(Tiểu luận) topic interest rate fell to very low levels during the covid 19, what would have happened to the capital market in viet nam

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATION PROGRAMS SUBJECT: CAPITAL MARKET Topic: Interest rate fell to very low levels during the Covid-19, what would have happened to the capital market in Viet Nam? Instructor: Assoc Dr Pham Van Hung Grade: Investment Economics CLC 62 Group Dong Anh Tho - 11207026 (Team Leader) Le Vuong Hung - 11201688 Le Thi Thanh Ngan - 1120274 Vu Hieu Linh - 11202316 Do Duc Anh - 11204271 Pham Quynh Phuong - 11203213 HANOI, 04/2023 TABLE OF CONTENTS CHAPTER THEORETICAL OVERVIEW 1.1 Interest rate 1.1.1 Concept & classification 1.1.2 Factors affecting interest rates 1.1.3 The role of interest rates in Vietnam's economy 1.2 Capital market 1.2.1 Concept & classification 1.2.2 Factors affecting the capital market 1.2.3 The role of capital market in Vietnam's economy 1.3 Impact of interest rates on Vietnam's capital market CHAPTER THE CURRENT SITUATION OF INTEREST RATES ON VIETNAM'S CAPITAL MARKET DURING COVID-19 EPIDEMIC 2.1 Current situation of Vietnam's stock market during Covid - 19 pandemic 2.1.1 Reaction of the delegation 2.1.2 Investor reaction 2.2 Current situation of Vietnam's bond market in the Covid-19 period 12 2.2.1 Government bonds 12 2.2.2 Corporate bonds 15 2.2.3 Investor reaction 20 2.3 Current situation of Vietnam's derivatives market in the Covid-19 period 23 CHAPTER FORECASTED FUTURE AND RECOMMENDED SOLUTIONS 24 3.1 Practical lessons 24 3.2 Future forecast 24 3.2.1 Trends in interest rates, exchange rates and inflation 24 3.2.2 Prediction of general capital market trends 25 3.3 Solution recommendations 26 3.3.1 It is necessary to accelerate the implementation of the roadmap of Basel II standards 26 3.3.2 Organizing market regulation in association with completing the legal framework 27 3.3.3 Actively implement the restructuring of the stock market, improve the competitiveness and quality of market intermediary institutions 27 3.3.4 Improve monitoring efficiency 28 CONCLUSION 29 References 30 Introduction The Covid-19 pandemic has had a significant impact on the global economy, with many countries taking measures to mitigate its impact Vietnam, like many other countries, has been hit quite hard, leading to a series of measures taken by the State Bank of Vietnam to combat the impact of the pandemic Among these measures, the most notable is the lowering of interest rates to very low levels The low-interest rate environment in Vietnam has raised questions about what will be the impact it will have on capital markets In the above topic, we will delve into the impacts of low interest rates on capital markets in Vietnam and explore the potential risks and benefits associated with this trend In particular, we will look at how the low-interest rate environment affects investors, businesses and the economy as a whole In addition, we will explore how governments and other stakeholders can manage and mitigate risks associated with a low-interest rate environment to ensure long-term stability and growth in capital markets CHAPTER THEORETICAL OVERVIEW 1.1 Interest rate 1.1.1 Concept & classification The interest rate is the rate by which interest is paid by a borrower for the use of money they borrow from a lender Specifically, the interest rate (I/m) is the percentage of principal (P) payable for a certain amount of time (m) per period (usually calculated on an annual basis) Interest rate targets are an important tool of monetary policy and are taken into account when dealing with variables such as investment, inflation and unemployment Central banks or reserve banks of countries generally tend to lower interest rates when they want to increase investment and consumption in the country's economy However, a low interest rate as a macroeconomic policy can be risky and can lead to the creation of an economic bubble in which large amounts of investment are poured into the real estate and stock markets Classification: Based on the nature of the loan, interest rates are divided into basic categories, including: Deposit interest rate, credit interest rate, discount rate, rediscount rate, interbank interest rate and basic interest rate 1.1.2 Factors affecting interest rates Interest rates are influenced by many different factors and some of the main ones are: Supply and demand of capital in the market: Interest rates will decrease when the supply of capital is more than the demand for capital and increase when the demand for capital is more than the supply of capital; Inflation: Interest rates will rise when inflation is high and fall when inflation is low; Economic stability: Interest rates will rise when the economy is unstable and decrease when the economy is stable; State policies: Interest rates will increase when the State raises taxes or fakes publicexpenditure and decreases when the State reduces taxes or increases public