Seeking ways out of stock market slumber

Friday, May 2, 2008
Viet Nam's stock market has unexpectedly gone ups and downs over the last year. The market has prevailingly witnessed downward corrections, especially since the start of this year. VN Index by April 23 dropped to 523.25 points, down by 40.8% against the lowest level in 2007, down by 73.2% against the highest level and down by 55% against the average level.

Commercial banks had ever reported the highest securities loans of up to 20 trillion dong, accounting for some 1% of their total assets worth 200,000 trillion dong. Currently, total securities loans at commercial banks was only about 9-10 trillion dong or 0.5% of total assets of banks because banks have been striving to collect securities debts, which has made the stock market further slash. According to PhD. Le Xuan Nghia, director of the central bank's banking development strategy department, the ratio of securities loans is not high.

Meanwhile, the government has instructed the central bank to offer discount loans with an interest rate of 9% a year when commercial banks are temporarily short of liquidity. After the stock market had continuously increased mainly because of the narrowed trading band, the market has constantly slashed due to the expanded trading band. Many shares have been offered for sales at floor prices right after the trading band is expanded. It is reasonable for investors to worry over banks' further lifting share-mortgaged loans. Particularly, when banks are meeting with difficulties in raising deposits, without lifting share-mortgaged loans, banks will be vulnerable to high risks. Meanwhile, investors have no money to supplement for securities deposit. If investors borrow capital from banks, they will have to accept high interest rates. However, if investors sell shares, they will loose all. Six months ago, investors could borrow 60 million dong if they mortgaged 1,000 REE shares worth 150 million dong. No-one could think that the price of REE shares was now only 52,000 dong a share.

Over the last time, prices of a series of blue-chips such as REE, SAM, GMD, FPT, SSI and so on, which have been most mortgaged, went down to unexpected levels, making VN Index continuously slash.

In fact, if hundreds of residents, who mortgage their land-use right and house ownership certificates to borrow loans from banks to invest into production or business activities, cannot pay debts due to their business or production failure, banks will find hard to collect debts or lift mortgage because banks cannot ask debtors to go out their houses. However as for securities mortgage, banks will be able to sell shares mortgaged by hundreds of investors at floor prices.

Nevertheless, in order to prevent a wave of lifting share mortgages, the central bank must take actions to intervene into such a move instead of offering banks discount loans with an interest rate of 9% a year. The central bank will use the discount loans to extend due securities mortgage contracts or repo. Commercial banks borrow capital from the central bank with an interest rate of 9% a year, and then extend contracts for investors with an interest rate of 12% a year or less. Investors, after suffering from heavy losses for some months, will feel secured partly with a preferential interest rate. With the current outstanding securities loans, if share-mortgaged loans in the OTC is deducted, the amount of money that the central bank lends is not big.

If several years ago investors found hard to seek information about companies, the domestic and foreign stock markets, now they are facing up massive information from different sources such as TV, internet, newspapers, which make investors feel confused. As a result, investors have recently sold both good and bad shares and VN Index topped among decliners in the world. Meanwhile, the US Stock Exchange amidst the economic recession time has seen little reduction. Namely, Dow Jones Index dropped by only 1,300 points or 10% against the highest level of 14,000 points. (DTCK)