Foreign capital seduces Vietnamese enterprises

VietNamNet Bridge – Domestic firms tend to seek capital from foreign sources because they can offer much lower interest rates.

Within business circles, rumor has it that a “big guy” in the real estate sector is negotiating with a German bank for a loan worth hundreds of millions of dollars to fund a high-grade shopping mall project in Hanoi.

Since domestic lending interest rates have jumped to peaks that are tens of times higher than the world’s, many companies are seeking foreign capital.

The world market’s dollar lending interest rate is hovering around one percent, which means that enterprises must pay 3-4 percent maximum for loans plus expenses. This is much lower than rates of 5.5-6 percent offered by domestic banks. Meanwhile, if borrowing money from foreign sources, firms can obtain long-term loans, while Vietnamese banks mostly offer short-term loans.

Vincom, a real estate developer, successfully issued corporate bonds on the international market. Last year, they offered $100 million worth of convertible bonds in Singapore and now will convert bonds into shares for shareholders who have demand.

Vincom Chair Le Khac Hiep mentioned that, besides the capital Vincom has and the capital Vincom borrows from domestic sources, the real estate developer needs much more from foreign sources to develop its big projects.

“We have enough capital for our projects this year. However, we regularly introduce ourselves to foreign financial institutions so that we can mobilize capital from different sources when necessary,” Hiep explained.

He went on to say that, in order to borrow capital from foreign sources, enterprises need to prove that they have feasible projects and healthy financial practices, which can be certified by auditing firms

The biggest obstacle to foreign capital is the lack of mortgaged assets. The land use right is not valuable, because, if borrowers cannot pay debts, foreign creditors cannot seize the land.

VnExpress quoted a source from the State Bank of Vietnam as saying that some joint-stock banks and private economic conglomerates are asking about procedures to borrow money from foreign sources, while State-owned corporations are planning to issue corporate bonds on a large scale.

In the past, State-owned enterprises were the biggest borrowers from foreign sources, while loans borrowed by private firms were inconsiderable.

“It is quite a normal thing for Vietnamese enterprises to seek foreign loans, because businesses can enjoy lower interest rates and longer term loans. However, if the outstanding loans climb sharply, this may cause problems,” an official from the State Bank commented.

The official noted that foreign loans have risen since the beginning of 2010, but the increases are not too sharp.

The National Finance Supervision Council recently warned about the risks of foreign debt, especially capital flow under the mode of mandated investment. Total outstanding loans in foreign currencies are now higher by 40 trillion dong than deposit balances in foreign currencies. This reveals that at least 40 trillion dong, or more than two billion dollars, has been transferred to Vietnam.

Council Chair Le Duc Thuy thinks that, since the dong interest rate increase, businesses rushed to borrow money in foreign currencies. When high demand for foreign currency loans could not be met domestically, commercial banks accessed foreign capital sources to re-lend. Thuy remarked that the council observed signs of “hot growth” and reported them to the Prime Minister.

Dr. Vo Dai Luoc, a well known economist, stated that there is no big problem with a sum of two billion dollars, but, if loans reach 10 billion and the world’s interest rates fluctuate, capital withdrawal would threaten Vietnam’s financial stability.