spending; Other macro factors: Interest rates will increase when there are large fluctuations in the world financial market, international investment flows, financial and monetary crises and reduce in the absence of these factors 1.1.3 The role of interest rates in Vietnam's economy Interest rates are important for the economy because they are a key tool in managing monetary policy Interest rates directly impact the costs and income of investmentactivities, influencing the investment decisions of businesses and individuals In addition, interest rates also help maintain the supply-demand balance of currency, ensure economic stability and inflation targets, support production and business and economic growth As interest rates rise, borrowing costs rise, making it difficult for businesses and individuals to access capital However, high interest rates can limit consumption and investment, leading to an economic downturn Conversely, when interest rates fall, borrowing costs fall, making iteasier for businesses and individuals to access capital and promoting investment and economic growth Therefore, governments often use interest rates as a tool to manage monetary policy to achieve economic goals such as economic growth, controlling inflation and maintaining economic stability 1.2 Capital market 1.2.1 Concept & classification Capital markets are part of financial markets; In particular, medium and long-term debt instruments over one year and securities are traded and sold Capital market securities such as stocks, government bonds, corporate bonds, local government bonds, mortgage loan agreements Capital market securities are illiquid compared to short-term securities and riskier than shortterm securitiesbecause their prices fluctuate greatly The main instruments of capital markets are securities, including stocks, bonds, investment funds, and derivatives such as options and futures Investors can buy and sell these securities through stock exchanges or online trading platforms In addition, capital markets use financial instruments such as market indices, futures contracts, and other financial services such as investment advisory and asset management Investors and companies often use these tools to make investment decisions and manage risk Capital markets consist of three main markets: Leasing market, Mortgage market and Securities market The medium and long-term stock market is a place where medium and longterm papers with a duration of more than one year are traded, and at the same time provide longterm credit to businesses provided that a mortgage is obtained The lease-and-buy credit market is a market that provides medium and long-term credit to enterprises in the form of asset leasing financing However, in reality, the capital market is often referred to as the stock market The stock market is the part of the capital market at which securities are issued and traded In particular, securities are evidence confirming the owner's legitimate rights and interests in the assets or capital part of the issuer Securities are expressed in the form of certificates, book entries or electronic data including: stocks, bonds, investment fund certificates, right, warrant, option, futures 1.2.2 Factors affecting the capital market The capital market in Vietnam is affected by many factors, including: Macroeconomic factors: Including indicators such as GDP growth, inflation, budget deficit, public debt, balance of payments surplus, exchange rate These factors will affect the demand and supply of capital, the present value of financial instruments, thecost and efficiency of investment projects; State policy factors: Including monetary, tax, legal policies These policies will affect interest rates, the ability of the Government and businesses to raise capital, and the level of transparency and safety of the capital market; International market factors: Including factors related to the world economic situation, international investment flows, financial and monetary crises These factors will affect the supply and demand of foreign currency, exchange rates, international risks,etc 1.2.3 The role of capital market in Vietnam's economy Capital markets are an important factor in allocating resources and stimulating economic growth Capital markets help provide capital for businesses to invest in effective projects, helping to improve labor productivity and national income The capital marketalso helps investors to choose investment channels that suit their goals and preferences, thereby optimizing their benefits Specifically, the role of the capital market in Vietnam's economy is analyzed as follows: Plays an important role inmobilizing people's savings and providing long-term investment capital for businesses, organizations and the Government The capital market enhances the ability to effectively use financial resources to serve socio-economic development Create new investment channels for people, helping them to choose