Tightening cycle to squeeze the market

The policy move will see many enterprises’ production costs jump

A tightened monetary policy could provide short-term stock market challenges, but positive effects in the long-term.

The State Bank raised the base rate from 8 to 9 per cent in early November, marking the first hike since December, 2009. The discount and refinance rates were also hiked by 1 percentage point to 7 and 9 per cent, respectively.           

Analysts said this was a surprise to investors, but not unexpected for banks when the inter-bank rate had recently surged. They say it signaled that the benchmark rate would be hiked, helping to improve the Vietnamese dong’s long-term strength.

“The base rate, however, carries more symbolic than actual weight these days as it is no longer used to set market interest rates,” said Ho Chi Minh City Securities Corporation’s (HSC) head of research Fiachra Mac Cana.

Vietnam International Securities (VIS) analysts added that after the base rate was hiked, domestic stock market indexes gained relatively, indicating that investment sentiments have improved and confidence returned.

PetroVietnam Securities Incorporated (PSI) analysts said the tightening policy would cause enterprises’ production costs to rise.  However, the pledge to keep the exchange rate unchanged would be a positive signal to foreign portfolio investors.

“Therefore, the market is expected to be supportive by foreign investors as they will cash in heavily for the time being after exchange rate risk was removed,” PSI chief analyst Pham Thanh Binh said.

Bao Viet Securities company (BVSC) said enterprises would face higher borrowing costs which affect inflation. However, the impact will not be remarkable as in fact, the lending rate was 16-17 per cent in early 2010 but inflation did not increase remarkably.

Saigon-Hanoi Securities (SHS) analysts said the tightening was good as the credit growth soared sharply in the first 10 months of this year, at 22.5 per cent on-year. “Therefore, as the Vietnamese equities valuations are relatively attractive, the impacts will be not large,” said SHS analysts.

BVSC believes that the State Bank will maintain the base interest rate at 9 per cent by the end of February, 2011 on the Lunar New Year when inflation may decline.

“Vietnamese authorities have taken a step in the right direction. Vietnam has taken a U-turn, sending a clear and strong signal to market watchers that policymakers were addressing economic concerns. This is encouraging enough for now,” said HSBC ASEAN market economist Sherman Chan.