Vo Thi Sanh, vice head of BIDV’s Treasury Department, said though the banking system’s greenback supply had dried up, the State Bank’s intervention had been limited. “We expected the State Bank to sell more dollars, but with the deteriorating trade balance, we should be worried that the dollar supply will be affected,” said Sanh.

In the first half of 2009, Vietnam’s trade balance saw a deficit of $2.1 billion, from a surplus at the end of the first quarter. HSBC’s economist Prakriti Sofat said Vietnam’s annual trade deficit would be around $8.5 billion, 9 per cent of gross domestic product (GDP) by end of 2009, much lower than last year’s $17.5 billion, 22 per cent of GDP.

On the State Bank’s website, head of the Foreign Exchange department Nguyen Quang Huy said that the trade deficit in 2009 was still under control and “much improved than 2008”. “The problem was the hoarding of corporate dollars, but with our implemented measures, the situation is getting better,” said Huy.

In June, the State Bank, in cooperation with the Vietnam Banking Association, successfully convinced local banks to lower the greenback deposit rates en masse, reducing the appeal of keeping the foreign currency. The current maximum interest rate for greenback deposits was 1.5 per cent, per year.

Huy said other sources of dollars were still stable. The disbursement of foreign direct investment was $4 billion in the first half of 2009 and is expected to close the year at $8 billion. Meanwhile, remittances from overseas Vietnamese reached $2.83 billion in the first half and is expected to hit $5.8-6 billion by the end of the year, slightly lower than the $7.2 billion in 2008. According to the State Bank’s recent report, in the second half of 2009, the bank would increase greenback selling volumes to banks.

HSBC’s foreign exchange strategist Daniel Hui said that the risk of re-widening the trade deficit could not be ignored and a gradual shift should be made to a market-based exchange-rate management system based on liquidity management, via interventions, from the current daily fixed and trading band-based system.

“Such improvements to the exchange rate regime would allow the foreign exchange market to better manage volatility if market risks return,” said Hui. At the moment, local banks are allowed to trade the dollar at 5 per cent on either side of the State Bank’s official daily exchange rate. In early July, the authority also tightened enforcement on methods used by commercial banks that could be construed as outside-the-band trading.

In May during a government month-end press conference, Prime Minister Nguyen Tan Dung said: “Pro-growth monetary policies always come with inflation risks, but why should we be afraid of this?”

This statement was translated that supporting economic growth should be the first priority of the monetary policies. By that time, no credit growth limit was mentioned. But, things have changed now. In July the government ordered the State Bank to curb this year’s credit growth to 25-27 per cent.

“The economy has started recovering and the priority now shifts to reining in inflation,” said Nguyen Thi Kim Thanh, head of the State Bank’s Banking Development Institute. Over the first half of the year, the banking system’s credit growth hit roughly 17 per cent, with scope to hit 8-10 per cent in the second half of the year. “The monetary policy coin has started flipping,” Thanh added.

In the second quarter of the year, the country’s gross domestic product (GDP) expanded by 4.5 per cent year-on-year. This means, on seasonally adjusted basis, the economy grew by 2.3 per cent quarter-on-quarter, well better than the 1.7 per cent contraction by the end of the first quarter.

“Taking into account the second-quarter GDP numbers our 2009 average growth forecast stands at just under 5 per cent. We believe that the recovery which is currently under way will gain momentum through the year, with GDP ticking up to 6 per cent by the year’s end. For 2010 we are looking for the economy to expand by 6.5 per cent,” HSBC economist Prakriti Sofat said.

Meanwhile, inflation continues to head south with the consumer price index (CPI) rose by just 3.9 per cent year-on-year in June, the lowest level since February 2004 and well lower than the peak of 28.3 per cent in August, 2008. “Despite inflation proving controllable, inflation risks are looming and curbing credit growth is needed,” said Thanh.

Asia Commercial Bank deputy general director Nguyen Thanh Toai said that with this move, local lenders would be more cautious in extending loans during the rest of the year. Eximbank’s deputy general director Dao Hong Chau said that the bank had tightened borrowing conditions for consumer lending.

“Of course, tightening credit extension could negatively affect banks’ profits as it makes up around 70 per cent of [our] earnings. But, it will keep the banking system in check and better control bad debts,” said Chau.

