VINACHEM

Nguyen Thi Ha sighs as she looks atthe dust and cobwebs covering crates full of colorful, enameledtiles in her factory by Hanoi’s Red River.

“We’re struggling to keep our business alive,” said Ha,who laid off more than half of her 60 employees this year asluxury hotels in the beach resort of Danang halted orders. “Ifthe situation doesn’t improve, it will be hard for us to holdout beyond this year.”

Ha’s factory is among thousands in Vietnam that cutproduction or closed this year after policy makers curbed alending spree and bad debts mounted. As demand also slows fromEurope to China, the shakeout of businesses that mushroomedduring the 2002-2007 boom is slowing economic growth and maytemper a stocks rally that made Vietnam the world’s third-bestperformer this year.

“There’s no way we can meet the economic growth target of6 percent this year when so many companies are in serioustrouble,” said Le Dang Doanh, an economist who has advisedPrime Minister Nguyen Tan Dung and who estimates 2012 expansionmay slow to as low as 5 percent, the least since 1999. “Manybusinesses are on their last breath.”

With almost 18,000 companies idled in four months and thegovernment stepping in to prevent a banking collapse, Vietnam istrying to find a sustainable path to growth after years of easycredit funded makers of cheap goods and triggered Asia’s highestinflation. Parliament meets this week to debate an economic planthat would draw more investment from foreign manufacturers suchas Samsung Electronics Co., better regulate banks, and fostermore domestic demand from its 88 million people.

Shuttered Plants

In the first four months of 2012, 17,735 companies haltedproduction -- including more than 400 with overseas investors --about 10 percent more than a year earlier, according to a reportfrom the Ministry of Planning and Investment. Pledged foreigndirect investment fell 32 percent.

Vietnam’s National Assembly will hold a session this weekto discuss proposals by the planning ministry to restructure theeconomy, said Nguyen Si Dung, the parliament’s deputy secretary-general. The plan was drawn up after bad debts mounted, Standard & Poor's and Moody’s Investors Service cut Vietnam’s creditratings in December 2010, and inflation as high as 23 percentsparked wage protests at factories across the country.

The benchmark VN Index (VNINDEX) gained 2 percent today as of themorning close after Deputy Prime Minister Nguyen Xuan Phuc saidthe government will take steps to aid companies that are facingtemporary difficulties in repaying bank loans and the Finance Ministry signaled a second cut this month of gasoline prices.

The index fell 9.4 percent last week, compared with a 5.1percent decline in the MSCI AC Asia Pacific Index. That’strimmed a rebound in Vietnam’s stocks this year to 26 percentafter a 27 percent decline in 2011.

The nation’s economy is showing signs of a “slowdown,”Phuc told the legislature today in Hanoi. Domestic consumptionhas significantly dropped this year as businesses facedifficulties, including accessing bank credit with high interest rates, he said.

Financial Strength

Government efforts to boost the economy may help thenation’s biggest companies recover from the recent slump becausethey are financially stronger, said Ngo The Trieu, head ofpublic investment at Eastspring Investments Fund Management Co.

Six firms account for more than half the weighting in theVN Index, including Vingroup JSC, Vietnam’s largest listed real-estate company by market value, and Vietnam Dairy Products SJC (VNM),the country’s biggest dairy producer.

Emerging-market stocks fell partly on concern Greece’s debtcrisis is worsening and amid a deeper slowdown in China. TheMSCI Emerging Markets Index lost more than 6 percent last week.

“Most companies are operating on money they borrowed frombanks with debt-equity of nine or 10 times -- it’s notsustainable,” said Trieu. “Companies that are having financialchallenges will stumble. Those that can survive will be goodinvestments in the long run.”

He said Vietnamese stocks could rebound as much as 30percent this year if there are more central bank rate reductionsand banks reduce lending rates to reasonable levels and improvetheir non-performing loan ratios.

‘Speed Up’

The prime minister told the central bank to “speed up”rate cuts to help businesses, the government said on May 9. State Bank of Vietnam Governor Nguyen Van Binh said in March themonetary authority would cut rates by 100 basis points in eachof the second, third and fourth quarters. The central bankreduced benchmark rates in both March and April and capped somelending rates this month for smaller businesses at 15 percent.

“The country’s economy is slowing quite sharply,” Art Woo, director of Fitch Rating’s Asia-Pacific sovereign ratingsgroup, said on a May 14 conference call. “The economic slowdowncan still have some collateral impact on the banking sector,which remains a source of weakness. Asset quality isdeteriorating.”

Economic expansion in the first quarter was the slowestsince 2009, while inventories in processing industries,including beverages, clothing, textiles and pharmaceuticals,grew 32 percent this year from 2011, according to April figuresfrom the General Statistics Office in Hanoi. In 2007, annual GDPgrowth peaked at 8.5 percent.

