Credit crunch putting the squeeze on businesses: government committee

Businesses say they are constrained by the capital shortage in maintaining production, making purchases and preparing materials for next year’s production. This also means they cannot have enough work and jobs for employees.

The problem has been worsened by the prolonged idle time during the Covid-19 crisis that has almost dried up their cash flow.

The lack of working capital as well as capital for medium and long-term investments has undermined competitiveness of many industries and the country’s internal economy, the committee, also known as Board IV, says in a report.

Steelmakers say that with supply exceeding demand, they have had to sell products at 30-40% lower than cost in order to maintain operating cash flow as they wait for the next credit allocation.

Enterprises in the supporting industry, meanwhile, say that in the past they could use signed contracts or mortgage real estate to borrow from banks. But, with banks having used up their credit quotas, businesses in the industry are unable to get loans. This, in turn, makes it impossible for businesses to sign new contracts.

The supporting industry, therefore, faces the risk of not being able to maintain their position in the supply chain because they lack capital to invest in new machinery and technology at a time they have to serve difficult markets.

In the agriculture sector, the lack of capital has made it difficult for businesses to buy input materials.

The committee says the “thirst for capital” has left many Vietnamese businesses in a “precarious position” to maintain operations, far less stage a recovery from pandemic impacts.

FDI enterprises, which are less affected by Covid-19 and do not depend on loans from domestic banks, are in a more advantageous position than domestic businesses.

September data from the General Statistics Office shows that exports by domestic enterprises decreased by 1.6% year-on-year while FDI enterprises maintained a growth rate of 14.1%.

“If the situation prolongs, it will create increasingly large gaps and disparities between the two economic sectors and reduce competitiveness of local enterprises and the Vietnamese economy,” the committee says.

It also notes that in the medium and long term, restrictions on capital mobilization channels will affect investment expansion and business recovery.

For instance, declining confidence among real estate businesses has spread to all other types of businesses, ruling out bond issuance as a major channel to help businesses raise capital in the short term.

The stock market has also been strongly affected over the past months, exacerbating capital difficulties. Many large enterprises have to arrange capital sources to buy back their bonds before maturity.

In the context of low market confidence, lack of working capital, and lack of investment flows, the assets of enterprises are at risk of being sold off, the committee says.

This means there may be a wave of factories or production facilities of Vietnamese enterprises being sold to foreign investors. Thai businesses are carrying out many negotiations to buy textile factories.

To help businesses survive the current difficulties, the committee proposes that the government considers extending until next year a number of policies issued to support businesses during the Covid-19 pandemic, including a 2% VAT reduction, extension/postponement of the new land rentals and rescheduling debt repayment.

It also expresses hope that the government allows domestic commercial banks to participate in the purchase of bonds before maturity date and treat them as a special form of credit in addition to normal credit.

The committee also proposes that preferential credit packages are designed for key manufacturing industries and fields to help them tide over the current difficulties.