Central bank policies aim to revive economy

VietNamNet Bridge – Late June, the State Bank of Viet Nam took two important decisions aimed at stirring up the economy market and improving aggregate demand.

However, these new policies cannot promise much, given that similar moves have not made much of a difference in the past, and that they do not address other factors behind the current economic malaise.

One of the decisions was to increase the dong-US dollar exchange rate by one per cent to 21,036 from VND20,828.

The central bank also decided to cut the dong deposit rate cap to 7 per cent from 7.5 per cent and dollar cap for individuals to 1.25 per cent from 2 per cent.

Accordingly, short-term lending rates for prioritised sectors including agriculture, exports, supporting industries, hi-tech businesses and small and medium enterprises (SMEs) will be cut from 10 to 9 per cent.

The central bank's moves are not so surprising that they can shock the market. They are expected to be a "lever" to lift demand and partly settle enterprises' inventory problem.

This is expected to allow enterprises to revive production and export enterprises will benefit from the cheaper dong.

The central bank's decision to lower the deposit interest rates is necessary since it would help reduce cost prices and encourage enterprises to step up production.

However, reality does not always dovetail with hopes and plans. Since late 2012, the central bank has already cut key interest rates several times in the hope they would stimulate consumption in the domestic market. However, this measure has generated modest results.

The current situation is likely to be the same. Cheap funds are not enough any longer to motivate enterprises and even individuals to borrow. Capital access is not the only problem they are facing. Bad debts, large inventories and loss of business confidence are some major issues that they are dealing with.

Moreover, enterprises saddled with bad debts cannot access loans even if the interest rates are low. Banks are wary of having their bad debts rise even further and have become very cautious in their lending. Of every ten firms that approach the banks, just two end up meeting the requirements to get loans.

On the other hand, many enterprises are not keen on borrowing because they are stuck with huge inventories and have lost confidence.

The latest 1 per cent adjustment in the foreign exchange rate officially came into effect on June 28. It was the first adjustment after nearly two years, during which the central bank had kept the rate at VND20,828 per dollar.

The central bank's move seems reasonable in the current context of exports showing signs of recovery and enterprises' dollar demand increasing to import raw materials.

However, the economy as a whole will not see great impacts. The move may benefit export firms, but imports would become more expensive, making it difficult for the majority of production enterprises that still rely on imported raw materials and equipment.

In addition, the central bank's efforts to keep the forex rate stable in 2012 and the first five months of 2013 has significantly boosted people's confidence in the local currency.

Whether the latest adjustment will erode this confidence remains to be seen.

Convenience shop battle

In mid-June, 41 of 42 FamilyMart convenience store outlets were renamed B's Mart after the Phu Thai Group, one of the country's leading distribution companies, announced it was buying the entire 44 per cent stake from Japan-based FamilyMart.

The convenience store chain in Viet Nam was run by a joint venture between Phu Thai, FamilyMart and Itochu.

Phu Thai also revealed that it planned to open an additional 20 B's Mart outlets in HCM City and Ha Noi by year-end.

The presence of B's Mart has heated up competition in the convenience-store segment.

More than 10 retailers who are world famous in the segment are already present in Viet Nam. They include Shop&Go (Malaysia) with 89 outlets, Circle K (America) with 50, Ministop (Japan) with 17, and Daiso (Japan) with eight.

While they carry a lot of common items, the foreign retailers have their own development strategies.

For instance, FamilyMart, now B'Mart, are always located near schools and carry a lot of Japanese style products processed from rice.

Circle K and Ministop stores sell many varieties of instant noodles, dumplings, meat pies and hamburgers. Shop&Go stores carry several essential goods, have automatic teller machines, IDD cards, and scratch cards.

Vietnamese retailers have not been passive observers of this "foreign invasion". Their convenience stores have reached out to residential quarters nation-wide, like traditional markets.

Sai Gon Co-op, for instance, plans to open 24 more Co.opFood convenience stores, increasing its tally in this segment to 79 in HCM City.

Other retailers have noted the success of Co.opFood convenience stores and decided to jump on the bandwagon. The Sai Gon Trade Corporation (Satra), the Sai Gon Food Trade and Services Company, and Bach Hoa Company have opened several SatraFoods, Minimart, and New Cho outlets respectively.

Vissan, Sagrifood, Phu An Sinh, and CP have also opened stores to sell their own products. Vissan leads the pack with 109 outlets so far.

