Unprecedented capital shortage an existential crisis for Vietnamese companies

Unprecedented cash flow difficulties, including a lack of working capital and capital for medium-term and long-term investment, have placed many Vietnamese companies in a precarious situation.

As a result, the competitiveness of many industries is weakening, says a recent report submitted to the Prime Minister by the Private Economic Development Research Board (Board IV) under the Prime Minister's Advisory Council on Administrative Procedure Reform.

The situation applies particularly to the private sector businesses, the report notes.

It says enterprises in almost all industries are facing "unprecedented difficulties in production and business activities due to the lack of capital". This has become a very big challenge for Vietnamese businesses after two years of Covid-19.

Steel companies have said that due to the oversupply crisis, they’ve had to sell products at prices 30-40% lower than production costs to have money to maintain operations. In addition, they are having to pay very high interest rates on borrowings while waiting for next credit quota for commercial banks.

According to the Vietnam Steel Association (VSA), steel production in the third quarter of 2022 reached 6.68 million tons, down 7% compared to the same quarter of 2021, when construction activities were almost frozen in big cities due to anti-pandemic restrictions.

In the first nine months of 2022, steel production hit 20.81 million tons, a year-on-year drop of 5.8% while consumption was 19.26 million tons, down 1.6%.

In its previously-released report, EVS Research said that the steel industry faced difficulties in Q3 and the first nine months of this year because the real estate sector was affected by the arrest of Tan Hoang Minh Group’s boss and the tightening of corporate bond issuance - an important source of capital for property developers in recent years.

The Organization for Economic Cooperation and Development's (OECD) Technical Committee also expressed concern over the crisis in the steel industry caused by rising energy prices and inflation.

A number of large steel enterprises reported losses in Q3, with the Hoa Phat Group and Nam Kim Steel JSC suffering losses of nearly VND1.8 trillion ($72.6 million) and VND418 billion ($16.86 million), respectively.

Steel makers are expected to suffer even bigger losses in Q4 and next year due to large inventories and U.S. dollar loans amid the appreciation of the currency.

Meanwhile, logistics enterprises say they face difficulties from instability in gasoline supply and prices in Vietnam and the world. In the last two months, petrol and oil scarcity has been seen in many economic hubs, seriously affecting the operation of transport enterprises - an important link in the chain of logistics services. Although the situation has eased, temporarily, many have forecast the recurrence of gasoline and oil shortages, especially in the year-end months - the peak time for logistics activities.

Meanwhile, companies in the supporting industry have said that they are no longer able to use signed contracts or real estate as collateral to borrow money because banks are constrained by credit quotas.

The companies face the risk of losing their position in the supply chain as they lack capital to invest in new machinery and technology to meet requirements set by demanding markets.

The capital shortage is also hurting the agriculture sector, hindering businesses from purchasing products that will be harvested in the last months of 2022 and early 2023.

With Vietnamese enterprises unable to access credit, it becomes even more difficult for them to compete with their FDI peers.

In addition, the sector’s exports to China, which accounts for 55-60% of Vietnam's fruit and vegetable export turnover, are still adversely affected by the neighboring giant applying a zero-Covid policy.

In the wood industry, firms involved in deep processing are in difficulty due to a sharp drop in demand, especially in the EU and the U.S. markets. Orders from these two major markets have decreased by 35-40% for furniture products. The industry is forecast to miss its exports revenue target of VND18 billion ($726,000) this year.

The ongoing cash flow difficulties have forced many businesses to stop exporting or do so moderately.

Legal difficulties and capital shortage have also drained real estate businesses who say they are facing numerous difficulties in implementing their projects.

They cite problems related to investment and legal procedures, especially in the approval of investment plans as well as land allocation and calculation of land use fees.

In addition, with ongoing strict credit controls and tightened controls over bond and stock markets, property developers are unable to access capital for project implementation.

According to the Vietnam Bond Market Association (VBMA), in the first 10 months of 2022, the bond issuance value of the real estate group was nearly VND51.7 trillion ($2.09 billion), accounting for only 20.5% of the total value of issued bonds.

Selling out

With most money-raising doors closed, capital shortage has become a survival issue.

Corporate bonds used to be the preferred source of capital for many businesses, especially real estate developers. But the tightening of the corporate bond market following the arrests of Tan Hoang Minh and Van Thinh Phat leaders for their bond issuance violations, and the promulgation of Decree No. 65 with more stringent requirements on private placement of corporate bonds have made this avenue virtually closed.

In October alone, there was just one bond issuer with a value of VND210 billion ($8.48 million).

According to Vietcombank Securities (VCBS), corporate bonds worth VND790 trillion ($31.87 billion) will mature in 2023-2024, accounting for nearly half of the outstanding bond volume, mainly issued by real estate businesses.

The payment pressures making it difficult if not impossible to issue new bonds can expose the whole financial system to liquidity risks, creating negative consequences for operations of enterprises in all sectors and the economy, the report warns.

Declining confidence in real estate businesses has strongly affected not only the bond market but also the stock market, making the capital crisis more serious.

The VN-Index, which tracks the performance of the Ho Chi Minh Stock Exchange (HoSE), has plunged by 30% since April and has many times been named among the worst performers in the world, causing panic and loss of confidence among people and investors. They are now choosing bank deposits as a safe investment channel, making it difficult for businesses to raise capital by issuing shares.

In its report, the Private Economic Development Research Board says that amid low market confidence and lack of working capital and investment flows, the assets of enterprises are at risk of being sold off.

It even warns that there may be a wave of factories and other production facilities sold by Vietnamese enterprises to foreign investors. This is an existential challenge facing Vietnamese businesses that also has serious implications for the macro-economy.