VIETNAM Increasing interest rates - the signs of a new difficult period?

Increasing interest rates - the signs of a new difficult period?

The interest rates now are described as "exorbitant" and they were only as high once before, in 2008. Many businessmen have warned that the production will become stagnant soon, because enterprises will halt their production. This may be their only choice, because the more they produce, the bigger losses they will suffer.


The interest rates have been increasing continuously, despite the efforts of the Government. It seems that Vietnam is to face a new difficult period.

Investment, business running at moderate level

The official deposit interest rates have reportedly climbed to 13.5 percent per annum, while the lending interest rate has reached 19 percent. Meanwhile, many banks have admitted that they now have to pay 14-15 percent for deposits and are lending at 20 percent per annum.

A managing director of enterprises told VietNamNets Vietnam Economic Forum that he does not know what to do now. He cannot continue borrowing money from banks, because the lending interest rates have become unaffordable. Meanwhile, he cannot raise the sale prices of products, because consumers will not accept overly high prices. But if he does not maintain production, he will still have to pay money. And if he does not manufacture, he will lose the market share and customers.

So, the best choice for now is to maintain the production at moderate level and not think of expanding business.

A textile and garment company in Hung Yen province complained that it now has to borrow money at the interest rate of 18 percent, while the lending interest rate was 12-13 percent only in the past. This means that enterprises will lose 5-6 billion dong in profit.

In the immediate future, the enterprise will only work on contracts it had signed before, and it will not dare toaccept new orders.

A mechanical engineering company in Hanoi said that its project is entering the final stage and it really needs a huge capital. However, the bank has raised the lending interest rate. If the company continues to follow the project, the production and income of hundreds of workers will suffer. But if the company delays the project, this will badly affect the companys long term development.

"Who will accept such high interest rates and borrow money from banks?" finance expert Dinh The Hien questioned.

The answer is that even big enterprises will not dare to borrow capital at such high interest rates. Only the enterprises, which seriously lack capital and accept risky business, will. In this case, even when enterprises can borrow and are capable of paying the interests, this will lead to higher uncertainty in the business environment

Analysts have warned that the high interest rates would paralise many other markets. The increasing interest rates have made the stock market gloomy, while the real estate market continues freezing as the cash flow from banks has stopped.

New interest rate cycle?

Analysts have warned that the high interest rates will push the prices of goods up, thus leading to a new interest rate hike wave.

In fact, the goods prices began increasing, when the interest rates were still low. It was because the input material prices increased in the world market, while the consumption demand was high due to the natural calamities.

However, the increasing interest rates will bolster the current difficulties, and analysts say, may make the inflation uncontrollable.

Dr Cao Sy Kiem, a well known economist, has expressed his worry that with the policy on floating the interest rates, commercial banks will push the lending interest rates up. If so, businesses will have to halt production, affecting the economic growth

The warnings for banks

Commercial banks have been warned that if they continue raising the interest rates, they would suffer negative consequences one day. High interest rates would prompt rich people who have idle capital to deposit at banks. And people will think that it would be better to deposit at banks than using the money to do business. Once the deposit interest rates become too high, and the loans are limited because of few borrowers, banks will meet big difficulties, because their profit will decrease, while the risks will increase.

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