Developers should lower real estate prices to pay bond debts: economist

Maturity pressure will remain a major obstacle for the Vietnamese corporate bond market in 2024, forcing businesses to sell or swap assets, writes economist Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council.

In 2023 to December 25, 79 enterprises issued VND245.9 trillion ($10 billion) of private placement corporate bonds in 2023, a year-on-year decrease of 35.6%, according to the Ministry of Finance,

Decree 08/2023/ND-CP amending, supplementing and ceasing the enforcement of a number of articles in Decree 65 on the offering and trading of private placement corporate bonds in the domestic market and offering of corporate bonds in the international market, effective from March 5, 2023, has shown certain effectiveness.

Corporate bond issuance activities have increased again, especially in the third quarter of 2023 with the participation of not only large banks and real estate businesses but also a number of new companies, both medium and small. The trend is forecast to continue this year thanks to the following advantages.

Firstly, the economy continues to recover, with businesses’ markets expanding, both in Vietnam and Europe. The number of orders is gradually increasing. This trend started to become clearer from the second half of 2023.

Secondly, deposit interest rates are at a very low level, which is an opportunity for corporate bond issuers to offer attractive interest rates, maybe 8-9% per year.

Thirdly, the exchange rate is expected to remain stable because the U.S. dollar is depreciating and U.S. government bond yields are on the decline.

Fourthly, the three main domestic investment channels are all showing more positive signs. Of which, the public investment channel is growing year-on-year. Registered foreign direct investment (FDI) in Vietnam reached $36.6 billion in 2023 through December 20, up 32.1% year-on-year, the highest ever growth, according to the Ministry of Planning and Investment. This gives rise to expectations that FDI disbursement in 2024 will return to normal levels, with an increase of 6-7%.

In addition, the domestic business investment channel is at a fairly low level, but accelerating public investment disbursement, increasing FDI, falling lending interest rates, and the recovery of economies such as China and India will help private investment in the domestic sector increase again. This will have a positive impact on both bank credit and corporate bond issuance activities.

For the corporate bond channel in 2024, we are expecting the recovery of the real estate market as it now remains the channel with the strongest capital absorption. This year, the low-cost and affordable housing segment that has long faced legal problems may become the focus. As the revised Land Law was passed in January, legal problems to this segment will be resolved. When regulations are clearer, banks will no longer be hesitant to grant credit to both project developers and customers.

The low-cost housing segment will become a breakthrough, not only expanding market liquidity but also creating new price levels for real estate serving residential needs, instead of speculation. This will also create new opportunities for real estate businesses to issue bonds more easily, thus increasing their debt repayment ability.

However, for the corporate bond market to truly recover, properties need to be brought to their true value. There will be about VND240-250 trillion ($10.23 billion) of bonds due in 2024, so business owners should sell off their assets and lower real estate prices to pay outstanding debts to bondholders. Businesses themselves need to be deeply aware that they must proactively save themselves and cannot rely on state policies.

No delay to credit ratings

Decree 08/2023 has a provision on suspending the implementation of regulations on credit ratings for issuers of private placement bonds until December 31, 2023. Therefore, from January 1, 2024, the regulations require "mandatory credit rating of bond issuers with the total value of bonds at par value mobilized in each 12 months greater than VND500 billion ($20.5 million) and 50% of the equity based on the latest financial statement or the total bond outstanding balance at par value as of the time of registration for bonds offering greater than 100% of the equity based on the latest financial statement".

When Decree 08/2023 was issued, a delay to credit ratings was considered appropriate, helping reduce pressure on bond issuance activities. However, now, the requirement for credit ratings of bond issuers is urgent. In the past 1-2 months, the number of businesses registering for credit ratings has increased sharply. This is an important regulation towards a transparent and sustainable bond market, helping to restructure the market in the direction of increasing public offerings instead of mostly private placements as in previous years.

Getting a high rating is also an advantage, helping good businesses access bank loans without collateral, mobilize capital from the capital market, and increase the ability to issue bonds. Credit ratings must be considered a norm for bond issuance.

"Green bond" paradox

Green bonds are an important capital mobilization tool in the sustainable development orientation of countries around the world. The green bond market is forecast to continue to grow strongly, becoming an effective capital mobilization channel for projects in the fields of environmental protection, climate change adaptation and green production and energy transition. However, the term “green bond” is still very new to the Vietnamese financial market.

Studies show that green bonds have lower liquidity risks and green bond issuance has positive spillover effects on socio-economic development. Developing the green credit and green bond market is also a major policy for the Vietnamese government towards the goal of net zero emissions by 2050. However, developing this market faces many difficulties. Technically, the government has assigned the Ministry of Natural Resources and Environment to develop a set of criteria for green projects, but up to now it has not been issued. As a result, financial institutions have no legal basis to promote green credit as well as green bonds.

In addition, the problems facing renewable energy power projects in recent years have left a large amount of capital from outstanding bonds and bank credit at risk of becoming bad debt. This makes green credit and green bonds even more difficult to mobilize capital. Furthermore, there are currently not many types of green project consultancy, credit rating and certification services in Vietnam, leading to high costs and reducing businesses' motivation for bond issuance.