WB: Viet Nam gradually improves regulatory framework for developing corporate bond market

Senior Financial Sector Specialist of World Bank (WB) Ketut Ariadi Kusuma made that above statement during an interview with the VGP on the development prospects of the corporate bond market in Viet Nam.

Regarding he importance of corporate bond market for Viet Nam, Ketut Ariadi Kusuma said: From a macro perspective, the development of the corporate bond market will provide a diversification of funding for development. In the past, Viet Nam has relied heavily on its banking system in channeling both short-term and long-term financing to fund its economic growth.

However, as the majority of banks’ funding is short term, a heavy reliance on the banking sector to provide long-term financing poses significant maturity and liquidity risks to the banking system.

In addition, the constraint imposed on public debt requires a significant shift in financing economic development from government funding to capital market and private sector funding.

Enterprises, either private or state-owned, would need alternative funding beyond the banking sector which is facing constraints relating to single-borrower limit for important infrastructure sectors such as the energy.

Even the banking sector will need capital market funding for its recapitalization and to increase average maturity of its total funding.

The corporate bond market also provides alternative investment for investors. The emergence of sophisticated investors in a more developed economy with growing middle class will need a variety of investment avenues with different risk and return profiles.

Long-term institutional investors, such as investment funds, life-insurance companies and pension funds (public and private) will also need to diversify their portfolio beyond traditional holdings of government bonds.

From these perspectives, corporate bonds offer a different investment profile from bank deposits, stocks, real estate investment, and others.

A well-developed corporate bond market, with sufficient liquidity and market transparency, would be useful to attract more investment which in turn can be used to finance development not only in the corporate sector but also in public infrastructure through PPP modalities.

Enabling regulatory framework for development of corporate bond market

Ketut Ariadi Kusuma said appreciation should be given to the Government of Viet Nam for gradually improving the enabling regulatory framework for developing the corporate bond market.

As a result, the market has grown rapidly in the past several years (compounding growth rate of over 40 percent per annum in terms of the amount of bonds issued in the past five years).

This reflects a genuine demand for this market both from enterprises that need financing and from investors who need investment opportunities. However, the market is still at an early stage of development.

Ketut Ariadi Kusuma however said certain gaps in the regulations and their implementation remain, although the Government has spent great efforts to address them through new regulations.

One of the major gaps in the Viet Nam corporate bond market is an ineffective distinction between public market and private placement market. The public market is where bonds are eligible to be sold to all types of investors, including retail/individual investors.

To protect the interest of the public, bonds issued in this market need to have a high standard of disclosure and they need to be approved by a government authority, in this case the State Securities Commission.

In contrast, the private placement market is where bonds are sold to only professional investors who have sufficient financial and technical capability to analyze information and make investment decisions.

While the law and regulations clearly differentiate these two markets, the barriers separating these markets are not tight. Participants in the private placement market find ways to sell private placement bonds to individual investors who may not be truly sophisticated investors but appear ‘professional’ if they have the paperwork.

When this happens, individual investors could be exposed to products that are not suitable for them. Bad players could also use this opportunity to take advantage of investors’ ignorance and motivation for higher returns despite greater exposure to risks.

As the market is growing fast, there is a risk that a failure in the corporate bond market may become a systemic risk. There is a strong linkage between the deposit market and the corporate bond market, as the investors are largely similar if barriers separating these markets are not tight.

There is also a strong linkage between the corporate bond market and the stock market, as they use the same market infrastructure. Therefore, there is a need to strengthen regulations not only for the corporate bond market, but also for the banking and stock markets. 

In a bid to well manage and advance the development of the corporate bond market, Ketut Ariadi Kusuma stated that improving the rules for private placement is important to avoid inappropriate risk undertaking by investors.

The definition and implementation of professional investors should be tightened. The law should provide core principles and standards of investor professionalism or sophistication.

The implementing regulations should also be adaptable to market conditions. The authorities may consider a higher minimum investment in the private placement corporate bond market, to screen out small investors who are unable to tolerate losses, conduct thorough risk analysis, or obtain professional advice.

Care should be taken to not excessively constraint enterprises to access the market. All enterprises, big or small, public and non-public, should be able to access the corporate bond market as long as they have good intention.

Meanwhile, retail/individual investors can access directly corporate bonds that are publicly offered. Here, the authorities should streamline the approval process for issuance and listing of corporate bonds.

This would make the public market a more attractive avenue for enterprises to issue bonds. Retail investors should not buy corporate bonds in the private placement market.

Supervision of the market should be strengthened. The supervision should not be limited to the enterprises which issue bonds, but more importantly the supervision towards market intermediaries who are advising, selling or distributing the bonds to individual investors should be intensified.

As licensed entities, their conduct should be closely supervised. They should take into consideration not only the qualification of the investors, but also the suitability of the investment for these investors.

A strong enforcement should be applied against misconducts by enterprises issuing securities, the investors, and intermediaries.

Development of institutional investors, such as investment funds and private pension funds, is important in channeling retail/individual savings into a pool of funds which in turn can be invested in corporate bonds.

The development of these industries will increase overall professionalism in the market and increase the standard of market practices.

The presence of high-quality credit rating services would also help increase transparency and market quality in general. While it would not eliminate misconducts completely, it could reduce the number and severity of such cases.