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Will the market overdose on repair mechanisms?
Experts warn drastic measures being discussed by the Ministry of Finance (MOF), State Bank (SBV) and State Securities Commission (SSC) may have adverse economic effects.
Delaying IPOs of big corporations, purchasing foreign currencies in order to pump more VND into circulation and raising the cap on securities lending are the three primary measures under discussion.
SBV announced it resumed purchasing dollars from commercial banks on January 15, thereby putting more VND into circulation. The stock market, immediately responded to the announcement: the VN Index suddenly rose by 37.24 points yesterday and item prices increased after a long slump.
However, experts warn that drastic measures may have drastic consequences in regard to other markets.
The stock market is currently described as a weak system that has been capital thirsty for a long time. If it suddenly receives too much capital at once, it may suffer from ‘indigestion’. The stock market needs appropriate remedies to recover, but a little medicine goes a long way.
An economist, who asked to remain anonymous, said “SBV should carefully consider its actions before deciding to throw superfluous VND into circulation because the stock market is just one part of a much greater national economy”.
The expert added that if the central bank focuses too much energy on dealing with the stock market, it may ignore or negatively affect the national economy as a whole. He implied that the overly high volume of VND in circulation will, once again, cause high inflation, a scenario seen in the first half of 2007.
Tran Du Lich, Head of the HCM City Economics Institute, said that as Vietnam is still incapable of adequately absorbing huge capital of foreign currencies, it has been suffering from increasingly high price hikes.
“Foreign currencies can be seen as a restorative, but it can be both good and bad,” said Mr. Lich.
Director of a securities company commented that the VN Index’s 37.24 point increase within a trading session is unsustainable.
“Investors, who have been too pessimistic, may become too optimistic, hoping that billions of dollars will soon be poured into the stock market. In principle, there are always latent big risks in an overly hot market,” he said.
Prevention rather than reaction
A lot of big corporations have been advised by the SSC to delay their IPO plans, because the stock market is currently oversupplied with commodities. However, some are asking whether these corporations should IPO now that the bourse has bounced back.
The question has not found an answer yet. It seems that the SSC, MOF and SBV are focusing all their attention on prompt actions to rebuild what was just a few days ago, a crumbling stock market. They have yet to develop a long-term strategy to ensure sustainable development.
Meanwhile, economists have warned if State management agencies do not soon produce a long-term strategy, the massive decline on January 15 may be the first of many successive falls.
Bui Ngoc Tuoc, a securities analyst, said the stock market can regain its robust health if State management agencies set up policies to prevent risks instead of letting problems occur and the only after, fixing them.
Mr. Tuoc said the decision to raise the securities loan ratio to 5% from 3% may not impact the stock market in a positive way. Too much money might be pumped in, while other branches of the national economy will find it difficult to access bank loans.
One of the suggested measures to rescue the stock market is to strictly control the real estate market. However, Vu Bang, SSC Chairman, did not agree to solutions that may abruptly shock the real estate market, considered even more ‘sensitive’ than the stock market.
The overly hot real estate market needs to be cooled down, but this must be done gradually to avoid injuries.
Dominic Scriven, General Director of Dragon Capital, also said that the banking sector, real estate and stock market are closely linked and it would be destructive if one was to get stuck.
VNN
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