Input costs for enterprises are increasing due to a higher lending interest rate and a depreciating dong, but deeper problems continue to cause concern.
The recent increase in the lending interest rate and the two depreciations of the Vietnam dong against the US dollar between November and February have contributed to increasing the input costs of enterprises in Vietnam. But foreign entrepreneurs welcome the changes, saying they are the right moves by the government in correcting distortions in the monetary market, although they do still worry about long-term stability.
Welcoming higher costs
The current lending rate has reached around 17 - 18 per cent per year, up from the capped rate of 12 per cent. In the middle of March, when it was obvious that bankers were frustrated with the cap and were trying to get around it, the State Bank of Vietnam (SBV) replaced it with a negotiated rate scheme. Banks were previously reluctant to provide loans because, with the capped lending rate of 12 per cent and the deposit rate of 10.5 per cent, there was not enough margin for them to pay their expenses and cover the risk.
Foreign businesspeople welcome the new interest scheme, as they now have better access to funding for their business. “The government was right to remove the cap on the interest rate, which caused distortions in the market,” said Mr Michael Pease, General Director of Ford Vietnam Limited and Vice Chairman of the American Chamber of Commerce in Hanoi.
Mr Alain Cany, Country Chairman of Jardines Matheson Group and Chairman of European Chamber of Commerce in Vietnam, is positive that the increase in the interest rate is just a temporary problem before the government can control inflation. “In any country, a free interest scheme is much better [than the cap scheme],”he said. “We are not happy to see the finance cost increase because it possibly reduces our profitability. But it makes businesses improve their efficiency and make wise decisions in their investments.
The increase in the lending interest rate does add costs to our businesses but it affect European companies less than Vietnamese companies because we are more productive and efficient. The bigger issue is the availability of funding for sound and productive businesses. With the negotiated rate scheme, the availability of loans for businesses has improved.”
The increase in the lending rate, Mr Cany, who was CEO of HSBC in Vietnam for many years, continued, is not because the cap was removed but because of two other reasons. “First is the lack of confidence in the dong, so people are reluctant to make deposits in dong at banks and ask banks to pay high interest rates for such deposits,” he explained. “Second is the government’s tight control over inflation, which makes credit availability more difficult. I believe that the current high interest rate will be a temporary problem for a few months before the government takes action to control the situation.”
Vietnamese enterprises, meanwhile, are not as upbeat as Mr Cany about the increased rate. Chairman of the Vietnamese Small and Medium-sized Enterprise Association, Mr Cao Sy Kiem, said that with an average profitability rate of only 15 to 20 per cent, most SMEs in Vietnam are facing financial difficulties in managing their businesses with an interest rate of 18 per cent. Several enterprises, particularly exporters, have switched to borrowing US dollars to reduce interest payments, despite the risk of another depreciation of the dong. The lending rate in the US dollar now stands at around 5.5 per cent per year.
Mr Cany said that European enterprises are very good at organising their businesses to maximise the use of resources and minimise costs, as long as they have access to funding. Vietnamese enterprises may not as skilled in this regard, and are hit a lot harder when the cost of funding increases by 5 - 6 per cent.
Not enough
At the same time, the two CEOs consider the depreciations of the dong against the US dollar to be the right way to deal with existing shortfalls in dollar supply in the foreign exchange market. However, their businesses are more exposed to the fluctuations and they are concerned about the long-term stability of their businesses in such an environment. “As we price our cars in Vietnam dong, the depreciation of the dong against the US dollar plus the increases in registration fees and the value added tax rates increased our vehicle prices by 20 per cent,” said Mr Pease. “Consequently, demand for our cars became very weak. I am very concerned about our recent sales.”
Ford Vietnam is typical of those who will suffer under the changes. Their cars are sold in dong while the majority of components are imported and paid for with US dollars. When the dong was depreciated by 3.4 per cent against the dollar in February, after having been devalued by 5 per cent in November, the car maker saw its production costs increase significantly. At the same time, the interest rate support policy on short-term loans was canceled, and registration fees and value added tax rates on automobiles were increased, the latter going back to 10 per cent from 5 per cent last year. Consequently, car sales in general and at Ford in particular have fallen. “Our sales have gone down significantly, even in February before Tet, when they usually increase,” said Mr Pease, without revealing exactly how much the slide was. The Vietnam Automobile Manufacturers Association (VAMA) reported that total sales by members in February fell 17.75 per cent month-on-month, after having plummeted 53.8 per cent in January.
However, Mr Pease is more at ease with the fact that his company’s access to US dollars is no longer as problematic as it was late last year. “We have seen significant improvement in dollar supply compared to the situation late last year when it was a major issue for us,” he said.
Mr Cany, meanwhile, whose group is also investing in the Truong Hai Company, a car manufacturer in Quang Nam province, is concerned about the instability of the dong over the long term, believing that depreciation alone is not enough to stabilise the currency. “I think the depreciation was the right move because there was a large gap between the exchange rate on the black market and the official rate,” he said.
The problem, he continued, it that it has not restored confidence sufficiently and people are now awaiting the next move. “We don’t have a clear idea of the SBV’s strategy. I saw the dong depreciated two times within three months. I question what are they going to do in three months time. The SBV should state it intends to keep the dong stable and for how long and install tools to make sure its stability.”
In his view there is no economic reason for the dong to be depreciated against the dollar. “The Vietnamese economy is competitive enough,” he believes. “The dong is the only currency in Asia to be depreciated against the dollar in the past year. It is not a matter of the competitiveness of the dong and the economy but a matter of confidence in the dong. The availability of the dollar in the market has improved but is still difficult because people are not yet confident in the dong.”
Confidence and strategy
Mr Cany sees that the deeper reason for both the increase in the interest rate and the depreciation of the dong is, indeed, confidence in the currency. If the SBV and the government could clearly state their monetary targets and strategies and implement consistent measures to realise them, confidence would be restored, he believes. “Once people are confident in the dong, they are more willing to keep the dong and accept lower interest rates on deposits,” he said. “Then the lending rate will automatically go down. And the pressure on the foreign exchange rate will also ease. What is really important for a business is consistency in policies.”
He did not, however, address the pressures of high inflation and trade deficit on the two inter-linked problems. International banks have pointed to these as the main reasons for the two problems, which not only require consistency in monetary policies but also fiscal policy and economic development strategies. HSBC late last month predicted the SBV would have to increase the prime rate by 1 per cent within the next few weeks due to the high inflationary pressure. In the middle of March, Standard Chartered Bank predicted that the dong would continue to suffer from further depreciation pressure due to the large trade deficit and high inflation in the economy. But, in the end, the SBV kept the prime rate unchanged at 8 per cent per annum on March 25.
The consumer price index (CPI) in the first quarter of this year reached 4.12 per cent against the end of last year. The import surplus is estimated at $3.6 billion, equal to 25.6 per cent of total export turnover, according to the latest figures from the Ministry of Planning and Investment.
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