According to the State Bank governor Nguyen Van Giau, the banking system’s bad debt ratio was 2.62 per cent at the end of April, considerably higher than the 2.2 per cent reported at the end of 2008

According to an Eximbank source, the State Bank had recently sped up the selling of dollars to lenders. “They have provided dollar amounts that we have needed for the past few weeks. Of course, we had to filter ourselves when selling dollars to enterprises. Only buying dollars for importing prioritised items such as pharmaceuticals or fertilisers was accepted,” said the source.

In July, State Bank governor Nguyen Van Giau reconfirmed that the authorities “had no plans to further devalue the local currency”. At the same time, the State Bank promised increased volumes of dollar sales to the banking sector. It also revealed that dollar deposits in the banking system totalled $20 billion, lower than national foreign currency reserves.

Duong Thu Huong, general secretary of Vietnam Banking Association (VNBA), said those moves had allayed local enterprises’ concerns. “The most important thing is confidence in the local currency. That’s what the authority has regained from the market participants,” said Huong.

Truong Hoang Luong, general director of Kien Long Bank, said confidence in the local currency had encouraged enterprises to come back to dollar borrowing, which had stalled in the first half of the year.

“Dollar loan extensions have been increasing over the past few weeks,” said Luong.

In the first half of 2009, with the exchange rate fluctuating widely, local enterprises turned their backs on borrowing dollars, with concerns of possible exchange rate risks. For instance, in March, if an enterprise borrowed a $10,000, three-month loan when the exchange rate was VND17,500, then in June, when the exchange rate increased to VND17,800, it would mean the enterprise had to bear an extra VND300 cost for each dollar borrowed.

According to Tai Hui, Standard Chartered’s South East Asia regional head of research, the devaluation risks for Vietnamese dong had decreased. “In recent months, the government and the State Bank have repeatedly stated that they will not devalue the currency again. Given that the trade balance deficit has narrowed somewhat and that the economy is picking up, we believe the risk of further one-off devaluations has decreased,” said Hui.

Since March 2008, the State Bank has conducted a series of one-off devaluations and it has widened the daily trading band on several occasions. Currently, the exchange rate’s daily trading band is /-5 per cent, which means that local banks are allowed to trade the greenback at 5 per cent either side of the State Bank’s reference exchange rate, which is set daily.

Meanwhile, the Vietnamese government expects the trade deficit to narrow to $10 billion in 2009 from $18 billion in 2008. Standard Chartered forecasted that with the global recession, Vietnam’s foreign direct investments and inward remittances would drop to $8 billion and $6 billion, respectively, from $11.5 billion and $7.2 billion in 2008.

Critics claim the law will do little to prevent real estate market speculation or increase state budget coffers. The draft law is expected to be discussed during the National Assembly’s meeting next month. It is due to be approved next May and take effect in 2011. However, after several amendments over the past few months, the draft is still triggering criticism.

“Billions of dong were spent on this law-making project, but the Ministry of Finance (MoF) only produced a draft law with 13 articles printed on five pages,” said a member of the National Assembly’s Budget and Finance Committee.

He pointed out that while Article 6 under the draft was described as “taxable price of residential houses”, it included regulations on taxable prices of land, which also reflected “sloppy work” by the MoF. Truong Thanh Duc, chairman of the Basico law firm, said the MoF had set five targets for the law, including encouraging economic use of land, preventing land speculation and increasing revenues for the state budget, but failed to meet any of them.

“The proposed tax rates are too low to make considerable contributions to the state budget. Meanwhile, with confusing regulations, the draft does not give any focus to help prevent speculation,” said Duc.

According to the draft law, residential land, houses and land for commercial purposes other than cultivation will be subject to tax, which is not the case under current regulations.

Residential houses with a taxable value of more than VND600 million ($33,500) will be taxed at 0.03 per cent on the excess value. Taxable value of houses is calculated based on construction price quotations regulated by the government, verifying depend on different type of houses.

Residential land with an area within the norms regulated by the government will be taxed 0.03 per cent of its taxable value. The tax rate will be 0.06 per cent if the land area is within three-times the regulated norm and 0.09 per cent if the area exceeds three-times the norm.

Land tax of apartments in multi-floor blocks will be calculated based on coefficients of the apartment’s floors, with the same tax rate of 0.03 per cent for apartments of different square meterage. “Regulating a single housing tax rate for all types of residential houses is unsuitable. The 0.03 per cent tax rate might suit houses in rural areas but will be too low for houses in urban areas,” said Pham Sy Liem, deputy chairman of the Federation of Civil Engineering Associations.

