High interest rates in Vietnam stymie stocks

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High interest rates have restricted capital inflows to the local stock market although investor confidence has improved since March, a senior economist says.

"Interest rates are now high, drawing funds into banks and away from the stock market," economist Dinh The Hien told Thanh Nien. "Besides, high rates will lower profits at companies and make it hard for stocks to rise."

Many businesses don't want to take loans now because of the high rates, he said, pointing out that credit in Ho Chi Minh City, which accounts for one third of all loans taken in the country, only rose 0.37 percent in the first three months.

The government is also selling bonds at high rates of up to 14 percent per year, which makes stocks less attractive to investors, Hien said.

Investor confidence has improved compared to the first two months, he said, noting that the International Monetary Fund has said the dong is stable and liquidity at banks has improved.

Still, the market may remain flat through the end of this month with the VN-Index hovering around 500-510 points, he predicted.

Cash injection

The government last week asked the central bank to try to bring down lending rates and allow negotiable interest rates on short-term loans. In February, the central bank had widened the range of medium and long-term bank loans that can be offered at negotiated interest rates.

Large commercial banks have agreed to lower lending rates to 14-15 percent a year, or the same level as 2007, central bank Governor Nguyen Van Giau said last Saturday. Among the lenders who have agreed to do this are Agribank, VietinBank, Vietcombank and BIDV.

Two weeks ago the State Bank of Vietnam injected VND10.7 trillion (US$563 million) of cash into the banking system to increase liquidity and encourage commercial banks to lower lending rates. Another VND14 trillion ($736.8 million) was injected to the system last week, the Vietnam Economic Times reported on Monday.

Information regarding the central bank's effort to lower interest rates by fund injections will gradually help improve market sentiment, the research team of Hanoi-based Woori CBV Securities Corporation said in a report on Monday.

However, investors' psychology in general is still wrapped up in concerns about how effective the plan really is, it added. "Once local banks start cutting the lending rate, the market will get a strong boost."

The research team said the fact that Q1 reports are scheduled for release starting this week can also be considered as "a source of supporting information."

The rising momentum of penny stocks might come to an end and the market can perform well with stable increases in blue-chip stocks, the team forecast.

Investors undecided

Hien said other investment channels, including real estate and gold, are also "quiet" and many investors do not have any concrete plans yet.

High interest rates have discouraged people from buying houses, HCMC Real Estate Association Chairman Le Hoang Chau was quoted by Lao Dong newspaper as saying last week.

In the city, only the low-price segment has recorded successful transactions, he said. "For other segments, the situation is very gloomy.

"Investors are wise enough not to spend money on real estate now. Even when the property market was in its golden age, it was uncommon for investors to have a profit ratio of 30 percent a year," Chau said.

Now that prices are not going up, "it will be a failure for sure if investors take loans to invest," he said, noting that lending rates of 16-18 percent a year means hardly any company can manage to make profits.

"Once both investors and home buyers have retreated, it's easy to understand why it will be really tough for the market," he said.

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