financial instruments that suit their goals and preferences, thereby optimizing their benefits Capital markets also contribute to improving people's financial awareness and skills Contribute to the research and development ofscience and technology, thereby increasing output and productivity in the economy Capital markets also help create jobs and develop infrastructure During the Covid-19 epidemic, the capital market also plays an important role in maintaining production and business activities of enterprises, minimizing risks and difficulties due to the impact of the epidemic The capital market is also a channel for the Government to mobilize capital to implement socio-economic support packages for those affected by Covid-19 1.3 Impact of interest rates on Vietnam's capital market Interest rates affect Vietnam's capital market in many different ways: Impact on demand and supply of capital in the market: When interest rates are high, people will tend to save more to benefit from high interest rates, thereby reducing consumer demand and investment Conversely, when interest rates are low, people will tend to consume and invest more to take advantage of business opportunities, thereby increasing the need for capital Therefore, high interest rates will reduce the supply of capital and increase the demand for capital in the market , while low interest rates will increase the supply of capital and reduce the demand for capital in the market; Effect on the present value of financial instruments in the market: The present value of a financial instrument is the sum of the value of future cash flows discounted to the present time by an appropriate discount rate This discount rate depends on the prevailing interest rate in the market When interest rates are high, the discount rate is high, which in turn reduces the present valueof financial instruments Conversely, when interest rates are low, discount rates are low, thereby increasing the present value of financial instruments Therefore, high interest rates will Document continues below Discover more from: Kinh tế đầu tư KTĐT1 Đại học Kinh tế Quốc dân 814 documents Go to course CÂU HỎI TRẮC NGHIỆM THAM KHẢO 35 Kinh tế đầu tư 100% (12) Nhóm câu hỏi - điểm KTĐT1 36 Kinh tế đầu tư 100% (11) Nhóm-2-Kinh-tế-đầu-tư 04 22 Kinh tế đầu tư 100% (6) Bài tập KTĐT có lời giải Kinh tế đầu tư 90% (10) Nhóm câu hỏi điểm KTĐT 11 Kinh tế đầu tư 100% (3) TÀI LIỆU ÔN KTĐT 84 Kinh tế đầu tư 100% (3) reduce the price of financial instruments such as stocks, bonds in the market, whilelow interest rates will increase their price; Impact on the cost and efficiency of investment projects: The cost of an investment project includes the initial cost and the cost of borrowing capital to implement the project The effectiveness of an investment project is calculated as the internal rate of return (IRR) of the project, i.e the ratio of the profit gained from the project to the initial cost When interest rates are high, borrowing costs are high, which in turn increases costs and reduces the efficiency of investment projects Conversely, when interest rates are low, borrowing costs are low, which in turn reduces costsand increases CHAPTER THE CURRENT SITUATION OF INTEREST RATES ON VIETNAM'S CAPITAL MARKET DURING COVID-19 EPIDEMIC On three main capital markets, the stock market plays an important role in the economic development of a country It provides a means for businesses to raise money and investment, while also allowing individual and institutional investors to investin potential businesses The development of the stock market also represents the development and stability of the economy as it creates a developed market and a platform for financial trading Therefore, we focus on this market The Covid-19 pandemic began to affect Vietnam's stock market from the end of January 2020, leading to an unprecedented rapid and sharp decline However, with the Government's ability to successfully control the epidemic, Vietnam's stock marketrecovered quickly in the remaining months of 2020 The Government also promoted the implementation of practical measures to support enterprises, the State Bank of Vietnam has reduced operating interest rates and implemented debt restructuring and debt relief for enterprises affected by the COVID-19 epidemic, thereby supporting listed enterprises to increase their ability to recover operations after the epidemic is controlled Along with that, with the strong recovery of the stock market and interest rates maintaining record lows, money has flowed strongly into the stock investment channel The market recorded an unprecedented scale of new investor participation in history 2.1 Current situation of Vietnam's stock market during Covid - 19 pandemic When interest rates fall, the cost of raising capital of enterprisesalso decreases, thereby increasing investors' expectations about the prospects of businesses, resonating with the decrease in the cost of raising capital of