The world’s eyes have been firmly fixed on the geopolitics playing out in the capital Hanoi this week. But for the Vietnamese government, the main aim of hosting US president Donald Trump and his North Korean counterpart, Kim Jong Un, has been to underline how much progress the Vietnamese economy is making.
A country that was once dominated by state-owned enterprises is now increasingly propelled by the private sector. And an economy fuelled by bank credit is slowing developing mechanisms to allocate capital more efficiently.
One of the government’s key priorities has been to create a thriving bond market: reducing the risks associated with banking-centric finance by giving companies alternative channels to raise funds.
The government has been reducing the ratio of short-term deposits that banks can use to finance medium- to long-term lending. In 2018, the maximum ratio was 45%; this year it is 40%.
It has also reined in credit growth to prevent another resurgence of non-performing loans on bank balance sheets. It reduced its 17% target at the beginning of 2018 to 14% by the end of the year. This year it is keeping the target in the low to mid-teens.
FinanceAsia recently caught up with Nguyen Hoang Duong, deputy director general of the banking and financial institutions department at the Ministry of Finance. Nguyen had just returned from an Association of Southeast Asian Nations (Asean) workshop in Bangkok on Innovative Financing Approaches for Sustainable Infrastructure.
In the following interview, he explains what the government is doing to promote bond market development in Vietnam.
Highlights include encouraging international capital inflows through global bond index inclusion and drawing a clear line between private placements and public offerings in the corporate bond market by steering issuers and investors towards the latter format.
Q. You have a roadmap to develop the domestic bond market. Are you hitting your targets?
A. Yes, in fact, our draft figures show that the corporate bond market has beaten our 2020 target of 7% of GDP. At the end of 2018, preliminary figures show that it stood at 8.57%.
By 2030, we want to build the corporate bond market up to 20% of GDP and government bonds to 45% of GDP, up from 38% in 2020.
We launched the roadmap in 2017 and each year we examine the previous year’s outcomes to make sure we continue to progress in the right direction. We plan to do a major review of the roadmap in 2020.
What are the key priorities for this year?
Our overall endpoint is all about creating a bigger, better quality and more stable bond market by broadening the investor base and putting in a comprehensive market structure based on best international practices.
To that end, we plan to prioritise the corporate bond market this year. We want to support companies to mobilise funds and reduce the burden on the banking sector.
We’ve also been doing a lot of work to strengthen the government bond market by building a primary dealer system, again based on international best practice and improving secondary market liquidity.
A lot of the details concerning these developments were contained in Decree 163, which you issued in December. Can you highlight the key changes?
It’s all about making it easier for companies to issue bonds and to widen access. As such, Vietnamese companies no longer need to be profitable for one year if they want to issue a domestic bond or three years to issue an international bond.
Many private placements, however, were previously being sold to retail investors and we want to protect this investor segment. The new decree stipulates that a bond cannot be re-sold to more than 100 non-professional investors for one year after it has priced.
We’re also setting up an information centre under the Hanoi Stock Exchange to increase market transparency. After a private placement is issued, the information will be published by the exchange.
The forthcoming Securities Law is shaping up to be a landmark event for Vietnam’s capital markets. How will it change the domestic bond market?
There are two key things I’d like to highlight from the current draft. One states that companies will need to be rated if they want to execute a public bond deal.
The second clearly defines what thresholds an investor has to meet to classify as a qualified or accredited investor. Investors who meet that threshold will be able to participate in private placements.
All other investors can participate in public bond offerings, which have more disclosure requirements. Once the Securities Law becomes effective, then we’ll need to modify Decree 163 since non-professional investors can currently still participate in the private placement market, although in a more limited way than before.
You mention the need for credit ratings. Brokers say that there is a credit rating agency but it seems to be having a hard time getting operational. Is a lack of credit ratings holding the market back?
That credit rating agency was the result of Decree 88. We issued one license, but the company hasn’t provided any services to the market yet.
We’re now working with a number of international entities to update them on the evolving situation. They previously queried why they needed to be in our market when there wasn’t any demand for their services.
We’re now establishing the demand, so we’re asking them to re-think. There are no restrictions on setting up a credit rating agency here. They simply have to establish a Vietnamese legal entity.
And I agree. We need credit ratings as soon as possible so that investors can differentiate between companies’ credit fundamentals.
Vietnam also needs a deeper domestic institutional investor base. What are you doing to encourage this?
Non-bank institutions such as the Vietnam Social Security Fund (VSSF) and insurance companies are starting to play a more important role.
The VSSF is the biggest player at the moment and it has just reached an agreement in principle to broaden its investment mandate from government bonds.
Insurance companies also invest almost exclusively in government bonds. But if market information becomes more transparent and bonds carry credit ratings, then this sector will feel far more comfortable about investing in corporate bonds as well.
Their investable funds are also getting a lot bigger since insurance fund assets are growing by 20% to 25% per year. That helps to increase long-term demand for government bonds.
A private pension fund industry is starting to develop too. There have been a couple of applications to set up voluntary pension funds.
Finally, the State Securities Commission (SSC) is also trying to encourage institutions to set up other types of investment funds including bond funds to improve financial capacity.
Green finance has become one of the defining themes of global bond market development this decade. Is this something Vietnam plans to prioritise as well?
I was in Bangkok at an Asean forum last week discussing this subject. Vietnam has already recognised the need to issue green bonds and it is covered under Decree 95.
We hope to launch a pilot green bond later this year. We’re currently analysing which green projects to target and we're developing a framework for the scheme.
Decree 163 also lays the groundwork for corporate green bonds. We’re encouraging enterprises to issue green bonds, although we haven’t put any specific incentives in place.
How are you developing the government bond market?
We launched a primary dealer system in January. Market makers are now obliged to quote two-way prices in the secondary market and in return can borrow government bonds.
There’s been no immediate impact on liquidity, as it will take a while for the changes to take effect. In December, average daily trading volumes stood at $150 million against government, government-guaranteed and municipal bond outstandings of $47.38 billion at the end of January.
The next step will be to launch government bond futures. That should happen early this year, and we hope that bond futures will become a good instrument for investors to hedge their risk.
How important are foreign investors in the government bond market?
They do participate and the number is growing. But it’s still only about 1% of overall outstandings.
We’re doing a number of things to encourage greater participation since we want to attract more investment and capital into the country.
In recent years, we’ve worked hard to improve the legal framework, shorten investment procedures, build up secondary market liquidity and reduce the length of time between issuance, settlement and trading. So there’s been a big improvement in market infrastructure and information technology.
We’re now working closely with the World Bank and the Asian Development Bank (ADB) on the next steps. One of these is to create a government bond portal in English. In the meantime, there is some information on the ADB’s AsianBondsOnline website.
The second is to get Vietnamese government bonds incorporated into international indices. We’re working with a consultant on meeting the inclusion criteria.
