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Brokers remain slightly bullish despite central bank money policy moves
Vietnam’s young stock market made a big leap in the second quarter 2009. Looking ahead, investors are of two minds. On one hand, they are optimistic about domestic recovery, but on the other, they fear return of high inflation and a tightening up of bank credit to would-be securities investors.
Is credit tightening, or just returning to ‘normal’?
In July 2009, the State Bank of Vietnam made adjustments to monetary policies that have affected investor sentiment .
First, it lowered the interest rate paid on compulsory reserves by commercial banks held at the central bank from 3.6 percent to 1.2 percent per annum, effective August 1.
Second, it lowered targeted annual growth in credit from 30 percent to 27 percent.
In principle, the credit tightening will affect the stock market by squeezing cash flow to the market. Thus the central bank’s moves have pushed down stock prices, especially bank stocks.
However, brokers believe that the moves do not actually mean monetary policy is tightening. In general, such tightening is effected by increasing the basic interest rate, increasing the compulsory reserve ratio, or by the central bank’s buying up cash to withdraw it from circulation.
An examination of the interest rates for compulsory reserves shows they were kept at 1.2 percent per annum for a long time up until August 2008. Then it was raised five times continuously in the last four months of 2008 , peaking at 10 percent. After that, the State Bank lowered the rate to 3.6 percent in February 2009 and now has reduced it to 1.2 percent.
As such, the central bank has simply brought the interest rate it pays on compulsory reserves back to the normal level. Sacombank Securities, in a recent analysis, called the lowering of this interest rate for compulsory reserves ‘significant in the current circumstances,’ following very high earnings reports by commercial banks for the first six months of 2009.
“This helps ease the burden on the state budget and signals that the banking system has been operating in more stable manner,” the report said.
Even if the State Bank of Vietnam raises the ratio of compulsory reserves by one or two more percent, this should not be seen as a move to tighten monetary policy, either, as the ratio will still be below the eight percent rate set in the period of robust economic growth period (the current rates are 1-3 percent).
“If this happens [a higher reserve requirement], it is simply a return from loose monetary policies to the normal mode, and not to tight monetary policy,” wrote SBS Securities Company recently. It called this”a good rather than a bad signal,” confirming the recovery of the national economy.
An analysis by Vietcombank Securities Company also called the moves by the central bank to cut the refinancing and re-discount interest rate instead of adjusting the basic interest rate as intended to keep monetary policy loose enough to serve demand stimulus programme.
Analysts also say that the monetary policies are not likely to cause shocks like the ones in 2008. The lowering of the targeted credit growth rate from 30 percent to 27 percent just aims to force banks to control their lending more strictly, following 17 percent expansion of credit in the first six months of the year.
Brokers bullish in medium term
In their forecasts for in the second half of the year, brokers uniformly expect growth in stock values. The most reliable foundation for this view is recovery of the national economy and listed companies. Meanwhile, they discount the likelihood of big changes in monetary policies.
According to FPT Securities Company, the market at the end of second quarter and early third quarter may see short term decreases with the VN Index (HCMC exchange) hovering around 410-450 points. FPT thinks that at best, on the base laid down in August, the economy and the VN Index could take off in September, to the 440-560 point range. Its worst case scenario shows the VN Index falling to 310-410 points if the national economy stumbles.
Vietcombank Securities Company declares ‘the bottom of the crisis’ is past, and there are opportunities for investors in the medium term
Hoang Nguyen
vietnamnet
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