Group 100

THE INFLUENCE OF
INFLATION
ON THE STOCK MARKET

Class: Banking EEP 63

Instructor: Mas. Nguyễn Ngọc Trâm
 I. Overview of inflation

II. Effects of inflation on the

Vietnam market in 2008

Effects of inflation on the

TABLE OF III. Vietnam market in the
CONTENTS period 2009-2010

Effects of inflation on the

IV.
Vietnam market in 2011
 Overview of inflation

1.1. The concept of inflation

1.2. Influence of SBV's inflation

control policies
1.1. The concept of
Inflation

Inflation is the continuous increase in the general

price of goods and services over time and the
depreciation of the value of a certain currency
 1.2. Influence of SBV's
inflation control policies

Measures to limit inflation The SBV has applied many monetary policy tools to curb
inflation, including: increasing the required reserve
ratio, issuing bills, raising interest rates, easing the
 Traditional measures exchange rate band to increase the VND against the USD

 Non-traditional measures
 Effects of inflation on the
Vietnam market in 2008

3.1. Economic Outlook

3.2. Impact of Inflation on the policies of SBV

3.3. Impact of Inflation on the Stock Market

 ECONOMIC OUTLOOK
GLOBAL ECONOMY
2008

 The year 2008 can be considered the

worst crisis since the economic crisis in
1930.

 The crisis originated from the explosion

of the housing bubble in the US, leading
to the collapse of a series of large
investment and commercial banks, along
with mortgage lending organizations and
individuals.

Source: Thebalance
 ECONOMIC OUTLOOK
2008
DOMESTIC ECONOMY

GDP Growth Rate

 The global economy fluctuated in
complexity: oil prices increased sharply
and food prices escalated until August
2008
 The global financial crisis broke out in
September 2008 and the world economy
sank into a deep recession.

 Economic growth rate in 2008 slowed

down to 6.2% compared to 8.8% in
2007.
=> the lowest growth rate since 2000
Employment growth GDP growth

Source: Vietnamese General Statistical Office

 ECONOMIC OUTLOOK
2008
DOMESTIC ECONOMY

INFLATION (CPI)
 Three high spikes occurred in
CPI Chart over 12 months in 2008
February, May and August.

 The price index was negative in

the last 3 months of the year.

 The important cause of this decrease is

due to the impact of the application
of tightened monetary policy in the
country, along with the global
economic recession and falling price
fluctuations on the world market.
Source: Vietnamese General Statistical Office
 Impact of Inflation on the
policies of SBV 2008
DOMESTIC ECONOMY

 The Central Bank applied a tightening

Interest Rate Fluctuation in 2008 (%) monetary policy.

 The exchange rate policy is also flexibly

adjusted by the State Bank with
interbank exchange rate and margin
regulations.

 Tightening monetary policy causes the

banking system to lose liquidity, leading
to an interest rate race.
• The base interest rate increased from
8.25% at the beginning of the year to
14% on August 11.
• Mobilization interest rates are
Base Refinance Discount interest
interest interest sometimes up to 20%, lending interest
Source: SBV
rates also increase correspondingly.
 Impact of Inflation on the Stock Market in 2008

 Following the decline of 2007,

the market welcomed 2008 with
tendency that were predictable but
the level of decline was still
unexpected.
S&P

500

index VN-Index

2007-

VN-Index Movement in 2008

2008
 Impact of Inflation on the Stock Market in 2008

 First half of 2008, the stock index dropped

rapidly.
Early January 2008, Vn-Index was still
above 900 points

S&P
 June 2008, the economic index fell
500 below the 400 point threshold for the
first time. => struggle
index  Since October 2008, the stock market
has continuously declined.
 11/12/2008, Vn-Index had only 288
2007- points left

VN-Index Movement in 2008

2008
 Vietnam
Investor’s
Behaviors
in 2008
 Effects of inflation on the
Vietnam market in the
period 2009-2010

3.1. Economic Outlook

3.2. Impact of Inflation on the policies of SBV

3.3. Impact of Inflation on the Stock Market

 ECONOMIC
GLOBAL ECONOMY OUTLOOK
GLOBAL ECONOMY
2009-2010

The Global economy continued to recover during 2009-

2010, supported by government stimulus packages.

