The exchange rate and gold prices soared in the early days of this year due to the novel coronavirus, while the core inflation has been under pressure from the last months of 2019.
Risks from the major debtors
The fact that a number of private economic groups which are leading corporations, having large debts and operating in many fields have recently divested capital, sold projects, and sought new loans from outside, has shown the challenges and risks in Vietnam's economic environment.
The risks from these too-big-to-fail businesses are thought to be increasing, and have a significant impact on the economy when uncertainty occurs. The term "too big to fail" was once used to refer to banks and economic groups that were so big that the world economy would have collapsed if they had not been rescued in the 2007 global crisis.
In Vietnam, there have been such major private corporations in recent years as their scale of operations spread across many sectors, greatly contributing to economic growth. However, accompanied with that is the level of debt they have. Owners of these companies always want to take advantage of the highest financial leverage and optimize the efficiency of capital use.
Although many businesses have been quite successful due to funding from abroad, it also comes with significant risks when the exchange rate increases, in the context of Vietnam’s credit rating being downgraded and currency devaluation move of many major economies in the region.
That the mobilization of a huge amount of capital is too easy when listing subsidiaries as well as selling shares to foreign investors also makes many businesses expand their business activities in order to gain market share and take opportunities in areas with potential for strong growth in the future. However, multidisciplinary risks will also be inevitable and cash flow of businesses will face great pressure when new fields are not as profitable as expected.
The risk of corporate debt was mentioned more than a year ago in the context of many businesses borrowing excessively and expanding operations to new businesses when the economic outlook was forecasted to be optimistic, but the unexpected trade war between the US and China has led the world economy to face more and more unpredictable risks.
Impact on the economy
The epidemic caused by COVID-19 has further worsened business confidence and increased the challenges and difficulties that the economy may have to face. It will not only affect tourism and aviation, but production will also be stagnant, trade will be limited, followed by bad effects on agriculture, retail and international capital inflows.
In addition, the sharp decline in the stock market in the past few days has made the future prospect gloomy, making it difficult for businesses to raise more capital, which leads to the fact that it will be very challenging to find financial source for due debts. Accordingly, businesses may have to resort to bank loans, pushing up the interest rate pressure, making businesses that are in excessive debt burden more and more burdened with debt.
In the period of 2018-2019, corporate bonds helped many businesses diversify their capital sources. Currently, with the sharp growth over the past time together with warnings, restrictive policies, tightening policies and increasing economic risks, businesses will face more difficulties if they still want to raise capital through this channel.
Looking at what China has been through so far, Vietnam has to be wary. Corporate debt in the world's second-largest economy is the biggest threat to the global economy, according to a recent Moody’s Analytics report. Meanwhile, Fitch Ratings also said that 4.9% of Chinese corporate stock issuers are overdue on domestic bonds (an increase from 0.6% in 2014). Earlier in October 2019, the International Monetary Fund (IMF) warned that low interest rates amid a slowing economy partly due to the U.S - China trade war would increase the risks to corporate debt, which could cause a new global economic crisis.
In Vietnam, the credit growth has been high for many years, the interest rate has been stable and tended to go down due to the efforts of the regulators. Many businesses have actively borrowed money to create tax shields to increase business efficiency and expand investment into other areas.
For international loans, if foreign capital flows slow down, Vietnam credit rating is downgraded in the coming time and the US accuses Vietnam of manipulating currencies, international borrowing will be increasingly difficult. Meanwhile, many large domestic private corporations are now seeking new sources of foreign loans to finance their existing activities as well as pay their due debts.
In the context of sustained economic growth, high consumer purchasing power, comfortable interest rates, businesses can still withstand and even find ways to increase financial leverage. However, when the economy reverses and decelerates, interest rates rise due to inflationary pressures and exchange rates, demand is weakened, businesses may pay the prices, especially those that are having large debts, unhealthy balance sheets and cash flow problems.
Vietnam’s public debt is worrisome
Figures in the Vietnam White Paper 2019 show that by 2017, the debt of businesses, including state-owned, non-state and foreign-invested enterprises (FDI), had been VND 23.6 million billion, while the gross domestic product (GDP) at the current price in 2017 was VND 5 million billion. Thus, debt to GDP of Vietnam is 472%.
According to recent government reports, it was expected that by the end of 2019, public debt would be 56.1% of GDP (compared to 58.4% of GDP in 2018), and government debt would be 49.2% of GDP (it was 50% in 2018). The Government's direct debt obligation to budget revenue is estimated at 19.5-20.5%. Most of the debts of state-owned enterprises and over 20% of the debts of 100% state-owned enterprises are not guaranteed by the Government. These items are not counted in the total public debt.
The ratio of equity to total capital of the economy is increasingly low. On average, in the 2011-2015 period, this ratio was 31.5%, in 2016 it decreased to 30.2%, in 2017 it was 28.4%. Particularly for state-owned enterprises, the ratio of equity to total capital decreased from 25% in the period of 2011-2015 to 19% in 2017.
Moreover, data from enterprises shows that the rate of return on capital of the whole country is very low, of which that of the non-state sector is the lowest although it tends to increase but has not been 2%. The ROC is much lower than the interest rate of deposits, while in 2017, VND 72 out of VND 100 of capital was for liability.
Source: thesaigontimes, VietnamCredit