(10-03-2008)
VN-Index buoys after State damage control
by Pham Hoang Nam
The Finance Ministry’s decision last week to let the State Capital Investment Corporation (SCIC) invest in the Vietnamese stock market was significant. For one thing, it immediately brought a halt to the relentless decline in the VN-Index, and new hope to investors.
Some experts have said that the decline was necessary to bring market valuations down to realistic levels. It is the price to be paid for the market’s incredible growth in the early part of 2007.
However, it might be hard to convince people who saw the money drain out of their bank accounts day after day about this theory.
The market tanked, according to analysts, because of a series of measures announced by the Government to put a brake on its rapid growth – like the introduction of capital gains tax and tightening margin loans by banks on stocks.
Once investors reacted to this by voting with their feet, the Finance Ministry asked the sovereign fund to invest at home. Will the recovery be sustained? No one knows but experienced investors think after running up for seven or eight sessions, the market will drop again.
Fickle financial policy
The National Finance Super-vision Committee has recently been set up to advise the Prime Minister on the financial market. It has become necessary, at least to avoid the dizzying changes in financial policy after Tet that have left local residents and investors scratching their heads.
Everyone understood that rapid moves were required to combat inflation and its worst fallouts. But in the absence of co-ordination between various financial policy-making agencies, some policies seem to work against each other. For instance, the central bank was trying to drain liquidity from the economy while the Government was still increasing public expenditure.
To ensure everyone pulls in the same direction, the Prime Minister has set up a system that provides an overview of the economy.
Public spending needs to be tightened because we know its effectiveness is not usually high. Besides, it is a breeding ground for corruption.
But it is not easy to tighten public expenditure because it plays a key role in ensuring economic growth in developing countries. If the Government does limit public spending, GDP will most likely take a hit.
Record trade deficit
Over the first two months of this year, trade turnover reached US$13 billion, an increase of 63.7 per cent in comparison to 2007. The trade deficit was $4.3 billion or 49.2 per cent of export turnover, triple what it was in 2007.
In response to the increasing rate of the trade deficit in recent years, the government has taken measures to curb it. However, the number of imported goods has significantly increased and exacerbated the domestic inflation rate.
The combination of local demand for imports and higher demand during the Tet festival pushed prices up. Meanwhile, import taxes on some commodities were sharply cut, especially for automobiles. According to recent figures, the number of imported automobile seating 12 or less people increased 10-fold.
To reduce the trade deficit, the Ministry of Industry and Trade is preparing to submit to the government a group of measures to limit imports and promote exports, particularly high valued-added products.
However, the decline of the international economy, especially in the US, which is a major market for Viet Nam, will limit the growth of exports.
In addition, besides importing necessary material for production, Viet Nam continues to import many household commodities that can be locally produced. The country also imports backwards technology, which could turn it into a junk yard for unwanted goods.
This year may see a record trade deficit for the country at $18 to $20 billion. — VNS