The government must “prioritize macroeconomic stability,”Tran Hoang Ngan, a member of the National Financial and MonetaryPolicy Advisory Council, said by telephone on April 24.“Prolonged high inflation rates in the last few years haveexhausted businesses and consumers.”

No Debate

Vietnam’s legislature won’t consider a reduction in the2012 growth target when it meets this week, Nguyen Hanh Phuc,the parliament’s secretary general, said on May 17.

Exports fell to $8.6 billion in April from $9.48 billion inMarch. The growth in garment shipments, the country’s biggestexport, slowed to 15 percent through April after expanding 33percent in the same period last year, according to preliminaryfigures from the statistics office.

Shipments of footwear, Vietnam’s fifth-biggest export, rose9 percent through April after jumping 26 percent last year,according to unrevised figures from the statistics office.Vietnam ships most of its footwear and apparel to the U.S. and Europe. Sales to those two regions account for more than 20percent of the economy, according to London-based researcherCapital Economics Ltd.

Taming Inflation

Vietnamese companies are caught between slowing exportorders and high borrowing costs after the government passed aresolution last year to restrain credit growth and tame what wasthen Asia’s highest inflation. While commercial lending rateshave since fallen from the peak of 27 percent last summer, theyare still as high as 20 percent. Vietnam’s annual inflation, nowAsia’s highest after Pakistan, slowed to an 18-month low of 10.5percent in April, from 14.2 percent in March, according to thestatistics office.

Of 700 companies on the country’s two stock exchanges, 11percent posted losses last year and 62 percent saw profit fall,according to data compiled by Bloomberg. Among 473 that havereported results in the first quarter, 14 percent lost money.

At Hanoi-based Viet Hung Real Estate, Garments & EmbroideryCo., owner Luong Thi Kim Oanh laid off more than half of herstaff and cut prices of her T-shirts, table cloths and beddingby 50 percent to get cash to pay her 70 remaining workers. Salesto Europe and the Middle East fell by half last year and haven’timproved, she said.

Loan Sharks

The business, started in 1992, defaulted on loans and nowcan’t get credit from banks to buy raw materials, she said.Desperate for cash to pay wages, she turned to unlicensedlenders who charge more than three times the bank rate, or anannualized equivalent of more than 70 percent.

“I’m exhausted,” said Oanh in an interview at herfactory. “My family and I had to mortgage all our propertiesbut we still don’t have enough cash to fund the factory’soperations. We are in desperate need of government help.”

The government’s response this month was to reducecorporate income tax for small- and medium-sized companies by 30percent, defer sales tax payments by six months and halvegovernment land leases.

“The tax breaks and tax delay for companies are likeputting a wet towel on someone’s forehead when they have a veryhigh fever -- the medicine needed to cure the illness isn’tthere,” said Vu Thanh Tu Anh, director of research of theFulbright Economics Teaching Program in Ho Chi Minh City, apartnership of the city’s University of Economics and theHarvard Kennedy School.

Not Enough

The government measures are worth about 25 trillion dong($1.2 billion), according to the Finance Ministry.

“The tax break and reduction in land lease are good, butstill far from enough to save businesses like ours,” VietHung’s Oanh said.

Commercial banks’ bad-debt ratio has risen to 3.6 percentfrom 3.2 percent at the beginning of year, Vietnamese centralbank Governor Binh said on April 12.

“Asset quality is likely to deteriorate further,” Fitch Ratings said in a March report. “Non-performing loans aresignificantly understated under the country’s accountingstandards and could be three or four times higher.”

“Given the current economic situation, more investors areopting for the relatively safe goverment bonds these days,”said Vu Anh Duc, a senior fixed-income dealer at Vietnam Joint-Stock Commercial Bank for Industry and Trade in Hanoi.

Falling Yield

The yield on the government’s benchmark five - year notesthis year fell about 300 basis points to 9.5 percent, the lowestsince June 2009, according to a daily fixing from banks compiledby Bloomberg. Ten-year yields dropped 170 basis points to 10.28percent, the lowest since October 2009.

Business conditions “continued to be weak” in April,Trinh D. Nguyen, a Hong Kong-based economist at HSBC HoldingsPlc., said at briefing in Hanoi. “Domestically, conditions aretough due to tightened credit and limited access to capital.”

At Bat Trang Ceramics Village, where pottery has been madefor more than six centuries amid rice fields along the RedRiver, Ha’s factory and more than 500 other businesses makingeverything from glazed bowls to power cable insulators areshowing the strain. More than half the kilns in the village haveshut down, she said.

“I wouldn’t be so excited about the corporate income taxcut since there are many businesses which don’t have anyincome,” Ha said. “There are thousands of companies dying.”