Stimulus
/The Vietnamese government, like every government, is starting to get serious about stimulus. Right now, there are 66 confirmed cases (updates here), and still no deaths. That’s all great news. Vietnam is doing very well, potentially helped by the fact that it doesn’t seem like COVID-19 spreads well in the heat (although you can still get it even if it is hot outside!).
What exactly is the government doing?:
The State Bank of Vietnam (SBV) has cut the refinance rate from 6% to 5% and the discount rate from 4% to 3.5%.
The cap on short-term rates by banks has been lowered from 6% to 5.5%.
SBV reduced the cap on interest rates on VND deposits to 4.75% from 5%.
The government has told banks to lower interest rates and waive fees for VND250 trillion ($10.7bn) worth of loans.
It may defer tax payments that total VND30tr ($1.3bn).
When I talked about debt yesterday, I was worried about cash flows overall. These are all helpful, but they don’t necessarily solve the problem of cash flows, except the deferral of tax payments. That is the most stimulative of all of these for consumers, in my opinion.
For companies, the SBV issued a statement that was pretty interesting as well (Word doc in English here). It looks like if you can prove that your business is hurt by COVID-19, then you get to defer interest and principle payments. That should keep a lot of companies in business, or at least allow them to stay out of bankruptcy for the time being.
I do wonder, though, if the debt balances are sustainable for a number of businesses now. At the least, companies may not be able to take on new debt, because their future cash flows (even in an optimistic scenario) may not allow them to. The same calculation may hold for deferring debt as well.
Let’s put some numbers around this. For example, a few years ago, you built a 500-room hotel at a cost of $50k per room, for a total cost of $25m. But you have actually paid off some of the debt you got to build it, so you only have $15m in debt now.
Stylized hotel income statement. Source: Vietecon.com
Before COVID-19, you made $5m in operating profit, but $4.1m in net income after interest ($1.1m) and taxes (20%, $1m). This is very good return on your initial investment Let’s also say that you have kept a healthy cash balance of $2m.
Even with doing just a minimal amount of work, you probably still have something like $3m in costs that you have to cover, from some salaries and overhead, maintenance capex to keep the hotel in good shape for reopening and some staff that you just can’t fire. And social insurance payments for the staff you do have to let go.
So this year, you will probably run through your $2m in cash quickly and need to increase your borrowings by $1m. You get a deferral on taxes from last year and your interest, but you still have to pay them at some point. Your debt goes from $15m to $17.1m ($1m from the interest deferral and $1m from op expenses you can’t get out of) plus another $1m to the tax authorities.
Your interest expense increases to $160k in future years because of the deferral. The next year, you have to pay off your tax, you need to pay $1.3m for interest, and you expect revenues are going to be down by 50%. Overall, you have operating profits that don’t cover your interest expenses or even your past due tax bill.
In that case, it would be better for your shareholders and employees to get the deferrals, but then file for bankruptcy after drawing down your cash reserves. In bankruptcy, renegotiate the loans - maybe a principle write-down and lower interest rates. Unless banks are willing to refinance once again, we might see a wave of bankruptcies go into next year, even if the banks are very aggressive about lending now.
Of course if demand picks back up to pre-COVID -19 levels, then the new debt load will be fine. Cash flows will be low at first, but should be enough to cover past taxes and the higher interest.
My view is that the companies should take the banks money, use it to give cash to staff and to smaller suppliers, and then let the government help the banks deal with the bad debt, if necessary, in the future. That would help keep money in the hands of people that need it most right now.