The headquarters of the State Bank of Vietnam (SBV) in Hanoi. The SBV’s monetary policy will have impacts on money supply (M2). (Photo: sbv.gov.vn) Under the 2023 stock market outlook reportreleased recently, KBSV said M2 was a factor that had a strong impact on thestock market movements. In the past, when M2 strongly increased, along with thelow interest rates and the abundant cash flows into the stock market, the VNIndex surged strongly, and vice versa.
KBSV cited the periods of 2006-2007, 2016-2017and 2020-2021 as examples. In the periods, Vietnam’s stock market witnessed astrong development when M2 had a high increase of more than 14% thanks to acombination of many factors such as the loosened monetary policy of theState Bank of Vietnam (SBV), the high capital absorption capacity of theeconomy and abundant foreign capital inflows.
In contrast, the Vietnamese stock market in theperiods of 2011, 2018 and 2022 saw a correction when M2 had a low growth ofless than 12.5%, together with adverse internal and external factors.
Considering 2022 alone, the growth of M2 hit arecord low of only 6-7%, against the average growth rate of 14% in the 2012-2021period. The M2 slowdown was one of the important causes of the fall of thestock market.
According to KBSV, there were two reasons forthe M2 slowdown in 2022. They were the SBV’s tightened monetary policy and thelow disbursement rate of the government’s public investment.
Forecasting for 2023, KBSV believed that M2 willsee both positive and negative impacts. As for the positive side, KBSVsaid the SBV will have more room to further loosen monetary policies in2023 when the exchange rate and inflation pressure is predicted to belower compared to 2022, when supply chain disruptions are graduallyimproved, the reduction in global consumption demand helps lower commodityprices, and the US Federal Reserve (Fed) is forecast to end the interest ratehike at the end of the first quarter of 2023.
Accordingly, the SBV may resume its US dollarpurchase in the context of having a good dollar supply thanks to a tradesurplus, rising remittances and FDI. The move will help increase the country’sforeign exchange reserves and support the liquidity of the banking system,which will contribute to lowering the savings interest rates and improving M2growth.
Besides, the disbursement rate of publicinvestment is expected to improve to more than 80% of the yearly plan (comparedto 75% of 2022), which will help unfreeze the capital source blocked in theState Treasury to support liquidity for the economy.
However, on the contrary, KBSV said there willbe still negative factors for M2 in 2023. For example, the demand for new loansof businesses and households is forecast to go down this year due to the highinterest rates while business conditions are predicted to be less favourable in2023. Despite being projected to be less stressful, liquidity of the system in2023 is unlikely to soon return to a stable level.
Besides, the reopening of China will boost theprices of oil and gas in particular and of other global raw materials ingeneral, which will put pressure on the prices of many other consumer goods andservices, and cause global inflation to rise, making central banks around theworld look to possibly maintaining tightened monetary policy for longerthan expected.
In addition, risks related to the corporate bondmarket will be also notable as the pressure of maturity of the bonds is huge in2023. A significant amount of credit will be used to serve the purpose ofcorporate bond settlement, which will cause the actual credit supplyto shrink. Notably, if in a negative scenario, banks’ bad debts canincrease sharply under the influence of the collapse of the corporate bondmarket, and banks’ lending activities are likely to be significantly narrowed,causing M2 to slow.
KBSV forecast the credit growth in 2023 will be13-14% while the rising rate for capital mobilisation will be 12%, which willhelp M2 to increase to 13% from 7% in 2022. Liquidity of the banking system,accordingly, will be less stressful, enabling interest rates to cool downcompared to the last quarter of 2022, despite being still at high levels.
With the high correlation of M2 and Price toEarnings ratio (P/E) of the VN Index as analysed above, KBSV said the growth ofM2 in 2023 will be an important driver to help P/E of the market balanceagain./.
VNA
