Balancing act to calm the market

In 2012, banking system growth will continue to be restricted so that capital can flow into other investment channels including the stock market, says State Bank Governor Nguyen Van Binh in an interview with VIR about the central bank’s plans for 2012.

In 2012, the State Bank’s message is that the monetary market will not attract all the capital in the economy. Capital will also find its way into other channels such as the stock market. Does this message conflict with the credit growth goal of 15-17 per cent in 2012, which is higher than the 12 per cent in actual credit growth seen in 2011?

In 2011, to comply with the government’s Resolution 11, we mostly invested capital in production areas. Specifically, in 2011, the total credit growth of all banking system was 12 per cent, but credit for production sectors grew 15.7 per cent. In particular, the credit growth rate for agriculture reached 25 per cent and credit for exports increased 58 per cent, contributing to a 30 per cent growth rate in Vietnam’s exports in 2011. This far exceeded the planned total for the year.

Vietnam’s gross domestic product (GDP) growth in 2011 was about 6 per cent, while total credit growth was 12 per cent. Compared to previous years we can see a big difference. To have GDP growth of 6-7 per cent in previous years, credit growth had to be higher than 30 per cent, it even climbed to 53 per cent in 2007.

In other words, in the previous years, credit growth was often five or seven times higher than the economic growth. But this year, the gap is only two-fold bigger. It is clear evidence that capital from the banking system has been used to meet the right demand, contributing to inflation reduction in the last few months.

In 2012, the State Bank will continue to tightly control credit for non-production areas, but will loosen credit limits for some areas in real estate such as housing projects to be completed in 2012 and projects to build houses for middle- and low-income people, dormitories and boarding houses for workers.

The central bank will also collaborate with the Ministry of Finance and State Securities Commission to find solutions to stimulate the stock market in 2012. However, in general, production areas are still being given priority for credit growth, especially the four areas of agriculture, export, supporting industries and small- and medium-sized enterprises.

The stock market picture has been pretty bleak in recent years. This has affected its ability to mobilise capital, putting pressure on the banking system. Do you have any solutions based on monetary policy to support the development of Vietnam’s stock market?

The monetary market is the market of short-term capital whereas the stock market is the medium- and long-term capital supplier to the economy. Normally, an enterprise that wants to operate well or have sound financial health must have at least one-third of the required capital of its own, then raise another third of capital in the stock market and the remaining third is working capital borrowed from the banking system. However, in Vietnam all three parts can come from banks, leading to the bank liquidity problems we have seen recently.

In reality, capital demand is very high. In recent years, the society’s total investment accounted for 40-44 per cent of GDP. However, economic savings are around 20 per cent of GDP. Limited capital and high investment demand together with an underdeveloped capital market make banks raise their mobilisation rate to attract capital, leading to two phenomena.

The first is that the mobilisation rate is always high, leading to a high lending rate. The second is the banking system attracts all the capital in the economy, making the banking system an investment channel for investors with idle cash.

Normally, investors choose the capital market first. When they do not have any investment destinations, their idle cash is temporarily invested in the banking system. However, in Vietnam, every time the monetary policy is loosened, stocks will turn green while when the policy is tightened, the stocks will turn red.

That means the financial market is distorted. In reality, the State Bank’s actions in 2011 were very basic steps to restore development balance between the stock market and monetary market.

Could you give us more details on the State Bank’s strategy to support the stock market development?

In 2011 and in the upcoming years, the State Bank will restrain the growth speed of the banking system and not let the banks attract all the capital in the economy. Then the mobilisation rate will come down, helping to pull down the lending rate.

When the monetary market is less attractive, people will choose to invest in other channels such as gold, real estate and the stock market. The most preferable one may be gold, but with the new gold market management regulations to be implemented in the near future, investors will find this channel less attractive or even extremely risky.

The other channel is the foreign currency market. However, with the State Bank’s anti-dollarisation target for the next five years, this channel will become less appealing. Eventually, people will choose to invest in the stock market. What the State Bank has been doing is to create fundamental steps to balance the capital and monetary markets.

Besides State Bank efforts to stabilise the monetary market and to balance monetary and capital market development, how should the stock market itself promote its recovery?

Obviously, it will take time for the capital market to develop, as the development steps of the capital market are not really reasonable. The mobilisation rate is 14 per cent per year. Meanwhile, enterprises pay dividends of up to 18-20 per cent on their stocks’ par value, but not many investors want to buy their stocks.

There are two reasons. First, information about listed companies is inaccurate and insufficient, lowering investors’ belief in a company’s development direction and stable operation ability.

The second is the market’s liquidity problem. If stock market liquidity is high, stocks will become more attractive as stock holders can enjoy high dividends and can easily transfer the stocks into cash when necessary.

However, the stock market of recent years still lacks those factors. To develop, the stock market must solve its internal problems.