The Vietnam Economic Report 2020 released by the Central Economic Commission in January has once again pointed out the necessity of having more independent credit rating agencies in Vietnam if the corporate bond market wants to attract more investors and develop sustainably in the future.
This idea is not new and has been raised many times by domestic and foreign experts in the context that Vietnam has not had any regulations on mandatory credit rating with businesses that issue bonds. Currently in Vietnam, the pioneer and almost the only company in this field is Vietnam Creditrating JSC (VietnamCredit), which has provided company credit rating reports of domestic and foreign businesses since the 90s of the 20th century.
According to the former CEO of a foreign bank in Vietnam, Vietnamese businesses that want to issue bonds internationally will most likely need the assistance of international credit rating agencies such as Moody's, Fitch, or S&P with very high cost which only large-scale corporate bonds issuers can afford. This is a barrier for smaller businesses to expand into the international market. The establishment of more Vietnamese credit rating companies is a must for a well-developed Vietnamese bond market.
Because it is not compulsory, information on corporate bond issuers are only showed on the website of the issuing enterprise and on the information platform of Stock Exchanges. The amount of information available to investors is limited, which makes it hard for them to assess the level of risk before making any investment decisions.
Thus, company credit rating is not only important to investors but also to businesses themselves because it creates more favorable conditions for them to raise capital and have better understanding of other businesses within the industry.
The Prime Minister has approved the Development Plan of credit rating services until 2020 and vision to 2030. Accordingly, by 2030, it is expected to issue business eligibility certificates for up to 5 enterprises, and in 2020, all corporate bond issuers must be given credit ratings.
The Central Economic Commission estimated that the successful issuance of corporate bonds in 2019 reached about VND 270 trillion, an increase of 9.9% compared to the end of 2018, making the market size to reach nearly 11% of GDP, higher than 8.6% in 2018 and surpassing the target of 7% of GDP by 2020 set by the government in the Bond Market Development Roadmap for the period of 2017-2020, with a vision to 2030.
However, this figure is still quite modest when compared with other countries in the region such as Thailand, Singapore and Malaysia where the market size of corporate bonds reached 22.36%, 34.01% and 50.25% of GDP respectively. In addition, most corporate bond issuers mainly issued on a piece-by-piece basis. The proportion of bond issuance to the public tended to increase in the last 2 years but still very small, only about 6% in 2018.
Regarding investor structure, domestic investors accounted for the largest proportion, more than 90% of the total volume of corporate bonds issued in 2019. If including the primary market, domestic investors still accounted for a large proportion, about 95%. The rest are individual investors. Notably, the primary buying volume of foreign investors in the first 11 months of 2019 accounted for only about 7% of the issuance volume, equivalent to about VND 14 trillion.
According to the data of Vietnam Bond Market Association (VBMA), in 2019, the number of registration sessions of corporate bonds reached 1,242 with a total value of over VND 440 trillion. In particular, the number of issues reached over 900 with a total value of nearly VND 297 trillion.
Particularly in December, the number of businesses issuing bonds increased sharply, reaching 58 businesses (out of 217 issuers for 2019). The banking sector accounted for a very large proportion in the issuance of corporate bonds in December, accounting for 40.41%, followed by real estate with 12.38% and businesses in other sectors.
The structure of corporate bond market investors, according to the report of the Central Economic Commission, is not diversified. The market lacks long-term investors with strong financial resources while banks and securities companies continue to be the main investors. Data from the Ministry of Finance shows that in the first half of 2019, commercial banks bought about 12% of the issued bonds while securities companies bought about 53%.
Although the recent period has seen an increase of individual investors, accounting for about 6.1%, these investors are mainly attracted by high interest rate bonds which are accompanied by great risks as there is nothing helpful to analyze and assess risks. The biggest risk for individual investors when participating in the corporate bond market is the inadequate access to information on corporate bonds issuers as well as their credit ratings given by independent credit rating agency.
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