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Talking about the unusual movement of the stock market in recent times, Mr. MICHAEL KOKALARI, Chief Economist at VinaCapital, said that after a somewhat negative reaction of investors, the stock market has once again gained ground after the credit tightening policy was eased.
JOURNALIST: - Sir, at the trading session on November 16, did investors react too negatively to the tightening of monetary policies?
Mr. MICHAEL KOKALARI: - The November 16 was one of the most dramatic days for the stock market when the VN Index fell more than 4 percent right after opening but reversed and gained more than 3 percent in the afternoon session, with hopes about credit tightening being eased. This movement made the VN Index one of the most volatile stock indexes in the world this year. Apart from fear of tightening credit for real estate enterprises, it may spread to other areas of the economy. This is also the reason why the VN Index dropped by 42 percent compared to the beginning of the year.
According to statistics, the VN Index decreased because the real estate industry group decreased by about 50 percent and the banking group also lost 40 percent of the market price compared to the beginning of the year. In my opinion, the stock market is currently too negative about the impact of credit tightening on real estate businesses, because the real estate sector contributes less than 10 percent to Vietnam's GDP, as opposed to nearly 30 percent in China. We have directly surveyed many businesses in many different fields, and the current credit tightening policy will mainly affect real estate enterprises and some small companies. Meanwhile, large companies other than real estate companies continue to access credit sources, despite higher interest rates.
In the trading session of November 16, a series of stock codes turned up after receiving suggestions from some Government members about steps that could be taken to solve the problem. These suggestions were realized when the Prime Minister established a working group to remove difficulties in the real estate sector. Vietnam's GDP is still on track to grow by 8 percent in 2022 and nearly 6 percent in 2023, while corporate profits are on track to grow 17 percent this year.
- Sir, do you think the current stock price level is attractive enough for investors to disburse?
- The combination of falling stock prices and increasing profits of listed companies has caused the VN Index P/E ratio in 2022 to drop from over 17 times in early 2022 to 9 times now. Even the forward P/E of 2023 is 8 times, 40 percent lower than the forward P/E valuation of other countries in the region.
From the survey results of VinaCapital on businesses in many fields, we believe that large and reputable companies outside the real estate sector will not have difficulty in debt reversal. This is reflected in domestic banks being more selective in lending and the State Bank of Vietnam tightening monetary policy by increasing interest rates by 200 basis points from the beginning of the year to 6%, along with the use of foreign reserves. Exchanges to support the Vietnam dong are also limiting overall credit conditions.
In addition, credit balance increased by 11.4 percent compared to the beginning of the year as of October 20, far exceeding the growth rate of deposits in banks by 4.8 percent compared to the beginning of the year. It is estimated that the growth of bank deposits will be about 9 percent compared to the beginning of the year if the State Bank of Vietnam does not sell about US$20 bln of foreign exchange reserves to support the value of the Vietnam dong.
The State Bank of Vietnam assigned annual credit lines to banks in 2022, equivalent to 14 percent of the credit growth of the whole system. The market rallied strongly in the trading session on November 16 thanks to the news that the State Bank of Vietnam will increase the credit limit target by about 2 percent, and the Government can set up a new Asset Management Company (AMC) to provide liquidity to the corporate bonds market, mainly of real estate companies.
- Sir, why are real estate businesses facing so many difficulties today?
- It usually takes about five years from the time the real estate company purchases the barren land until it is converted into residential land and until the apartments and residential buildings are built. The barren land cannot be used for loans until it is converted to residential land and the project is approved. At this time, real estate enterprises can use the land as collateral to secure bank loans. But even when approved, banks only provide loans for short terms.
The State Bank of Vietnam recently started to encourage banks to lend to home buyers with mortgage loans rather than lending to real estate businesses. In addition, real estate businesses are also restricted from raising capital before opening for sale and can only collect money from homebuyers after the foundation has been completed. As a result, real estate businesses must attract capital to collect their land fund through the corporate bonds market. They issue bonds on easy terms or have bypassed the regulations on issuing bonds. As far as I know, individual investors have bought corporate bonds mainly with a term of two to three years with an interest rate of 10 percent to 12 percent, while the interest rate on 18-month bank deposits in 2021 was only 7 percent. This resulted in issuances skyrocketing from US$12 bln in 2019 to US$ 32 bln in 2021.
- Thank you very much.
