Vietnam has outlined a capital market reform roadmap that would see outstanding bonds as a percentage of GDP increase to 60% from around 32% by 2045, but the plan lacks concrete steps.
Last month’s multi-ministry initiative seeks to builds on earlier reforms to debt and equity markets and mobilise capital needed to fund social spending plans that will require approximately US$1.5trn between now and 2030.
Among the measures that relate to the bond market are the increased use of credit ratings, the creation of bond valuation service providers, the promotion of new instruments such as ESG and infrastructure bonds, and the expansion of an institutional investor base. The directive, signed off by the prime minister’s office in late July, does not itself amend the current legal requirements for corporate bond issuance.
“[It] draws a framework of how they envision the financial system in the long term,” said Willie Tanoto, senior APAC financial institutions ratings director at Fitch. “The specifics of how these may be implemented in the near term remain interesting to watch.”
Phan Duy Hung, head of financial institutions at domestic credit rating agency VIS Ratings, explained that mandatory ratings are already in place for public bonds, with the exception of those issued by credit institutions, and for private placement bonds sold to professional retail investors.
However, bonds issued through public offerings currently account for just 3%–5% of total outstanding bonds, according to data from asset manager Dragon Capital.
“Private placements dominate the corporate bond market, accounting for about 90% of total issuance,” concurred Hung, adding that only around 40% of domestic bonds sold in Vietnam require a rating.
The percentage of bonds owned by institutional investors such as insurance companies, pension funds and mutual funds remains low compared to other regional markets because of restrictions on the kind of instruments these investors can buy, Hung said. For example, insurers face restrictions on purchasing corporate bonds where the proceeds are intended for refinancing, while social security funds may only buy government bonds, term deposits and bonds issued by certain banks.
For the social security funds, there is currently no indication the government will remove these restrictions, but in September last year the ministry of finance released a roadmap for the securities investment fund industry that would lift the ban on insurers purchasing bonds for refinancing, Hung said.
Other types of institutional investors such as private pension funds exist but are small in size.
Muted trading
Meanwhile, bond trading in Vietnam remains muted. The creation of bond valuation service providers offering investors buy/sell recommendations and fair value estimates could lead to better price discovery and more secondary market liquidity, Fitch’s Tanoto said.
The document lays out goals for the government to address 60%–65% of its funding needs for 2031–2045 from the bond market, while local governments should address 20% of their funding needs from bonds, reducing the reliance on bank capital.
The current level of around 32% of GDP for outstanding corporate and government bonds is below the official target of 47% for the 2021–2025 period.
“We see the 60% target as more of a long-term vision rather than a specific KPI,” Tanoto said.
Mobilising private capital
Efforts to improve disclosures and the transparency of capital markets are not new. In recent years, Vietnam has sought to enforce tighter bond issuance rules to raise standards in the wake of high-profile scandals.
However, the country is entering a phase of intense social investment for which it will need to mobilise large amounts of private capital.
The government has committed to financing 20% of the approximately US$1.5trn that will be required for social spending between now until 2030; the remaining 80% will need to be drawn from FDI disbursement, bank credit and, in particular, capital markets, said VIS senior analyst Do Le Thanh Dat.
“The government and banking system cannot carry the funding requirement like it has historically – capital markets must step up in this next cycle,” he said.
A draft public-private partnership bond framework that eases restrictions on the issuance of infrastructure bonds, including waiving historical operating and profitability requirements, is expected to come into effect later this year and should pave the way for PPP bonds.
Certain bonds issued for projects under construction will need to be rated or have their principal and coupon payments backed by a credit guarantee agency (such as GuarantCo or the Credit Guarantee and Investment Facility), so these agencies are expected to play a role in the development of project bonds, Dat said.