Corporate bond market has ample room for improvement

September 14, 2022 - 08:30

However, fast growth normally goes with high risks. After some scandals, the Government had to take tough action to keep the market in order.

Lê Việt Dũng

HÀ NỘI — The corporate bond market still has ample room for improvement, according to Nguyễn Tú Anh, Director of the General Economic Affairs Department, Communist Party Economic Commission.

Anh was speaking at the conference "Corporate bond market: Trust and responsibility" held by BizLive yesterday.

He said corporate bonds are a flexible capital channel which allows firms to raise proceeds without causing dilution of ownership. Between 2017 and 2021, the market grew at an annual rate of 46 per cent, indicating a huge demand for the financial instrument.

However, fast growth normally goes with high risks. After some scandals, the Government had to take tough action to keep the market in order.

The director underscored two possible solutions to restore trust in the market. The classic solution is to develop strict regulations to keep all risks at bay. This solution is not advisable as it goes against the principle of risk-return trade-off.

The second solution is to develop financial instruments to service investors with various risk appetites. One such instrument could be a credit default swap (CDS), which enables them to hedge against default.

Lê Xuân Nghĩa, a member of the National Financial and Monetary Policy Advisory Council (FMC), estimated total corporate bonds at VNĐ1.4 quadrillion. Meanwhile, the total medium- and long-term loans of the banking system stay at VNĐ5 quadrillion.

He said the corporate bond market grew at an annual rate of over 30 per cent. If the market can keep this pace, it would soar to about VNĐ11.2 quadrillion in the next six years, sufficient to supersede banks' capital.

However, the council member also labelled the market as the "Achilles heel" of Việt Nam's economy as about VNĐ84 trillion of corporate bonds will be due this year and VNĐ140 trillion the next.

He called for the establishment of supervisory institutions and credit-rating agencies to lay the groundwork for the market's development.

Võ Trí Thành, a member of FMC, highlighted the role of corporate bonds in capital raising but admitted that the instrument is never risk-free.

He estimated total corporate bonds at VNĐ1.5 quadrillion, higher than Nghĩa's estimation. Commercial banks are the largest issuers, followed by realty firms and renewable energy firms.

The council member admitted that risks in the market are not investor-specific but systematic. He said individual investors hold about VNĐ300 trillion out of VNĐ1.5 quadrillion worth of corporate bonds.

Vũ Đình Ánh, a financial expert, said firms can issue corporate bonds via public offering or private placement. Publicly-offered bonds are regulated by the Law on Securities whereas privately-placed bonds are by Decree 153.

The expert said the draft amending the decree needs revision since it holds the Ministry of Finance solely responsible for the corporate bond market. The expert believed the responsibility should be shared with the State Bank of Vietnam to regulate commercial banks' involvement in bond issuance.

He also stressed that firms would switch to bank loans should they have collaterals, so the market needs credit rating agencies rather than collateral-related regulations.

"Credit rating agencies are the catalyst for the market's development", he said.    

Vũ Tiến Lộc, Chairman of the Vietnam International Arbitration Centre, admitted that firms are in urgent need of capital for recovery but the capital raised from the securities market accounts for just 26 per cent of the total capital available to the economy.

"Only one đồng comes from the securities market in every four đồng available to the economy. The other three represent bank credits," he said.

The chairman was concerned that a large number of corporate bonds are going to mature in the short-term, posing a high default risk to bond issuers, notably including realty firms. — VNS