The debt burden on local businesses

Vietnam’s explosive credit growth over a long period of time, together with bank policies to provide easy access to credit, have made Vietnamese businesses more dependent on bank loans.

However, this was not revealed until the double global crisis hit the country.

Since 2011, many leading groups and corporations have suffered losses and even faced the risk of bankruptcy. This has been attributed to the overuse of bank loans and trying to earn more profits by investing in “non-core” projects.

Worrying statistics

At a recent investment conference, Nguyen Xuan Thanh, Director of the Public Policy Program at the Fulbright School in Ho Chi Minh City, said Vietnam has 709 businesses listed on the country's stock exchanges.

Of that total, more than 50 are financial businesses under commercial banks, financial corporations, and security companies and 647 are non-financial enterprises. Together they have a debt-to-capital ratio of 1.53, much higher than the figures of companies listed on the stock exchanges in the US (1.2) and China (1.06).

Of the 647 businesses listed on Vietnam's stock exchanges, construction and real estate companies have the highest financial leverage rate of 2.07, followed by non-financial ones (1.53), energy (1.44), and raw materials (1.39).

The consumer goods sector uses the lowest financial leverage rate of 0.8.

The use of financial leverage at high rates over the past years has created the difficulties confronting construction and real estate businesses.

Thanh said there is no clear relationship between financial leverage and the scale of businesses, but there is a huge difference in the amount of debts among industries.

According to statistics announced by the Ministry of Finance, State-owned enterprises (SOEs) have a debt-to-capital ratio of 1.71.

Nguyen Nam Thanh, Managing Director of Vietnam Capital Partners, estimates the debt ratio of Vietnamese businesses at 1.2 percent, much higher than the regional average of 0.45.

Leading enterprises such as the Hoang Anh Gia Lai Group, Vinaconex, and Phat Dat all have high debt to capital ratios and are facing the possibility of bankruptcy.

What connection with the banking system?

There has actually been a boom in the banking system recently. While credit growth in the 1990s was only 20 percent, credit outstanding nationwide hovers around 140 percent of GDP, higher than other ASEAN countries and only lower than China.

Bank credit is focused on the business sector, with outstanding credit now reaching VND2,021 billion (77.2 percent).

Economists say there is now a trend of debt deflation in the economy, which should ease the debt burden on businesses. This is reflected in the decrease of the credit to GDP ratio.

Banks are now moving their investment to government bonds and other short-term bonds to refinance their debts.

Economists also proposed SOEs reduce their debts by selling property and accelerating equitization.

Once businesses are able to pay their debts, commercial banks will have more money to help other enterprises, especially small- and medium-sized ones.

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