Meanwhile, Hanoi Institute for Socio-Economic Research specialist Nguyen Minh Phong said land tax on apartments in multi-floor blocks would discourage investment in modernised housing to save land.

Dang Hung Vo, former deputy minister of Natural Resources and Environment, suggested a higher tax rate at 0.12 per cent for deserted land or land left idle due to project delays to encourage effective land use.

Nguyen Thi Kim Thanh, head of the State Bank’s Banking Development Institute, said around VND10 trillion ($560 million) in short-term loans of less than 12-month terms would be returned in November and December, 2009. These loans were extended under the government’s 4 per cent interest rate subsidy programme launched in February, 2009. The central bank recently announced to expand the subsidy programme to cover medium and long-term loans which will mature by the end of 2011.

Nguyen Thanh Toai, Asia Commercial Bank’s (ACB) general deputy director, said few of the returned funds would be rolled-over into medium-term loans. “Most of these funds were short-term mobilisation ones, while the State Bank has tightened the conditions of using short-term funds to finance medium- and long-term lending,” said Toai.

In August, with Circular 15/2009/TT-NHNN, the State Bank allowed lenders using a maximum 30 per cent of short-term deposits to fund medium- and long-term assets instead of 40 per cent previously.

A Vietinbank source said that depositors still favoured short-term deposits, mainly three and six-month terms.

“Thus, once we get back the money extended during February-April, it will not be easy to allot these funds. Government bonds could be a good source,” said the Vietinbank official. At the moment, the government’s interest rate subsidy programme is only applied to medium and long-term loans.

“The rate subsidy makes loans more affordable and without a rate subsidy, the interest rate could be quite high for enterprises. But, we are capped by the 30 per cent level,” added the Vietinbank official.

Vo Thi Sanh, BIDV’s Treasury Department vice head, said that in November and December, some of the loans would be returned.

“By then, it would create some space for us to extent new loans under the watchful eyes of the authority over credit growth,” said Sanh. Sanh admitted that the bank had actually denied some borrowing requests, due to the bank’s high credit growth over the past few weeks.

In 2009, under inflation concerns, the State Bank aimed to keep the credit growth under 30 per cent. However, over the first nine months of the year, credit grew by 28 per cent. Thanh shared the view that investing in government bonds could be an alternative for banks to funnel their available money. “Investing in bonds was not considered as lending and current government bond yields are quite okay,” said Thanh.

At the moment, two and five-year bonds are traded at 10.0-10.06 per cent, per year while normal loans interest rates are capped at 10.5 per cent, per year. Lenders are allowed to mobilise and lend at rates within 1.5 times of the base rate currently set at 7 per cent.

The National Assembly Finance and Budget Committee said that next year, the Ministry of Finance (MoF) would likely earmark as much as VND5 trillion ($284 million) for state-run groups and corporations.

“Though state budget expenditure for groups and corporations will not be so remarkable, the government will still have to strictly revise such expenditure. All improper expenditure, though negligible, will be cut down,” said committee chairman Phung Quoc Hien.

The committee’s report said that in 2010, amid the world’s slow economic recovery, Vietnam’s economy would continue to face difficulties. “Thus, the government will not stimulate the economy in an even manner. All resources will be concentrated on restructuring the economy quantitatively,” it said.

Hien said the MoF would earmark VND3.5 trillion ($199 million) for PetroVietnam, VND28 billion ($1.6 million) for Vinacomin, VND60 billion ($3.4 million) for VNPT, VND10 billion ($568,000) for Vinatex and VND54 billion ($3 million) for Vinalines. The committee, however, proposed the funds must be used to fulfil special mandates assigned to the groups and corporations.

“As for the remaining tasks that need expenditure, the groups and corporations will have to use their own capital earned from production and annual after-tax profits,” the report stated. Hien said: “For example, many groups and corporations have established their own vocational schools and centres to service their workers and factories. Thus, they have to use their own capital to build such projects.”

He said projects that did not fall within a group’s business scope, but were assigned by the government, would receive state funds. “For example, if Electricity of Vietnam builds an electricity system at remote areas as assigned by the government, the group will be given capital,” Hien said.

However, a National Assembly delegate from Hung Yen province Vu Quang Hai said that without the government’s support, groups and corporations would not be interested in investing in education, training, health care and social welfare.

Hien replied: “If we use the state budget in such a way, they will always rely on the state budget. Moreover, this type of investment will cause inequality among units provided with state budget capital and units who are not.”

