Businesses to face challenges in coming months

(SGI) - The current dire situation where several domestic enterprises are planning to suspend business operations, and with some even willing to close altogether is indeed a serious cause for great concern. The number of businesses exiting the market each month is now continuing to rise.
Businesses to face challenges in coming months

Unless some effective measures are taken soon to support these businesses, the outlook for the remaining months of the year remain very bleak. This perspective was shared by Dr. NGUYỄN MINH THẢO, Head of the Business Environment and Competitiveness Research Department at the Central Institute for Economic Management (CIEM) in a talk with Saigon Investment.

While discussing her thoughts with Saigon Investment, Dr. Nguyễn Minh Thảo expressed her many views. As per the General Statistics Office (GSO), during the first four months of 2023, around 77,001 enterprises withdrew from the market. Among these enterprises, a majority of 64.8 percent of them opted for temporarily suspending their operations, a 21.8 percent increase compared to the same period in 2022. The number of enterprises awaiting dissolution procedures reached 20,945 which is a 39.9 percent increase, and the number of enterprises preparing to dissolve reached 6,126 which is a 10.1 percent increase. In April alone, the country witnessed 14,509 enterprises exiting the market, which is a 39.8 percent surge compared to the same period in 2022.

The challenges faced by domestic enterprises have been a cause for concern since the fourth quarter of 2022. This year, these difficulties have been exacerbated by various unfavorable factors both domestically and internationally. The number of businesses leaving the market now surpasses the number of new business registrations or reentries, which is a complete reversal of the usual trend where new establishments outnumber closures. This reversal indicates that the economy is grappling with multiple instabilities, leaving businesses in a state of constant struggle. The enterprises exiting the market include not only small and medium-sized enterprises (SMEs) but also large enterprises. This is a dangerous sign, as the growth of larger enterprises typically requires a significant amount of time. The closure of such enterprises often serves as an indicator of an impending economic downturn, which is highly worrisome.

JOURNALIST: - Ma’am, since the third quarter of 2022, monetary policy measures have been implemented to support businesses. However, despite the expectations that these measures would take about six months to yield results, more than half a year has passed now, and it seems that the monetary policy intended to assist enterprises has not proven effective. What are your thoughts on this?

Dr. NGUYỄN MINH THẢO: - Among the support packages within the Economic Recovery and Development Program, several interest rate support packages, including a 2 percent interest rate reduction, were introduced. However, the effectiveness of this 2 percent interest rate support package has been questioned since the end of last year due to the stringent conditions and requirements set by commercial banks, making it difficult for businesses to access these preferential loans. For instance, banks often demand that enterprises fully resolve any existing debts before being eligible for the 2 percent interest rate loan. These strict regulations create barriers, and hinder businesses in need of capital from accessing this support package.

In my opinion, while this support package is well intentioned, the accompanying guidelines from the State Bank of Vietnam are not sufficiently clear to encourage commercial banks to lend to businesses. Commercial banks face numerous risks and significant pressures. Without clear regulations, they hesitate and lack interest in disbursing this support package. Despite the positive intentions and goals of this policy, its implementation has proven challenging, revealing many shortcomings and inappropriateness in the quality of policy when promulgated.

- Ma’am, recently the State Bank of Vietnam lowered the operating interest rate for the third time. Does this reduction adequately support businesses in accessing credit?

- The interest rates have indeed decreased over the past three operating periods of the State Bank of Vietnam. However, commercial banks have still maintained relatively high interest rates, while the current market conditions are challenging, with high input costs. This means that the interest rate reduction has not significantly benefited businesses as anticipated. Enterprises primarily borrow from banks to meet short-term capital needs, including debt repayment, rather than having enough resources for reinvestment in production. To secure medium-term capital, businesses must seek alternative channels such as bonds, but currently this avenue is restricted.

Therefore, even with lower interest rates, businesses eventually borrow capital only to address immediate problems, and lack long-term financial sustainability. Additionally, most businesses are required to provide collateral when borrowing, as banks are concerned about the increased risk of bad debt.

To summarize, the failure to enforce strict discipline in previous years has allowed commercial banks to maintain high interest rates, erode business profits and growth potential. The recent interest rate cut can be seen as fighting measures that should have been implemented much earlier.

- Ma’am, what is your assessment of the business landscape for the remaining months of this year?

- In my opinion, businesses will continue to face significant challenges, and the coming months of this year will not be favorable. Therefore, more decisive solutions and actions are necessary. There are several measures that can support business recovery. For instance, the Ministry of Finance has proposed a 2 percent reduction in Value-Added Tax (VAT) to the Government and National Assembly. This is a highly appreciated solution for businesses since it directly supports them. However, the crucial factor here is swift implementation. Delays in issuing this VAT support package will significantly limit its effectiveness in supporting businesses. Hence, it should be implemented promptly.

Moreover, a survey indicates that 70 percent of businesses cite cumbersome administrative procedures as the cause of 70 percent of their difficulties. This issue can be addressed by the government, ministries, and relevant departments, as it can be resolved immediately without requiring significant financial resources. In fact, internal policies and institutional factors also contribute to inadequacies and barriers that erode business confidence.

- Thank you very much.

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