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A cautionary tale: Pha Lai Power comes a cropper on yen borrowing   2009-12-16 - VietNamNet/NLD

A lot of businesses have borrowed foreign currencies to enjoy low interest rates. However, in many cases, the foreign currency loans have done more harm than good.


Nguoi Lao Dong looks at the case of Pha Lai Thermopower Company, which has suffered big losses, not because of the bad business performance but because they got hammered by exchange rate fluctuations.  Pha Lai Power (PPC) is not alone; quite a few businesses have secured foreign currency-denominated loans at low interest rates, any gain has been wiped out by the appreciation of the currencies.


On December 11, Vietcombank quoted the Japanese currency at 216.77 dong = one yen, up from 184.96 dong per yen in late 2008.


PPC’s latest report shows that at the end of October, the company’s net debt was 34.35 billion yen. As such, the yen appreciation alone increased PPC’s debt by 1,092 billion dong of PPC up to December 11.  In total, yen appreciation has cost PPC had to spend 2,635 billion dong in the last two years.


As a result, though PPC got a relatively good operating profit, 2008 turned out to unprofitable once the change in its debt obligation was added in.  The bottom line: a pretax loss of 469 billion dong. The same scenario may repeat in 2009: though PPC has got big profits from the electricity rates increase, it may still take a loss in the year because it has to spend more on debt service.


The price of PPC’s shares on the bourse has dropped to 16,500 dong, nearly as low as during the market’s crash last February.


Experts say that it’s not worrisome for businesses to borrow in foreign currencies if they can earn foreign currencies from sale. However, it is really problematic for companies like PPC, which borrow foreign currencies but only have earnings in dong.


In principle, foreign currency loans bear a lower interest rates than dong loans.  Someone who borrows dong must expect to pay eleven percent per year or more, but a borrower can get Japanese yen at three to five percent.   However, if the dong’s value drops significantly against the yen, the foreign currency loans just become a burden on businesses .


According to Nguoi Lao Dong newspaper, since late 2007, the Japanese yen has appreciated by more than 50 percent against the dong, from 142.34 to 216.77 dong.  And, vis-à-vis the dollar, the dong has been doubly depreciated: the dollar has lost value against other ‘world currencies,’ and the dong has lost value against the dollar.


Huy Nam, an independent financial expert, emplasizes that businesses must anticipate the exchange rate fluctuations and make provision against them.  If they cannot do so, they ought not to be borrowing in foreign currencies.

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