Narrower Access to Loans for Stock Investment

Many people have been so surprised by petroleum’s price increasing on March 29^th since it went up so high in February and inflation pressure has not cooled down in first quarter of 2011. After two increases since the beginning of the year, petroleum price has now increased by 29.88 to 43.05 percent for each type, creating new height of domestic petroleum.

 

Ministry of Finance increasing petroleum price this time is influenced by many internal and external factors as previous times. Firstly, fight in Lebanon and strained politic in Middle East and North African countries such as Yemen, Bahrain, Egypt which are world’s key petroleum suppliers, pushed world’s price of crude oil from less US$95 per barrel in January 2011 to US$105 per barrel in the end of March. It has increased difference between domestic petroleum price and the world’s one despite no influence from exchange rate of USD over VND since it is remained stable in bank network and free currency market is partially intervened by the government. Secondly, budget for valorizing petroleum has been spent out to assist enterprises in import whereas other financial solutions such as reducing petroleum tariff to zero percent makes the government hardly have local policies to decrease pressure of increasing petroleum price.

 

Facing that pressure, Ministry of Finance has officially increased petroleum price despite inflation pressure not being reduced. This has made inflation curb more necessary and State Bank might strictly tighten currency policy.

 

As for medium and long term, increasing petroleum price has rather positive influences such as handle subsidizing burden, pull the price near that in the world according to market economic rules and therefore, economic entities will control their behaviors toward saving and efficiency. However, in short term, increasing petroleum price twice in one month not only negatively influences citizens’ life which has been much affected by petroleum price increase in February and electricity price increase by 15.3 percent since March but also makes Government hardly be able to curb inflation in 2011. Petroleum price increasing in February and electricity price officially increasing in March have pushed up transportation cost; especially transport fare is up to 6.69 percent and kicked up March’s CPI by 2.17 percent, which is the highest in last two years. According to statistical relation between petroleum increase and CPI index, it is expected that petroleum price in late March will be reflected into CPI index in second quarter of 2011.

 

There are many factors showing that pressure on increasing petroleum price has not ended. Firstly, world’s petroleum price in the following time is expected to continuously increase when NATO joins battle in Lebanon and conflicts in Middle East and North Africa have had no signs to decrease as well as world’s demand for petroleum still tends to high go up when countries such as US, Europe and Asia (except for Japan) are gradually recovering the economies after crises, and nuclear crisis in nuclear power plants in Japan will kick up the demand for petroleum in thermal power plants. Secondly, according to Ministry of Finance, this time’s increase is still under necessary level, which makes domestic petroleum price still lower than that in neighborhood. Of more importance, since Ministry of Finance will remain policies of “trading petroleum under market procedure”, which will cause more adjustments in domestic petroleum price, given influences from supply and demand factors. Therefore, pressure of increase SPI in following months will be great. Meanwhile, as for second quarter, minimum wage is expected to increase from VND730,000 to VND830,000 since May, which will exaggerate inflation pressure in second quarter of 2011. Accordingly, April’s CPI is expected hardly less than 1.5 percent.

 

With such inflation stress, State Bank is supposed to continue their tightening currency policy as well as fiscal policy according to Resolution 11. In addition to a variety of methods which is being implemented such as increase operation interest rate, reduce money supply in open market, review public investment and increase efficiency of publicly funded projects, reduce expenditure and public investment into unnecessary items, possibility that State Bank increases minimum reserve requirement especially when current rate are low is not an exception. However, State Bank is not expected to increase minimum reserve requirement too high due to current limitations on available funds of banks since Circular 13/2010/TT-NHNN and Circular 19/2010/TT-NHNN have been in practice since October 2010. In addition, in 2007, State Bank once doubled minimum reserve requirement from 5 percent to 10 percent for terms less than 12 months and from 2 percent to 4 percent for terms over 12 months. However, since the beginning of 2011, interest rate on refinancing has been increased twice from 7 percent to 12 percent and that on rediscount has been raised from 7 percent to 12 percent.

 

Petroleum price increase has put more pressure on implementation of currency policy, which shows that State Bank should more tighten money supply to balance influence from petroleum price increase on price. Therefore, disposable funds for stock investment surely narrow; stock market is supposed not to out of trouble. Declining times so far have reduce stock price so low with current PE and PB, in turn, of 9x and 1x, which are the lowest in Vietnam stock history. However, since currency policy is going in the direction of sacrificing economic growth and stress of currency policy on economic growth as well as enterprises’ difficulties have not been able to be quantified, for which the reason is method of tightening currency is still being implemented at very first stages and unstable macro risks have not ended, which makes declining pressure still exist on stock market. In short term, since risks for surfing and short-term investors are still supposed great, it is essential to cautiously wait and only join the market when macro status becomes more positive.

 

(Vietcombank Securities)