Now, the situation was getting worse. “According to the government’s report, there are four big expenditures exceeding initial estimations,” he said.

The first expenditure was for development investments, which were VND135.5 trillion ($7.53 billion), while the initially planned sum was VND112.8 trillion ($6.27 billion). “Thus, the expenditure has been exceeded by 20.1 per cent, while the government’s report said that the speed and quality of disbursements were limited,” he said.

In 2009’s first nine months, the disbursement rate of construction capital was at 60 per cent of the estimated cost, while that of government bonds was 52 per cent of initial planning. The second expenditure was non-state budget expenditure of VND11.722 trillion ($651 million), of which the excessive amount was VND620 billion ($34.4 million).

The third expenditure was for paying debts, in which there was a VND6 trillion ($333 million) increase against initial estimations and an expenditure of VND11 trillion ($611 million) for social welfare programmes that had not been initially planned. The last expenditure exceeding initial estimations was an advance payment of VND50 trillion ($2.8 billion) though possibility of return remained unclear.

In total, 2009’s initially estimated expenditures were VND491 trillion ($2.78 billion), but the real expenditures were VND533 trillion ($29.61 billion). “Under the current law, a project with VND20 trillion ($1.11 billion) has to be submitted to the National Assembly for consideration. But, why was the VND42 trillion ($2.33 billion) expenditure exceeding the initial estimation not reported to the National Assembly?” Hung wondered.

Deputy Nguyen Van Ba from Khanh Hoa province said: “I propose that the government give us clear explanations. I think the Budget Law is being sneered at. The government needs to design punishments for expenditure without concrete reasons.”

“State budget expenditure is for socio-economic development. So, expenditure for big projects needs to be revised,” Ba said. Deputy Nguyen Minh Thuyet, from Lang Son province, said the government’s current stimulus package was equivalent to about 80 per cent of Vietnam’s gross domestic product (GDP) and 30 per cent of the state budget.

“However, the government determined the package without letting the National Assembly Standing Committee know about it,” Thuyet said. He said the current stimulus package could not be controlled and many National Assembly delegates did not know how it was implemented.

“We cannot know the exact effectiveness of the package because a large part of it has been invested in the stock market and in property, both of which are full of risks,” Thuyet said. According to many delegates, many ministries and sectors could not control their budget expenditures. For example, the Ministry of Education and Training (MoET) said that some 20 per cent of the state budget was invested in education and training. However, not only the MoET but also localities and other ministries used these expenditure.

“I believe that the ministries of Culture, Sports and Tourism, Information and Communications and even Finance cannot control their expenditures,” Thuyet said. He said while Vietnam was still wrestling with economic woes, the country was about to borrow $500 million for establishing four international universities. In another case, Thuyet noted, if the project to build a nuclear power plant was approved, the government would have to borrow $12 billion, which was tantamount to half of its budget, from outside.

Meanwhile, he said, by 2025, this plant would be able to meet only 4.4 per cent of the country’s power demand. “While will Vietnam not boost investments into agriculture and rural areas and national security, instead of investing in such projects?” Thuyet asked.

According to Minister of Finance Vu Van Ninh, the money exceeding the initial estimations came from standby capital resources for preventing natural calamities and from additional 2008 revenues.

The market recorded a new high trading volume of over 118 million shares, valued at about VND3.5 trillion ($196.85 million) on May 6, at Hanoi and Ho Chi Minh stock exchanges.

The following trading days betrayed many analysts’ expectations of a considerable drop in trading volume, with ongoing high matched orders of 66 million shares on May 7 and 80 million shares on May 8 in both bourses, valued almost VND1.93 trillion ($108.55 million) and VND2.325 trillion ($130.75 million), respectively.

Analysts said high liquidity, especially with significant ask orders, demonstrated the market’s optimism at a long-term stock market rally. Tran Hoang Son, customer executive of EuroCapital Securities Company, said that high market liquidity signalled the investors’ readiness to join the market and promised a sound market recovery.

“Market confidence has been confirmed and reinforced, with positive supporting information from United States’ stock market, property market and unemployment rates,” said Nguyen Thanh Hai, An Binh Securities Company’s (ABS) director of Individual Customer Centre. Furthermore, the large demand for shares demonstrated the financial potential of Vietnamese investors and the stock market.

Hai said that investors’ financial standing remained high, as the total money deposited in investors’ accounts at ABS during February and March was disbursed at about 30 per cent. ABS was opening 30 to 50 new accounts each day and more money was pouring into new and existing investors’ accounts.

