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Finance costs gobble up businesses’ profits   2012-02-14 - TBKTSG

The majority of businesses have reported losses because of the overly high finance costs in 2011.

The overly high interest rates make businesses suffer

VSP, a shipping and real estate firm, has reported the loss of 523,7 billion dong for 2011, blaming on the overly high finance cost of 311.3 billion dong, which was double that of the year before.

VSP is a typical example of the failure in doing business of shipping companies in the last four years. The prolonged crisis in shipping services in the world has made Vietnamese firms in the field suffer long term loss.

In 2006-2007, Vietnamese shipping firms made heavy investments to expand their fleets with the bank loans. VSP was one of the firms. However, VSP’s investments were bigger than others, while the money was spent on more modern ships. In order to survive the crisis, many firms have to sell old ships. However, it was really difficult to sell VSP’s ships.

In 2011, the Baltic Dry Index BDI dropped by another 60 percent in 2011, which led to the plunge of the ship chartering fees. The ships, which were once chartered at 20,000-30,000 dollars per day in the pre-crisis period, could be chartered at 5000-6000 dollars per day in 2011.

VSP took - profit with its main business, but the loss was less ominous than the bank debts, both short term and long term, 175 billion dong and 1747 billion dong, respectively. In 2010 and 2011, the total finance costs reached 471 billion dong, thus making VSP’s loss soar dramatically and reducing the stockholder equity.

In early 2011, the stockholder equity of VSP was 1649 billion dong, while figure had dropped to 962 billion dong by the end of the year.

A banker, who is the creditor of VSP, said that the debts did not raise worries to the bank, because VSP has big mortgaged assets.

However, analysts say the problem does not lie in the VSP’s capability to pay debts, but in the overly high bank loan interest rates. If the current situation cannot be settled, businesses would bog down in difficulties, Even if the world’s shipping market recovers, which helps VSP and shipping firms make profits, the profits would not be big enough to cover the high interest rates.

Real estate firms have also complained that they incurred loss. Some firms made profit in the first three quarters, but then incurred heavy loss in the fourth quarter. ITC, for example, incurred the loss of 137.8 billion dong in 2011, Dat Xanh incurred the loss of 16.6 billion dong, and Sudico 62 billion dong in the fourth quarter. Only the real estate firms which provide construction and installation services, could make profits, but the ratio of profit on capital decreased sharply. Subsidiaries of the Song Da Group have reported minus profits, including Song Da 5 (- 39.4 billion dong) and Song Da 4 (- 51,6 billion dong)

In the production sector, the enterprises, which borrowed bigger loans, suffered bigger losses. Thai Hoa, a big coffee group, incurred the loss of 120 billion dong in the whole year 2011. A representative of the company said that if the lending interest rates had been lower, Thai Hoa would have incurred lower losses, or could have made break even.

Analysts have noted that only the businesses which did not borrow money from banks, could live well. However, the percentage of businesses which can operate with their own capital is very modest.

While businesses moan about the big losses caused by the high interest rates, commercial banks feel happy with the huge profits brought by the high interest rates. An analyst has pointed out that previously, the margin between the deposit and lending interest rates was just 2.5 percentage points, while it has risen to five percent. This explains the huge profits of the banks.

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