people, increasing the demand for loans, investment and consumer spending, etc thereby increasing the demand for products and services and the value of assets in the common market, thereby triggering the flow of money into the market, causing the stock price to rise According to the General Statistics Office, in 2020, the total capital mobilization for the economy of the stock market reached VND 383.6 trillion, up 20% over theprevious year; The average trading value on the stock market reached VND 7,056 billion/session, up 51.5% compared to the average in 2019 despite being in the period of serious epidemic impact By 2021, along with the strong growth in the index, the capital levelof the stock market also increased sharply As of December 28, the market capitalization reached VND 7,729 trillion, up 46% compared to the end of 2020, equivalent to 122.8% of GDP in 2020 The listed and registered trading scale of the market reached VND 1,727 trillion, up 14.1% compared to the end of 2020 with 761 shares and fund certificates listed on stock exchanges and 890 shares registered for trading on UPCoM Liquidity in the stock marketin 2021 continues to boom and increase sharply thanks to the cash flow of domestic investors leading the market From the average trading value of VND 19,000 billion/session in January, stock market liquidity has increased rapidly and continuously over the months and by November reached VND 40,000 billion/session, of which on November 19, 2021, the market recorded a record trading session of VND 56,105 billion Generally, from the beginning of the year until now, the average transaction value reached more than 26,564 billion VND/session, up 258% compared to the average in2020 Total capital mobilization on the stock market in the first 11 months of 2021 reached VND 444,941 billion, up 23% over the same period last year Figure 2.1 Stock market liquidity in 2021 (Source: VDSC Securities) 2.1.1 Reaction of the delegation In 2020, the outbreak of the COVID-19 pandemic has significantly affected the production and business activities of listed and registered enterprises, in which the after-tax profit of companies has been significantly affected In the first quarter of 2020, the complicated epidemic has caused stock markets in the world and Vietnam to plunge, and at the same time caused investor confidence to shake On the stock market, as of March 23, 2020, the market capitalization reached VND 3,302 trillion, down 24.7% compared to the end of 2019 Falling interest rates cause businesses to pay lower interest costs, increase profits and, indirectly, increase stock prices However, in the context of the epidemic, businesses still cannot afford to pay for loans In August 2020, the continuous decrease in interest ratesis an opportunity to lower the level of financial costs for businesses Therefore, many listed / registered businesses still have positive business results, the number of companies reporting profits still accounts for 84% of the total number of companies that have made fish reportsin the third quarter of 2020, shares also began to show signs of recovery By 2021, the total capital mobilization in the capital market will reach over VND 1.12 million billion, equivalent to 38.7% of the total investment capital of the whole society In particular, capital mobilization of the corporate sector through stockissuance and equitization auction reached over VND 143.5 trillion, up times in 2020 Figure 2.2 The 2021 issuance value is at a record high within the past years (Source: FiinPro Platform) 2.1.2 Investor reaction The outbreak of the Covid-19 pandemic in the world and Vietnam has brought business activities and social life in many places to a halt From a negative perspective, the epidemic and lockdowns and distancing orders make people across the country have to stay at home more, however, it is advantageous because they have alot of free time to find more income, it is difficult to find a more convenient investment channel than stocks Vietnam has also adjusted operating interest rates to support the economy, the reduced interest rate level makes safe investment channels such as savings less attractive because of very low returns Therefore, stocks become attractive compared to traditional investment channels Leading to a skyrocketing number of new accounts opened as more people began to tend to enter the market brings risks such as increasing bad debt ratio, reducing the quality of collaterals, lack of information transparency and supervision In general, the bond market still maintained an impressive growth rate in the past 05 periods, withan average compound growth rate of approximately 55.4% / year Total domestic issuance volume in 2021 reached VND 658,009 billion (up 42% compared to 2020) In which, the public offering rate is 4.58% (much lower than 2020: 7.10%) This shows that initially, in 2020, there has been a shift from private issuance to public issuance (up from 5.86% in 2019 to 