Vietnam’s emerging corporate bond market needs urgent stimulus to address underdevelopment and distortion.
The Vietnamese financial market is dominated by bank credit supply. Credit expansions in recent years, despite tight regulatory control, have been twice to thrice, or even four to six times higher than the country’ economic growth. Most enterprises entirely rely on bank capital, while little attention is paid to other sources, which go with more risks.
Relatively high medium and long-term interest rates have pushed corporate bond coupon rates to very high levels, close to the average capital profit. Therefore, businesses that use corporate bonds in capital mobilization have not secured what they expect.
In addition, the term of corporate bonds is mainly three years. This discourages investment from manufacturing companies. Therefore, corporate bonds are often focused on speculative sectors like real estate (accounting for 46% of total corporate bonds issued) or on increasing tier-2 equity in the banking system (30% of corporate bonds issued). Among these, a large amount of corporate bonds has been used for debt reversal, capital contributions, or mergers and acquisitions.
Thus, the number of corporate bonds directly serving production like manufacturing, processing, agriculture, high-tech, commerce, and start-ups is very small. This largely explains why Vietnam’s corporate bond market remains distorted and sluggish.
The State Bank’s Circular 16/2021/TT-NHNN aims to control the use of proceeds from corporate bonds and directs the issuance of bonds to raise capital for projects in production like manufacturing, high technology, agriculture and commerce. This control and monitoring of the use of proceeds from corporate bonds is a step in the right direction.
Therefore, the key to develop a healthy market is to solve problems from issuance, including:
- Transparency of financial information and using issuer proceeds.
- To rate corporate credibility independently and objectively, so that investors could choose corporate bonds in accordance with the risk structure and term of coupon rates.
- Coupon rates must be reasonably based on market principles, not for speculation.
- Terms must be long enough to boost investment and profitability among manufacturing businesses.
- The collateral and guarantee mechanism for corporate bonds must be transparent and be supervised by regulators.
- Another reason behind the market’s underdevelopment are imperfect market rules and regulations. There are not enough rules ensuring safety and transparency, with supervision lacking and inconsistent.
In addition, the corporate bond market still lacks financial institutions that support it like guarantors, auditors and evaluators, while credit ratings agencies are not trustful enough to promote market development.
In 2022, the market will continue experiencing difficult development conditions in terms of corporate bond quality, issuer credibility, investor reliability, and regulator supervision and management. Growth, therefore, is still low despite the economy’s high demand for medium and long-term capital.
However, if the State Bank of Vietnam has stricter control over medium and long-term credit and the legal system is more complete, it is likely the market would see new developments in 2023 or later.
In turn, in order to reduce coupon rates in the market, bank interest rates, specifically medium and long-term, must decrease. Bond terms must be extended to 5-10 years so companies in production, manufacturing, agriculture, and construction could make use of bonds effectively over a suitable period.
These problems cannot be solved overnight, obviously under the country’s current circumstances. And this is also the reason why domestic enterprises rely greatly on bank credit supply. This shows the corporate bond market needs a “push” to take off.
Towards that goal, the Ministry of Finance and State Bank need to be bolder and more drastic in applying regulations on cutting the ratio of using short-term capital for medium and long-term loans as written into the already set roadmap.
They should not delay reducing the ratio of short-term capital used for medium- and long-term loans to 37%, followed by 34% and 30% to gradually draw closer to international practices and reduce risks for the banking system.
*Dr. Le Xuan Nghia is Director of Institute of Business Research and Development.