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Reforms needed to unleash potential of capital market


HÀ NỘI — Although progress has been realised by Việt Nam in recent years, the country is still unable to finance all the needs of its hungry productive sector, including private firms and SOEs.

According to Taking Stock, the World Bank (WB)’s economic report on Việt Nam which was released on Tuesday, many firms operating in the domestic market face severe obstacles preventing expansion, with the most pertinent being access to credit.

“Addressing the financing constraint of firms should receive the greatest attention from policy makers if Việt Nam wants to continue on its trajectory of rapid and inclusive growth and reach high-income status in the coming decades,” said Ousmane Dione, WB Country Director for Việt Nam.

Việt Nam’s success over the past twenty years has been financed by a substantial increase in banking activities, as the ratio of credit to GDP jumped from 17 per cent in 1996 to more than 130 per cent in 2018, according to Jacques Morisset, WB’s Lead Economist and Programme Leader for Việt Nam, Macroeconomics, Trade and Investment.

While this expansion has allowed the financing of productive activities, sustained long-term financing for many domestic private firms may be constrained moving forward.

At present, the financial market in Việt Nam has a limited range of long-term products due to excessive concentration around the banking sector, as stated in WB’s report.

Other instruments (bonds and equities) accounted for approximately 40 per cent of total finance activities at the end of 2018, which reflects a rapid increase over the past few years, but still far from the amount reported in more advanced countries, not only globally but also regionally.

In Thailand, the Philippines and Indonesia, the size of the local bond market and of the market capitalisation of listed companies far exceeds the value of domestic credit provided by the banking sector.

In Việt Nam, bonds issued by the government represent close to half of the bond and equity markets, leaving a smaller share to private instruments.

The provision of long-term credit by banks to businesses has been held back by the short-term nature of their deposits (more than 80 per cent are one year or less), and by relatively high transaction costs due to the lack of information, lack of sufficient collateral, and a weak insolvency regime. This limits the extent to which the real sector can transact trade, insure, and manage risks and save or invest in the long term.

The report advocates for the development of well-functioning capital markets as a foundation for Việt Nam’s future prosperity.

As experienced by many countries in the world, including in East Asia, well-functioning debt and equity markets can help finance the domestic productive sector and complement lending from the banking system and diversify sources of financing. They also contribute to the resilience of the financial system as a whole by ensuring deeper liquidity and diversifying risks.

While capital markets have expanded rapidly in Việt Nam over the past few years, they remain 1.5 to 2 times smaller than in Thailand and Malaysia respectively, and are largely dominated by a few big players, including the government.

The report suggests five areas policy makers should focus on to advance the development of the capital markets: modernising the legal and regulatory foundation, improving governance and information disclosure, broadening the investor base, developing innovative products and strengthening the government’s role in development of long-term finance.

Growth momentum

According to WB’s report, Việt Nam’s economy has performed well in 2019, with GDP expanding by an estimated 6.8 per cent, public debt reduced by almost 8 percentage points of GDP since 2016, and a trade balance surplus for the fourth year in a row.

GDP growth has continued to be driven by a strong external sector with exports increasing by about 8 per cent in 2019, nearly four times faster than the world average.

The country has also remained an attractive destination for foreign investors, with foreign direct investment (FDI) inflows averaging US$3 billion per month.

Private consumption has emerged as an important contributor to GDP growth as the result of an expanding middle-income class and rising wages. Private firms also increased investment by 17 per cent during the same period.

Prospects for the short to medium term are goods as the WB forecasts a GDP growth of around 6.5 per cent over the next few years. Việt Nam’s economic fundamentals appear robust, and the government has built some fiscal space through its prudent fiscal policy.

However, Việt Nam is not completely immune to external shocks as demonstrated by the gradual decline in export growth from 21 per cent to 8 per cent between 2017 and 2019. This decline has been even more pronounced in non-US markets, up by only 3.6 per cent during the first 11 months of 2019.

Greenfield FDI has also slowed by about 30 per cent over the past two years, even if it has been compensated by an increase in mergers and acquisitions.

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