Most of the domestic convenience stores follow the same model. Co.opFood, SatraFoods, and Minimart stores mostly sell fresh foods, which account for 30-40 per cent of the goods on shelves, apart from some cosmetics, processed foods, and essential items.

Like traditional markets, fresh foods (meat, fish, vegetables, fruits) are displayed for customers' choice.

At the New Cho stores, besides cosmetics and essential goods, fresh food is pre-packed and displayed.

AT Kearney, a market research firm, explains the enthusiasm of both domestic and foreign retailers for convenience stores by pointing to the high growth rate of more than 20 per cent that the retail market has enjoyed for several years.

Vietnamese consumers are still shifting to modern shopping methods, so the sector will see continued growth in the years to come.

Retailers have compared convenience stores to arms that reach out to every corner of residential quarters.

For many Vietnamese consumers, convenience stores are a good choice, because they offer high quality products at reasonable prices.

The main customers of convenience stores are the middle class, who are willing to pay more than at traditional markets but want good service and guaranteed quality.

They do not want to buy food at traditional markets because they are not sure about hygiene and do not have the time to go to supermarkets where they would have to spend time parking and waiting at check-out counters.

In other countries, people frequent convenience stores because they only go to supermarkets once or twice a week. Investors know that this tendency may also be seen in Viet Nam in the near future and are preparing for it in advance.

Coffee investment

Several leading coffee firms in the country are mired in losses and debts due to heavy investments in their core operations that have turned out to be inefficient.

Whereas enterprises in other industries ran up debts through investments in non-core operations, major coffee firms are suffering the problem because large-scale projects in their core area have been inefficient.

According to the Viet Nam Coffee and Cocoa Association (Vicofa), bad debts and overdue loans of its member companies currently total some VND6.33 trillion (US$290.3 million).

Meanwhile, a report by the Viet Nam Development Bank reveals that its outstanding loans for coffee exporters amounted to VND696 billion as of May, accounting for six per cent of the total loans that the bank had given exporters.

In Central Highlands Dak Lak Province, the main coffee growing area, 43 firms and sales agents announced insolvency last year, with total debts of over VND300 billion ($14.3 million).

On a Government guarantee, Vinacafe in 1999 borrowed 212 million French francs, or some VND424 billion ($20.2 million), from the French Development Agency (AFD) to develop 40,000ha of Arabica coffee in some northern provinces.

In 2005, the corporation admitted the plan had failed. Consequently, Vinacafe has sold its headquarters and many other assets to repay nearly VND1 trillion (US$48 million) to its creditors including AFD and Agribank.

The Thai Hoa Viet Nam Group Joint Stock Company invested in many coffee processing plants using loans.

The company used short-term funds for long-term investments, building coffee processing plants in several provinces including Quang Tri, Nghe An and Son La, but it did not develop material zones to ensure supply of raw materials for these plants.

Meanwhile, Vinacafe Buon Ma Thuot invested heavily in a storage system covering over 175,300 square meters, including five warehouses with a capacity of between 350,000 and 400,000 tonnes. When the system was completed in late 2010, debts owned by Vinacafe Buon Ma Thuot had amounted to VND2.9 trillion ($138.1 million).

To date, the company has been able to repay just VND1.3 trillion ($61.9 million) because the storage system has not performed to capacity.

High interest rates are also another reason that many coffee firms are debt ridden.

In the "hot" growth period of the coffee industry from 2008 to 2010, several companies were ready to accept interest rates of 24 per cent per annum. In the current difficult economic context, they have no way to earn enough to repay such high interest rates.

The firms have got deeper into debt with both domestic and export prices of coffee dropping sharply in the first few months of this year.

At the end of June, the price of coffee beans in Tay Nguyen (Central highlands) provinces was VND36.7-36.9 million ($1,748-1,757) per tonne, down by VND9 million ($429) over March prices.

Many export enterprises had bought the beans for VND46 million ($2,190) per tonne early in the year, so they suffered big losses with the subsequent steep fall in export prices.

The prices of Arabica coffee at the New York Trading Floor has dropped for two years in succession, from $6,800 per tonne in 2011 to just $2,980 per tonne last May.

Robusta coffee prices, meanwhile, have dropped from $2,200 per tonne late in the first quarter of the year to $1,850 now.

Faced with the possibility that many coffee firms could become insolvent, the Ministry of Agriculture and Rural Development has proposed to the prime minister that producers and traders are allowed to extend their loan terms from 12 months to 36 months, particularly those involved in exports.

Source: VNS

Central bank policies, economy market, export enterprises
 
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