State Bank’s Directive 01: Fretting Stock Market

After the Lunar New Year, or Tet, the Vietnamese stock market rebounded strongly and the market benchmark VN-Index surpassed the 400-point threshold without effort. The investor confidence has been restored. However, after the State Bank of Vietnam (SBV) issued the Directive 01 on controlling credit operations in 2012 concerns investors.

 

The Directive 01 highlights close credit control and safety for banking system. The new ruling does not open up credit valve for the stock market and many investors fear a new downward spiral and illiquidity as happened before Tet.

 

There are grounds for investors’ fears. The Directive 01 allocates different credit growth rates for different banks. The State Bank classifies credit institutions into four groups. The Group 1 - healthy operating banks - is granted the highest credit growth of 17 percent. The Group 2 - average operating banks - is allowed the credit growth of 15 percent. The Group 3 - below-average operating banks - is given 8 percent growth. The Group 4 - underperforming banks - is not allowed to have any credit growth.

 

Indeed, with these quotas, the credit growth cannot be high this year. On macro level, this decision is essentially aimed at controlling inflation.

 

According to the Directive 01, credit growths for discouraging fields will be strictly controlled throughout 2012 and the growth is capped at 16 percent. Discouraging fields include securities investment, consumer lending and real estate investment.

 

Thus, there is no ground that the stock market will be rescued by direct cash flows. Indeed, the stock market needs long-term comprehensive package of solutions to uproot its problems. The quality of securities must be improved, transparency must be enhanced and new securities derivatives and new measures need to be introduced, particularly shorter clearing payment terms.

 

Supporting information keeps coming out after the Tet to shore up the uptrend. But, uncertainties overshadow the market because global economies are not in good condition. With its deeper integration, Vietnam cannot stay out of global negative economic impacts.

 

According to experienced stock investors, to stabilise the economy, the immediate priority of the Government is to revitalise the banking system. To do so, bad debts must be cleared and new debts are precluded. In 2011, bad debts mainly came from real estate and securities markets.

 

Thus, according to many senior investors, the rally seemed to be driven by institutional investors to sell their assets at good prices in order to raise money to settle bank loans. This is a good chance for shareholders to sell for high values. If they have not invested, they should stay on the sideline to watch.

 

Not only experienced investors but securities companies also have very cautious outlooks. VNDSecurities Company said investors should stay outside the market to see a clearer development. Saigon Securities Inc (SSI) recommended investors to keep high cash ratio on their account balances. Bao Viet Securities Company said the strong uptrend will be unlikely in the coming time.

 

According to Directive 01, labourers in State-owned enterprises are allowed to purchase IPO shares. Anyway, this ruling is a prudential approach. Its ultimate purpose is to revitalise the banking system rather than rescue enterprises or the stock market.