Hanoi - Vietnam's stock index dropped sharply after opening Monday morning, as investors reacted to a tightening of credit due to commercial banks carrying out a mandatory government-ordered purchase of over 1.4 billion dollars in government bonds. The Vietnam Index finished the day down 4.4 per cent at 615.7, reversing much of the ground gained in a minor rally last week.
The mandatory bond purchase was part of a raft of measures the government introduced early this month to fight inflation, which hit 15.7 per cent in February. The bond purchase was intended to slow excessive growth in credit, which has swollen the money supply.
Nguyen Quang Luong, deputy head of the office of the State Bank of Vietnam, said the government was taking measures to simultaneously fight inflation and stabilize the stock market, but the bank was not concerned with the stock market side.
"The State Bank of Vietnam is only concerned with curbing inflation," Luong said. "The stock market's movements depend on many other factors."
The small rally last week came after Vietnam's State Capital Investment Corporation was authorized to begin investing in the stock market as a way to stabilize the index. The SCIC is a state-chartered company created in 2006 to handle the proceeds from the privatization of state-owned enterprises as part of Vietnam's long shift to a market economy.
Executives at several major investment firms said they had no way of knowing whether SCIC had actually begun purchasing stocks. But investors had reacted positively to the news last week that it might.
In the long term, investors said a recovery in the market would depend on more fundamental changes, including more attractive initial public offerings of state-owned enterprises.
"Last year the state started to ask increasingly high opening bid prices for SOE's," said Andy Ho, managing director of asset management firm VinaCapital. "Everything from banks to breweries was going public with very high asking prices. The market didn't like this very much."
A meeting Friday between Vietnam's Deputy Minister of Industry and Trade, Nguyen Thanh Bien, and Vietnamese exporters revealed the tensions that are complicating the government's strategy on monetary policy.
At the meeting, according to Vietnamese newspaper Thanh Nien, exporters urged the government to lower interest rates, loosen bank credits, and buy dollars to keep the value of the dong low.
The IMF and other international analysts have advised Vietnam to raise interest rates, tighten bank credits, and allow the value of the dong to rise, in order to fight inflation.
Deputy Minister Bien reportedly agreed to press banks to lower interest rates and give preferential loans to the agriculture and forestry industries.