Domestic institutional investors created the major demand for the market, while individual investors sold more, Son said.

“However, the market appeared to be a bit over excited, as many investors were rushing to buy penny stocks [stocks that trade at relatively low price, liquidity and market capitalisation, usually highly speculative and high risk], which weren’t appreciating a few weeks ago,” Hai said. Though foreign investors were net buyers over the last week and over the first four days of May and they bought more than VND700 billion ($39.36 million), they still remained cautious.

The latest HSBC report on the Vietnamese economy said that the worst was over. However, it said, other markets in the region were still more attractive and less risky than Vietnam. Hai said that funds started to disburse more but stayed hesitant. They appeared not to hold in the long-term and would sell as soon as there was a chance to make a profit.

Over the last two weeks, money has been flowing into good penny stocks instead of bluechips, a major change across the last two months of rallies. Many penny stocks have kept rising even when the VNIndex experienced downward corrections.

In the local market, stocks that trade at less than $1 per share, have relatively low market capitalisation and high risk are considered penny stocks, while bluechips are stocks from well-established companies with stable earnings, no extensive liabilities and low risk.

Since early May, Mirae Fiber Jsc (code KMF) has soared by almost 66.7 per cent, from around VND6,000 ($0.34) to VND10,000 ($0.56) per share. Ho Chi Minh City Metal Corporation (code HMC) also rose by 45 per cent over its initial price of VND11,000 ($0.62).

Thuan An Wood Processing Jsc (code GTA) rose 45 per cent from it initial price of VND9,000 ($0.51), Vietnam Electricity Construction Joint Stock Corporation (code VNE) rose 37.5 per cent over VND8,000 ($0.45) and Hoa Sen Group (code HSG) rose 80 per cent from its initial VND15,000 ($0.84). All rose over a period of eight to 10 days.

Analysts said blue-chip stocks had risen sharply over a two-month rally to fairly high prices, but high risk. Good penny stocks, which stayed at lower prices, were more attractive to investors.

Though market prices were up by only VND3,000 ($0.17) to VND6,000 ($0.34), many penny stocks have already increased by 40-60 per cent over only two trading weeks, which captured the attention of investors more than the vacillation of bluechips, according An Binh Securities Company (ABS) analysts.

“Many penny stocks have seen good business results, which is worth noticing,” said Dao Viet Anh, head of ABS’ Business Centre. “In the current uptrend of high market trading volume, investment in penny stocks is also much less risky than in a market downtrend, thanks to higher market liquidity,” he said.

In addition, penny stocks are often searched by a large number of market participants with limited source of capital, especially new investors just getting started. SSI said that investors’ interest in penny stocks demonstrated less fear of market risks, extensive participation of individual investors and hot market growth.

Analysts said though the market had previously been under-priced and dropped to an unreasonably low level, the sharp rise was in need of some corrections.
Nguyen Mien Tuan, director of Viet Dragon Securities Corporation, said the market was “overheated mostly due to investors’ excitement.” Almost all securities companies have given warnings of the current market’s potential risks.

Stock prices of securities and banking companies such as Asia Commercial Bank (ACB), Saigon Thuong Tin Commercial Bank (STB) and of blue-chip companies such as Vinamilk (VNM), Cable and Telecommunication Materials Jsc. (SAM), Refrigeration Electrical Engineering Corporation (REE), PetroVietnam Fertiliser and Chemicals Jsc. (DPM) ceased to be hot, according to Tran Hoang Son, customer services executive of EuroCapital Securities Company.

For instance, stock price of VNM continually dropped by 9 per cent over two trading weeks. Prices of SAM, DPM, ACB and STB fluctuated and declined by VND1,000- 2,000 last week. Son said though market trading remained high, investors were not buying at any price and significant buy orders placed at floor prices demonstrated the drop in demand and investors’ hesitance.

“The market is in a correction phase,” said Pham Ngoc Hai, brokerage executive of Habubank Securities Company. Investors’ worries were mounting, as trading volumes on correction days dropped to less than 60 million shares per day in Ho Chi Minh Stock Exchange compared to more than 70 million shares per day two weeks ago, according to FPT Securities Company’s analysis department.

Hai said the market rally had pushed stock prices to relatively high levels and they were no longer cheap. “Though the worst is predicted to be over, and the economy has show signals of a recovery, the stock market should rally step-by-step rather than soaring over quick period of time, when many difficulties are still lying ahead,” said Hai.