On December 22 last year, State Bank of Vietnam (SBV) decided to cut down 150 points of the basic rate to 8.5% pa, marking the highest reduction from the monetary tightening up policies being released to curb inflation. Domestic and foreign institutions forecasted that the basic rate might come down to 7.5% pa by the end of the first quarter of 2009.
Broker KimEng Securities Co released an analysis on the relationship between interest rate cut and the potential of the stock market. Usually, investors joining the stock market wish to gain a higher profit than savings rates. When commercial banks raced to hike deposit rates, the interest rate for 12-month deposits (of Eximbank) was over 18% pa (in August 2008) while the profitability from stock investors (calculated based on the market's Price to Earnings (P/E) ratio) was only 6.2%.
However, until the end of 2008, the deposit rates continuously declined in parallel with the corrections in the stock market. According to KimEng, last December 31 when VN Index was around 316 points, the profitability of the stock market went up to 10.4% while 12-month saving rates was 8.1% pa, which made stock investments more attractive than savings at the banks.
What will happen if the basic rate in 2009 continues to go down and the 12-month saving rate returns to the 7% pa level? As planned, the country's GDP growth this year is expected to be 5-5.5%, the profitability ratio of stock investments will average at 8.76%, still higher than 7% pa of saving rates. The result is calculated based on comparing risks in investment operations and savings. In theory, the money always flows to the fields with higher profitability ratio so banks' interest rate fall will help upgrade the stock market's attractiveness.
Cutting basic rates is a measure to relax the monetary policies and encourage residents to deposit money at the banks, lower lending rates to help enterprises access low-cost loans from the banks. But HSBC Bank predicted that Vietnam's basic rate will still go down in the near term.
In the latest report on Vietnam's economic prospect for Q1 of 2009, HSBC said that more measures to relax monetary policies will be launched and the basic rate will be back to 7.5% pa while top broker Saigon Securities Inc (SSI) foresaw a lower basic rate of 7% pa by the end of Q1.
HSBC forecasted that Vietnam's economic growth could be 5.4% in 2009, after China's 7.8%, India's 5.9% in the Asia Pacific region while Taiwan, Hong Kong, Singapore, and Japan could post a negative growth.
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