Reviving the bond market

Concerns are emerging as the corporate bond market is rapidly declining, shrinking by as much as one-third in the past few years, especially as more and more businesses, facing difficulties in issuing bonds, are turning to bank loans. This situation could lead to significant maturity and liquidity risks for the banking system.

Concerns are emerging as the corporate bond market is rapidly declining, shrinking by as much as one-third in the past few years, especially as more and more businesses, facing difficulties in issuing bonds, are turning to bank loans. This situation could lead to significant maturity and liquidity risks for the banking system.

After a period of rapid growth, with an average annual increase of 45% from 2018-2021, the corporate bond market in Vietnam suddenly plummeted from 2022 due to changes in the business environment, legal framework, and some incidents related to violations of issuance regulations. The total outstanding corporate bond debt is currently around 1 trillion VND, equivalent to 10% of GDP, a sharp decrease compared to 15% of GDP in 2022. This figure is very low compared to other countries in the region such as Malaysia (54% of GDP), Singapore (25%), Thailand (27%), etc.

The rapid decline in the bond market has prompted the National Assembly's Economic Committee, in its recent socio-economic review report, to express a series of concerns. In fact, the market is concerning not only because of the decrease in issuance volume, but also due to a number of other factors.

Firstly, the issuance structure is unbalanced, with private placements accounting for nearly 90% and public offerings accounting for just over 10%. This figure indicates a problem with market transparency. Furthermore, the small volume of publicly issued bonds limits businesses' access to capital from public investors.

Secondly, the bond market is gradually becoming a "playground" for financial institutions, instead of becoming the official fundraising channel for businesses.

Specifically, in September 2024, over 80% of the bonds issued were from banks, with a small percentage from real estate and service businesses, and virtually no manufacturing businesses participated in bond issuance.

Thirdly, the short maturity periods of bonds (mostly under 5 years) create significant maturity pressure on businesses and are not suitable for the long-term capital needs of infrastructure and economic development projects.

Fourth, the bond market still lacks transparency, with investors acting like "blind pedestrians." Most privately placed bonds on the market are not credit-rated, and although the State Securities Commission requires businesses to disclose information, the level and quality of information provided remain rudimentary.

Fifth, the bond market lacks risk measurement tools to assess the likelihood of bond defaults, making it unattractive to investors—especially foreign investors.

Most worryingly, the volume of newly issued bonds has halved compared to its peak and is far less than the medium- and long-term capital needs of businesses. This situation is putting pressure back on the banking system. Currently, banks mainly raise short-term capital, but must serve high medium- and long-term capital needs, leading to constant maturity risk and liquidity risk.

Vietnam's credit-to-GDP ratio is among the highest in the world , a figure that has been repeatedly warned against by the International Monetary Fund (IMF) and the World Bank (WB). However, the decline in the bond market has made businesses increasingly dependent on credit. Consequently, this ratio has not only failed to decrease but has tended to increase in recent years.

While Vietnam's credit-to-GDP ratio was 123% in 2021, it rose to nearly 125% by the end of 2022, and reached 132.7% by the end of 2023. Moody's, a leading global credit risk assessment organization, believes this ratio poses a potential risk of instability to Vietnam's macroeconomic situation.

Recently, the Ministry of Finance has implemented numerous measures to tighten the bond market, issuing a series of stricter regulations. However, the regulators have yet to find effective solutions to revive the bond market. In the draft law amending seven laws submitted to the National Assembly this session, the Ministry of Finance (the drafting agency) intends to exclude individual investors from the private bond market to avoid risks. This is a controversial issue, as it will further degrade bond market liquidity, especially since there are no truly effective mechanisms or policies to attract institutional investors.

Clearly, the decline in the corporate bond market poses a significant challenge to meeting the economy's medium- and long-term capital needs, especially given the economy's substantial capital demands for infrastructure development, real estate, other manufacturing sectors, and support for the green energy transition.

In this context, finding solutions to restore investor confidence and help the bond market recover and develop sustainably is extremely urgent. This requires a coordinated effort from regulatory agencies, financial institutions, and the bond-issuing companies themselves.

Source: https://baodautu.vn/vuc-day-thi-truong-trai-phieu-d228248.html