Vietnam would be overreacting by imposing capital controls to curb investment inflows that have made its stock market the world’s best-performing index this year, according to Citigroup Inc. The HCM City VN Index’s 43% gain this year has fuelled speculation among unidentified financial institutions that the government may follow Thailand in imposing penalties on fund inflows. The gains have been fuelled by the country’s economic growth, its entry into the World Trade Organisation and demand for investment capital, said Citigroup economists Renee Chen, Chua Hak Bin and Sim Moh Siong.
The government should impose measures to slow stock investments, instead of wider curbs, they wrote in a report published yesterday.
“Broad capital controls would be an over-reaction to what appears to be narrow concern about excesses in the stock market,” the economists wrote. “Capital controls could have wider repercussions on confidence, investment and public finances. Any measures should be targeted more directly on cooling the stock market.”
Asian central banks face policy missteps as they attempt to control “huge” capital inflows into their markets that are spurring inflation and causing their currencies to strengthen, Standard & Poor’s said on February 13. Capital inflows have made the Ho Chi Minh Stock Index the best performer of 83 tracked by Bloomberg.
Developing countries in Asia attracted US$98 billion in overseas investment last year, according to the United Nations about four times the average from 1998 to 2004.
The Vietnamese government may put restrictions on overseas funds on March 1 to deter speculators, Australia & New Zealand Banking Group Ltd economists Alex Joiner and Amy Auster wrote in a February 8 research note, citing unidentified reports from financial institutions.
Vietnam should enforce more stringent rules on bank lending to limit gains in shares, the Citigroup economists said. Alternative measures to capital controls can include allowing more investment outflows, imposing higher withholding or capital gains taxes on sales of shares, they said. Taiwan-based Chen confirmed the contents of the report.
Thailand’s central bank introduced currency controls on December 18 to stem gains in the baht that exporters said were curbing competitiveness. The Bank of Thailand exempted stock investments a day later after the benchmark stock index plunged 15%. The controls, still in place for bonds and real-estate funds, penalise investors withdrawing money from Thailand within a year.
“Capital controls, once introduced, are difficult to reverse, and foreign investors might be put off by `flip-flop’ regimes, hurting longer-term investment prospects,” the economists said.
Some investors have already reduced holdings of shares on concern Vietnam will impose controls. After touching a record on February 7, Vietnamese stocks fell 5.9% the following two days amid speculation of the curbs.
The dong gained 0.02% per dollar in January and 0.25% in December, the biggest monthly advance in more than 11 years, eroding the value of the nation’s overseas shipments. The dong has fallen for the past 11 years as the nation favours a weaker currency to spur exports.
“We expect the dong to likely remain steady despite the possibility of increased investor caution about regulatory uncertainty in the near term,” Citigroup said. “Continued strong direct investment and robust economic growth should still support mild appreciation of the dong against the US dollar over the medium term.”
The dong was at 15,988.00 per dollar at 8 a.m. in Hanoi. The Ho Chi Minh Stock Index closed at 1073.19 yesterday.