However, the recovery remained fragile, facing increasing

inflationary pressures and, most notably, the sovereign
debt crisis. Major central banks, such as the Fed, the ECB,
etc maintained low-interest rates.
 ECONOMIC OUTLOOK
DOMESTIC ECONOMY 2009-2010
Figure : VietNam’s GDP Growth Rate, CPI and Interest
rate
 Vietnam remained one of the few
countries to achieve a positive GDP
during 2009-2010.
 In 2010, the GDP growth rate reached
6.78%.
=> lower than the period before the financial
crisis (2007), but much higher than the growth
rate of 2009 (the first year affected by the
crisis) and exceeded the target set by the
National Assembly at the beginning of the
year.

Source: Vietnamese General Statistical Office

 ECONOMIC OUTLOOK
DOMESTIC ECONOMY
2009-2010
Figure : VietNam’s GDP Growth Rate, CPI and Interest rate

 It can be stated that inflation in

2009 was within expectations,
and controlling inflation was a
success for Vietnam in that year.

 However, by September 2010, the

consequences of the loose monetary
and fiscal policy applied in 2009
caused the CPI to rise again

Source: Vietnamese General Statistical Office

 Impact of Inflation on the
policies of SBV
DOMESTIC ECONOMY

Correlation between VN-Index and refinancing rate 2009-2010

(%) and 1-year deposit interest rate (%)
 In 2009, to reduce the lending interest
rate floor and meet the capital demand,
the SBV adjusted and decreased the basic
interest rate, the discount rate, and the
refinancing rate.
 In the first 10 months of 2010, the deposit
and lending interest rates of credit
institutions continued to show a downward
trend.
 However, by November 2010, the SBV had to
adjust the policy rates to control inflation.

Source: VietinBank Securities

 Impact of Inflation on the Stock Market 2009-2010

 In 2009, the Vietnamese stock market

witnessed a relatively impressive
recovery.
 Fiscal and monetary policies were
loosened, and the government's stimulus
S&P package in 2009 served as the main
impetus for the stock market recovery.

500

index

2007-

2008
VN-Index Movement during the 2009-2010
Period
 Impact of Inflation on the Stock Market 2009-2010

 Due to the increasing risk of inflation,

in the last two months of 2009,
monetary policy began to tighten.

 From the second half of October 2009,

S&P the SBV required banks to cease
securities lending.

500  Along with excessive psychological

impacts
index
=> caused stock market indices
to enter a downturn cycle from
2007- November until the end of the year.

2008
VN-Index Movement during the 2009-2010
Period
 Impact of Inflation on the Stock Market 2009-2010

 At the beginning of 2010 due to

improved macroeconomic conditions
and low interest rates
This upward trend was not sustainable
as inflation surged back towards the end
of the year.
S&P

500  Tightening monetary policies continued

to be implemented, leading commercial
banks to significantly increase deposit
index interest rates after a stable period in
the first 10 months of 2010.

2007- This resulted in subdued and dismal

activity in the stock market, with trading
volume and stock prices continuously
2008 declining.
VN-Index Movement during the 2009-2010
Period
Stock Market Situation 2009-2010

 During the 2009-2010 period, market fluctuations closely followed

the dynamics of the State Bank of Vietnam's monetary policy and
macroeconomic prospects.

 Meanwhile, other factors, especially the business performance of

enterprises, had little impact on market movements.
Vietnam
Investor’s
Behaviors
2009-2010
 Effects of inflation on the
Vietnam market in 2011

3.1. Economic Outlook

3.2. Impact of Inflation on the policies of SBV

3.3. Impact of Inflation on the Stock Market

GLOBAL ECONOMY
ECONOMIC
GLOBAL ECONOMY OUTLOOK
2011

 According to IMF Report, Global economic growth

slowed to 3.8 %.

