Catalysts for capital market restructuring

Saigon Investment
(Saigon Investment) - The entire world has been severely affected and was suffering from the effects of the Covid-19 pandemic during the whole of 2020. The emergence of a new virus variant strain has now neutralized the effects of vaccines, making hopes of economic recovery even more uncertain. 

Illustrative photo.

Illustrative photo.

In response to support requests from production companies and investors,  interest rates are still being kept low. The possibility of capital market restructuring is therefore expected to prolong even further, proving more detrimental for the growth of the economy.

Stock market expansion

According to international practice, capital markets include the stock market, the bond market, and the credit market. For a long time in Vietnam, the largest mobilization shares of businesses belonged to credit channels, mostly banks. Therefore, the resistance of businesses in the economy depend on the interest rate. However, in countries with developed economies, capital is mostly mobilized from the stock market, instead of banks. The nature of stock holding allows the investor to be a part of the enterprise, increasing equity on the balance sheet, instead of increasing debt.

Raising a large capital source to trade stocks from the stock market helps businesses pay much lower costs. Ever since it was established in 2000, Vietnam's stock market has played an important role, but has not yet fully utilized its ability to provide medium and long-term capital. The size and liquidity of Vietnam's stock market, although growing strongly over the years, is still quite small compared to other countries in the region and its stability is also not so high. The total market capitalization in 2019 was relative to GDP at about 102.6%. This is a low level compared to Japan with 337%, Singapore with 257%, Malaysia with 215%, and Thailand at 161%. Therefore, expansion of the stock market is very necessary.

Stock market expansion will help reduce the burden on the credit channel in mobilizing capital for businesses, and limiting the risk of credit growth. Most banks have to ensure lowered standards for lending to achieve credit growth targets. Besides, the possibility of bad debts clogs up cash flow in the economy. When accessing the stock market with abundant capital, enterprises will reduce business costs significantly, facilitate the adjustment of price of goods and services provided in the market, and improve competitiveness. This advantage will bring better resistance to businesses when faced with long-term challenges.

Up until now, there has been no major policy focused on restructuring the capital market, but this is still necessary and will happen. Especially in the time when the new pandemic variant has not yet been contained and businesses are in need of medium and long-term capital large enough to continue operating even as the pandemic rages on unrelentingly. Therefore, ensuring the health of businesses by reducing dependence on credit, by expanding the stock market, will help consolidate the economy, so restructuring should most certainly take place.

Complicated scenario

The Covid-19 pandemic could possibly continue to become even more complicated, and the prospects for global and domestic economies will remain unpredictable. Mr. Nguyen Thi Hong, Governor of the State Bank of Vietnam, assessed that the banking industry would continue to implement measures to remove difficulties for enterprises and people by expanding credit, promising a long period of low-interest rates. Credit expansion must go on with efficiency. However, the government's support packages for businesses and workers affected by the pandemic through the credit channel have not yet been disbursed efficiently. Only 11.7% of the VND 62,000 bn package for social security was disbursed, and the financial support package of about VND 180,000 bn was also disbursed of 26.4%.

The money source is currently stagnant due to credit institutions considering the interest rate factor. Bank profits this year are relatively high, while the disbursement of three support packages is still modest, showing many existing worries. When the interest rates are reduced flexibly to increase the disbursement rate, the support packages will potentially risk forming bad debts. This means setting up higher risk provisions, which will erode into the profitability of banks. This concern causes interest rates at both ends to decrease, but the scenario of increasing interest rates is very unlikely until a special vaccine is made available.

In addition, very few businesses choose to borrow capital to maintain long-term operations when they are facing heavy losses. When the number of customers decrease, the price of goods reduce, so interest rates have more reason to remain low. Long-term interest rate cuts make idle cash flow turn to other more attractive safer channels. Among the markets that can absorb idle money well, the stock market is the most promising, as real estate has a bleak future due to decline in demand, and with the gold market fluctuating, there are few options left.

Therefore, in coming time, it is necessary to have a plan to ensure a healthy growth momentum of the stock market. In order to tackle fluctuations in the stock market, it is not advisable to just remain cautious or simply take measures to eliminate risks in operations of the stock market, but implement specific actions in institutional reform so that the stock market develops in substance, thereby reinforcing investor confidence for times to come.

Besides, with Vietnam being accused of being a currency manipulator, the value of the Vietnam dong will have to increase more or less against the US dollar in the near future. This will create premises for negotiations for economic relations to proceed and giving the stock market a chance to welcome more foreign capital flow. Therefore, it is necessary to loosen foreign ownership limit to increase this cash flow.

The government should also find effective solutions to change the mindset of the people to move from saving to direct investment. Hence, by strengthening the stock market, the economy will head towards long term growth, and eventually move closer to the high standards of other countries in the region and in the world.

Le Duong Anh Tuan, University of Economics, Ho Chi Minh City

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