Tightened credit: needed bitter pill

Tightened credit prescribed for Vietnam’s neighbouring countries in the financial crisis 1997-1999 proved successful in bringing about their remarkable growth.

The State Bank of Vietnam (SBV) and the Governor, Nguyen Van Giau has been confronted with relatively great deal of criticism on tightened monetary policies and dong devaluation since the beginning of the year.

Inflation being curbed, trade deficit being reduced and dong/US dollar forex rate pressure inclined to calm down, however, have by far proved the efficiency of SBV’s tough policies.

It can be seen from some recent news on Saigon Economics Times. Garment and textile industry’s exports in the first half of the year have enjoyed a year-on-year increase of 30 percent, said Le Tien Truong, the deputy general director of Vietnam National Textile and Garment Group (Vinatex). The pickup is absolutely garment and textile enterprises’ accomplishment, but also thanks to dong devaluation of more than 13 percent over the last twelve months.

Many experts have earlier disapproved of the devaluation for fear of potential adverse impacts on exports and garment and textile export has been cited as a typical example because of this industry’s huge import of raw materials.

Truong affirmed increased prices of raw materials; particularly cotton has experienced a 103 percent surge in value but a cutback of nearly 10 percent in volume. Hence, enterprises have resorted to other low-cost sources of raw materials which are domestically manufactured.

More importantly, garment and textile export surplus is recorded at $2.1 billion out of the sector’s total export earnings of $6.16 billion, which could be translated into a 30 percent export value domestically generated. Given the dong devaluation ratio of more than 13 percent over the last twelve months, Vietnam’s garment and textile exported products’ competitiveness has rose by 4 percent, which means processing enterprises could then offer prices of 4 percent lower than the previous year thanks to devaluation.

Obviously, the remaining 70 percent of export value could not be domesticised in a day or two. However, taking dong to its actual value would probably encourage export firms to return to internal materials, which would be applied not only to garment and textile exporters.

The garment and textile industry has enjoyed profits of 1 trillion dong in the first six months, revealed Le Tien Truong. Garment and textile exporters are, therefore, still considered profitable especially in the context of complaints of high interest rate hindering business operations.

Considering the author, Giang Le’s suspicion of Vietnamese small and medium-sized enterprises’ high financial leverage ratios, despite modest absolute earnings they could still benefit from reasonably high return on equity (ROE) if being multiplied with financial leverage ratio.

Regarding Vinatex, some of its projects enjoy return on invested capital ratio of more than 20 percent, which means a ROE of 40 percent given that 50 percent of investment capital are funded by banks.

The governor would not be necessarily concerned about banks’ announcement of depositing in banks rather than investing in business. Currency devaluation and interest rate increase together with tight public spending are truly bitter yet inevitable pills. This annoying dose was prescribed for the neighbouring countries in the financial crisis 1997-1999. They then had this measure maintained for a long time and all enjoyed relatively impressive achievements. It is expected that SBV would stay persistent and not shortly loosen monetary or credit policies.

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial