more than VND11 billion ($5.5 million) in unpaid power bills. It also owes nearly VND7 billion ($3.5 million) to the city’s social insurance department as well as thousands of billions of VND to six credit institutions.
Enterprises facing difficulties, especially manufacturing enterprises, can have major consequences for the country. “It may create the conditions for foreign products to flood into the market, while reducing exports,” Mr Thanh said. “Monetary policies should not destroy enterprises in such a manner.”
Long-term and short-term measures
The government recently asked MPI to prepare plans for the development of SMEs in the 2011-2015 period. But many experts believe the government and relevant authorities should first review the results of the plan for 2006-2010 before implementing any new plan.
Mr Le Duy Binh, an economic expert from Economica Vietnam, told an MPI conference that although the government identified seven main groups of measures and a range of specific action programmes in the first plan, many were not implemented because they were unfeasible. “The eight main measures contained in the new plan are not much different to those in the previous plan,” he said. The government must adopt not only long-term but also short-term measures that can help solve the greatest concerns of enterprises.
Of the measures adopted, Decree No 101/2011/ND-CP amending and supplementing a number of tax measures and issued in November, was welcomed by SMEs. It regulates that the government will reduce corporate income tax by 30 per cent in 2011 for a number of SMEs, in particular those with large workforces in fields such as production, agricultural, forestry and aquatic product processing, textiles, footwear, and electronics, among others.
According to Mr Thanh, adjusting interest rates is an urgent step because they have a significant and direct effect on enterprise development. He told VET that interest rates of less than 10 per cent would be good for the growth of enterprises in general and for SMEs in particular, while over 10 per cent will create problems for some enterprises, and from 17-19 per cent will simply “destroy” their development.
“The State should regulate the flow of cash at a suitable level to avoid inflation and avoid deflation by making accurate forecasts on the flow of cash,” he suggested. It is also necessary for the government to strictly manage exchange rates, because they have a significant impact on import and export commodities.
“The State should also reform complicated administrative procedures and corruption as a matter of urgency, as these create numerous problems for enterprises,” he added. “Such efforts help to create a favourable business environment and help to boost competitive capacity during economic integration.”