Regulatory Agencies must lower Corporate Bond Risk

SGI

All throughout 2019, corporate bonds were in favor when the issuance volume grew sharply, and this trend is expected to continue in 2020 when experts forecast that issuance volume will reach 300,000 to 350,000 billion VND.

Illustrative photo.

Illustrative photo.

In view of this trend, the need for the corporate bond market to develop more robustly is an urgent requirement that must be addressed by regulatory agencies.

Investment shift

According to statistics given by the SSI Securities Joint Stock Company, by the end of November 2019, the total amount of corporate bonds had reached VND 206,680 bn, in both private and public issues. This number did not include individual issues in the first three months of 2019 because it had not been announced in detail, but based on the aggregate data of ten-month cumulative issuance results of the Hanoi Stock Exchange (HNX).

SSI estimates that the number of individual issues in the first three months of 2019 were around VND 30,000 bn. Accordingly, the total amount of corporate bonds actually issued in the first eleven months of 2019 were at VND 237,000 bn, 5.8% higher than in 2018. BIDV Training and Research Institute also stated that by end of November 2019 the corporate bond market was about 10% of GDP, higher by 8.6% than in 2018 and exceeding the Government target of 7% of GDP for 2020.

However, some experts forecast the total volume of corporate bonds issued in 2019 were around VND 245,000 bn. Also, according to statistics given by Dr. Can Van Luc, Chief Economist of BIDV, the amount of corporate bonds issued in 2019 reached at around VND 250,000 bn, up 7% compared to 2018, in which, real estate businesses issued about VND 70,000 bn, accounting for 35-37 % of total bonds issued. With this volume of issuance, corporate bonds had a hot growth rate in 2019, because in the period 2011-2017, the total issuance volume was only VND 405,167 bn, an average of VND 57,900 bn per year.

The development of the corporate bond market is indispensable due to tightening of medium and long-term credit. Credit institutions must ensure the ratio of short-term capital for medium and long-term loans and capital adequacy ratio. Along with that, the conditions for issuance of corporate bonds were loosened under Decree 163/2018, and unpredictable developments in the stock and real estate markets led to the phenomenon of an investment shift. With its rapid growth in scale, diversity and accessibility to smaller investors, corporate bonds created great competition for the stock market in 2019.

This trend may still occur in 2020, reflected in the recent optimistic forecasts by some economic experts. Specifically, the issuance volume this year is forecast to reach about VND 300,000 to 350,000 bn. In particular, the banking group is expected to continue to lead in issuance, to meet the needs of medium and long-term capital and balance capital to meet Basel II standards, which are the requirements of Circular 22 issued by the State.

Positive and negative aspects

According to Dr. Truong Van Phuoc, former Chairman of the National Financial Supervisory Commission, the development in corporate bonds is indispensable in Vietnam, especially when the credit ratio is over 130%. In fact, if the State Bank drops credit to 20%, credit institutions can still lend but face risk, thereby creating credit growth. When there is no large credit limit to meet capital demand, it forces businesses to issue corporate bonds, gradually reducing bank credit. However, it should be clarified who will suffer if investors buying corporate bonds lose money, as well as the credit rating of businesses for investors when deciding to invest.

Currently, some credit institutions buy corporate bonds as an essential business need to diversify investment, but need to strictly control and avoid debt reversal and balance the financial market, which is too dependent on banks.
Leaders of a number of securities companies are underwriting the issuance of corporate bonds, indicating that individual investors are increasingly interested in corporate bonds because of high interest rates and flexible trading. In order to participate, they need information on the financial situation of issuing businesses, the purpose of bond capital mobilization, the prestige of businesses, the risks associated with bonds, and the risks incurred by issuers. However, these issues have not yet been met, because Vietnam has no credit rating organizations, and the corporate bond market is not well organized.

Because of a lack of these factors, the recent corporate bond market has grown too fast, having both positive and negative aspects. On the positive side, it provides a channel for capital for many businesses, but on the negative side, it brings interest rate competition, with many businesses issuing bonds with interest rates upto 14% per year or even 20% per year.

From the above situation it can be concluded that the orientation and management of the corporate bond market is still healthy. Dr. Can Van Luc proposed that three things need to be done in the near future. (1) Institutional improvement, especially revising Decree 163 on issuance of corporate bonds to make amendments in the direction of creating favorable conditions, but also minimizing risks. (2) A contact point is required for management and supervision for which the Securities Commission should be delegated. (3) Strictly control corporate bond interest rates, not allowing issuing corporate bonds with high interest rates that can disrupt the market and put investors at risk.

Translated by Kristine Bell

Yen Lam

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