The five pillars in capital market development need to focus

24-Dec-2019 Intellasia | Thoi bao Ngan hang | 6:02 AM Print This Post

Perfecting the legal framework for the capital market, improving governance and information disclosure, expanding the network of investors, developing innovative products and strengthening the role of the government were the proposals that had been recommended by the World Bank (WB) experts to develop the capital market in Vietnam.

Banking and capital market were parallel and complementary to each other

Both economic theory and empirical evidence in countries showed that economic growth always went hand in hand with the development of financial markets. This correlation had also been evident during more than two decades in Vietnam when high economic growth had always been accompanied by a sharp increase in credit ratio (from just 17 percent of Gross Domestic Product (GDP) in 1996 to over 130 percent of current GDP). The financial market was growing but still mainly focused on bank credit channels. About other markets and tools, such as bonds, stocks, although the proportion had increased rapidly in recent years, yet were still minimal compared to more developed countries.

Alaweed Altabani, the chief financial officer of WB, said that the development of capital markets became an excellent solution to raise capital for longer and riskier projects through using debt and equity instruments when the supply and long-term credit structure of the banking sector were limited. That limit was mainly due to the short-term nature of the mobilisation source when over 80 percent was from the loan of one year or less, or concessional loans that were no longer available when Vietnam had graduated from the Official Development Assistant (ODA). The pressure and burden of financing the economy, which relied heavily on credit, would thus diminish.

Vietnam currently lacked a long-term financial mobilisation market, said Alaweed Altabani. The capital market in Vietnam had experienced substantial growth in recent years but the capitalisation of the stock and bond markets was still very low compared to many countries in the Asean region.

If there were the right implementation strategies and solutions, the banking sector and capital markets would complement each other. In particular, the banking sector would be more specialised in fixed, standardised, mortgage-based mechanisms to raise capital for more traditional and short-term business and investment activities. The intensive capital markets according to the contract mechanism would be designed following the circumstances and mostly not guaranteed. The ability to share profits (stock market) and transfer assets (liquidity on the secondary market) would make capital markets more attractive for investors accepting risks at a higher level.

The ‘rules of the game’ need to be more concerned because experience showed that transparency and competition were necessary conditions to ensure that the capital market would effectively perform its role of providing long-term financial resources. In particular, the competent authorities should balance between protecting investors and maintaining investors’ confidence in market development orientation, while allowing more flexibility in the process of investment and capital mobilisation, Alaweed Altabani proposed.

The government should be the major bond issuer

In the latest ‘Taking Stock’ report, the World Bank also spent a significant part in assessing the importance of capital market development in Vietnam and proposing pillars for reform. In particular, improving the legal framework was emphasized most by a complete and stable legal system along with sufficient market infrastructure, which was the basis for market participants to feel secure to participate.

Currently, there were regulations, such as the need to prepare capital and confirm before trading, costing market members, limiting liquidity, increasing costs and hindering transactions. If Vietnam wanted to upgrade to become an emerging market in global stock and bond indices, these regulations would need to be abolished.

Besides, improving market mechanisms, corporate governance and assessing credit rating should also be focused. At the same time, developing innovative products to meet the needs of the market should be essential. The World Bank had proposed new tools to raise capital for the real economic sector, such as for infrastructure projects and housing, which could be project bonds, infrastructure investment funds, etc. Investment opportunities, laws and regulations should create conditions, make the issuance procedures more favourable to encourage businesses to release new and appropriate products, creating sufficient depth and breadth of the market.

Expanding investor networks were also an important factor in developing capital markets, thereby helping not only maintain market growth but also increase liquidity and reduce volatility. Solutions could be implemented including expanding the investment mechanism for Social Insurance, the largest investor in the government Bond market recently, creating a favourable environment to attract investment in the capital market of life insurance businesses, continuing to develop regulations to guide and promote the development of private pension funds and mutual funds, improving the issuance programme according to the benchmark and determining the target scale to issue according to the higher criterion to attract the participation of foreign investors.

Finally, the government needs to strengthen in developing long-term financial sources. Besides the role of State management, the government was also a big bond issuer. Experience in emerging markets showed that the government could influence the yield curve of bonds by extending the maturity axis. This approach would encourage businesses to issue by forming reference prices based on yield curves. The government could also influence the liquidity in the market by committing to publishing in anticipation so that potential investors could plan their investments early.

One of the issues that needed further improvement was to develop yield curves by raising the scale of benchmark bonds and reducing the number of tools. Also, it was advisable to encourage the use of hedging tools in the market, such as hedging exchange rates and interest rates. If hedging tools were developed, foreign investors would be increasingly involved.

Authorities should also consider establishing a more reliable short-term reference rate to complete the yield curve from the short-term segment to the long-term segment. That would help improve pricing for floating rate instruments and create a solid anchor for longer-term instruments. Having a reliable short-term interest rate benchmark was also a way to improve the efficiency of the valuation of hedging instruments thereby helping to better market liquidity.

 


Category: Finance, Vietnam

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