7.1% in 2020), which is a good sign in the corporate bond market However, the growth in issuance rates has not been sustained as it immediately dropped by nearly 40% in 2021 Figure 2.11 Share of private placement and public offering, 2015-2021 (Source: Vietnam Bond Market Association) Medium and long-term capital demand tends to focus on industry groups such as Real Estate, Construction, Electricity or Building Materials and continues to remain high Meanwhile, lending standards are being tightened, corporate bond channel plays agreat role in mobilizing medium and long-term capital for the development of enterprises and the economy The impact of the above industry groups is the result of low interest rates and tight credit In addition, the bond channel of these enterprises has a much greater advantage than depositing money in commercial banks In 2021, the value of corporate bonds raised in Vietnam far exceeded the value mobilized from the stock market, and approached the value of medium-long-term new loans from commercial banks 16 Figure 2.12 The volume of capital raised from different channels (Source: Fiin Group) Considering industry groups, the group of commercial banks accounted for the largest proportion in terms of issuance volume, with nearly 40% of bond volume issued in Q4 2021, in order to raise capital for year-end credit growth and complywith capital regulations Real estate corporate bonds accounted for 35% of the total issuance volume, continuing to increase sharply in size as the real estate market continuously grew in 2021 Meanwhile, sectors such as consumer goods and services and energy all decrease in the volume of bonds raised compared to year 2020 Figure 2.13 Proportion of government bond issuance volume in 2020 and 2021 (Source: Vietnam Bond Market Association) 17 In addition, in 2021, there were 243 enterprises issuingfor the first time with an issuance volume of 40% Table 2.2 Number of enterprises issuing bonds for the first time in 2020 and 2021 (Source: FinGroup) Among them, over 60% are real estate and construction enterprises, a sharp increase compared to 2020, while decreasing in most of the remaining industry groups First-time issuers with a large volume mainly residential real estate group (typically include: Masterise Group companies mobilizing investment capital for Saigon Binh An Urban Area project (~ VND 15,500 billion); medical companies (Sun Valley, Bach Hung Vuong, Wealth Power) (~9420 billion VND); Van Truong Phat Construction Investment Company (~ VND 6,000 billion) invested in Viet Phat Urban Area) For the issued bonds, in general, bonds with short maturities of 1-3 years accounted for a large proportion (67%) The average issuing interest rate in 2021 is 7.75% and the average issuance tenor is 3.8 years Interest rates on bonds issued in 2021 have decreased compared to 2020, but are still more attractive relative to savings deposit products Figure 2.14 Average tenor and issuing interest rate by industry group in 2020 and 2021 (Source: Vietnam Bond Market Association) 18 Tenors and issuing interest rates decreased slightly in industries with positive developments in 2021 such as Real Estate, Banking, and insome industries facing difficulties such as manufacturing and industry, which had to temporarily stop operations due to the impact of the epidemic In particular, in the context that bank credit capital continues to tighten for the real estate sector, many enterprises have increased capital mobilization through bond issuance to mobilize capital for project implementation The report on the corporate bond market ofSSI Securities Company shows that real estate enterprises lead in bond issuance with VND 92,300 billion Particularly in the second quarter of 2021, there are about VND 2,000 billion of corporate bonds issued to the public by real estate enterprises such as Beijing Urban Development Corporationand Glexhomes Joint Stock Company In the context that the bank's deposit interest rate is currently low and is expected to remain low, especially when the deposit interest rate is currently at 5-5.5%/year for a 12-month term, the bond investment channelwith an interest rate of 8-10%/year is still attractive to individual and institutional investors However, besides positive signals from the corporate bond market, experts said statistics show that risks with corporate bondsare increasing By excluding bank bonds and financial institutions, most bonds of issuers are unsecured Figure 2.15 Proportion of bonds issued without collateral or secured by shares (Source: Vietnam Bond Market Association) With an average maturity of 3.37 years and an average issuance interest rate of 10.36% per year, up to 29% of bonds issued are unsecured, or only secured by shares This rate has increased by about 4-5% in the second half of 2021 when real estate stock price movements are relatively favorable for mortgages The risk of this is that when the issuer falls into insolvency, which 19