 Economic Growth and global prices heightened

concerns about high inflation in developing
countries.

 In the first half of 2011, inflation returned to the peak

levels

Source: USDA
 ECONOMIC OUTLOOK
DOMESTIC ECONOMY 2011

Figure : VietNam’s GDP Growth Rate, CPI and Interest rate

 Faced numerous risks and challenges.

 GDP growth rate in 2011 decelerated to

5.89%

=> Aligned with the prudent implementation

of macroeconomic policies aimed at curbing
inflation, stabilizing the macroeconomy, and
ensuring social security.

Source: Vietnamese General Statistical Office

 ECONOMIC OUTLOOK
2011
DOMESTIC ECONOMY
 Due to simultaneous impacts from both
Figure : Consumer Price Inflation (CPI) Movement, 2007-2011 supply-side (cost-push) and demand-side
(demand-pull) factors, including:
CPI Inflation, Vietnam; 2007-2011
 Increased import prices due to the
influence of global price factors.
 Government adjustments raising prices of
some essential goods, leading to spillover
effects causing price increases in other
commodities and fostering inflation
expectations.
 Delayed effects of fiscal and monetary
policies loosened in 2009-2010.
 Heightened inflation expectations.
Source: SBV
 ECONOMIC OUTLOOK
DOMESTIC ECONOMY 2011
Figure : Consumer Price Inflation (CPI) Movement, 2007-2011

CPI Inflation, Vietnam; 2007-2011

 However, the inflation trend slowed

down from May 2011 due to the
easing pressure from global price
reductions and the effectiveness of
tighter macroeconomic policies.

Source: SBV
 Impact of Inflation on the policies of SBV
2011
DOMESTIC ECONOMY
 Monetary policy was carefully managed to
Deposit and Lending Interest Rates in 2011 control the credit growth rate to below
20%, while reducing the proportion of non-
productive credit to below 16% by the end
of 2011.
=>
• Affecting all real estate businesses because
in the short term, they cannot reduce their
debt ratios
• Numerous ongoing projects were stalled
due to capital shortages.
 Banking system entered a race to pull down
the proportion of non-productive loans to the
required threshold, pushing interest rates
higher.
 The SBV had to impose a ceiling on deposit
interest rates.
Source: SBV
 Impact of Inflation on the Stock Market in 2011

 Experienced a decline with negative

growth in stock prices and trading
value, leading to a contraction in
market size.

S&P  Due to adverse impacts from the

global stock market's downward
trend, coupled with capital inflows
500 into the stock market being affected
by tightened macroeconomic policies.
index
. => Downturn in the stock market

2007- VN-Index

VN-Index Movement during the 2011

2008
Vietnam
Investor’s
behaviors
in 2011
CONCLUSIO
N
 2008-2011
 Policy interest rates
experienced significant
fluctuations due to Vietnam's
economy being impacted by
the global economic crisis
=> caused instability in
commercial interest rates.
 The high policy uncertainty
increased risks, leading to
erratic movements in the
stock market.
 However, the VN-Index still
recorded strong growth
during periods when the
State Bank of Vietnam
continuously reduced policy
interest rates, and conversely,
the market experienced
sharp declines when policy
interest rates increased
 Figure. The relationship between inflation, monetary policy, and the stock market.

 Historical data indicates that when
inflation is under control, the upward
cycles of Vietnam's stock market
typically coincide with loose monetary
policies.
 Conversely, when inflation shows signs of
overheating, the trend of increasing policy interest
rates accompanied by continuous liquidity tightening
actions from the SBV will lead to a sharp rise in
commercial interest rates.

 Low interest rates primarily drive funds  The attractiveness of higher interest rates encourages
to shift towards alternative investments, fund outflows from investments in the stock market,
notably the stock market. causing market declines.