The Vietnamese corporate bond market lacks a reliable and reputable rating agency

22-Oct-2020 Intellasia | Dau tu Chung khoan | 6:02 AM Print This Post

Asian Development Bank (ADB) had just published the report ‘The Potential for Foreign Investment in a Domestic Credit rating Agency in Vietnam’ to evaluate the Vietnamese bond market’s attractiveness from a global credit rating agency.

According to the report, Vietnam was the sixth-largest economy of the Association of Southeast Asian Nations (Asean) and its fastest-growing economy. The trade war between the United States (the US) and the People’s Republic of China (China) over the past 18 months had prompted a shift in production from China to Vietnam.

Compared to other Asian countries, Vietnam suffered the least from the corona virus epidemics. Although a slowdown in short-term economic growth was expected in 2020, the Vietnamese economy might return to the growth trajectory in 2021 and maintain its position as the region’s fastest-growing economy.

Vietnam’s corporate bond market had multiplied since 2017, the report said. In 2019, the number of issues was $12.8 billion, larger than the figure of Indonesia and the Philippines. Bonds issued privately accounted for 94 percent of total corporate bonds issued in 2018 and 2019, after loosening regulations on information disclosure and issuance conditions.

However, the lack of a credit rating culture posed significant risks to the bond market and the financial sector, mostly as individual investors currently owned nearly a quarter of the total issued bonds, the report emphasized.

The past lack of credit rating needs had always been a limiting factor for domestic credit rating agencies in Vietnam. The two domestic credit rating agencies licensed by the Ministry of Finance (the first in 2017 and the second in March 2020) had not yet been operational.

Meanwhile, the new Law on Securities issued in 2019 required some bonds issued to the public (but not privately issued) to be rated by a domestic credit rating agency to take effect as of January 2021.

Furthermore, the draft regulations guiding the implementation of the new Law on Securities required very little, if not, issued bonds must be ranked. This differed from other Asean markets where credit rating was required for bonds issued to the public and often by private placement throughout the years of bond formation.

According to ADB, Vietnam’s policymakers were eager to see the orderly growth of a healthy bond market and had expressed a strong commitment to domestic rating agencies.

The corporate bond market growth since 2017 had been sustainable, and the business landscape for a global rating firm to enter the Vietnamese market through a technical services agreement was very attractive. An engineering services agreement provided the market entry with low risk.

Vietnam’s market entrants would like to see local institutions collaborate with a global rating company, the report said. This would lead to an ideal blend of global good practice with a local understanding of culture, business and practice.

Furthermore, technical cooperation between a global rating agency and a domestic rating agency would improve the domestic rating agency’s reputation (through the rigorous analytical rating firm’s reputation and regulatory processes), leading to broader market acceptance and greater use of local ratings by companies.

The more bonds that were ranked, whether through changes in culture or rating regulations, the clearer the business landscape would be for an international rating firm to go beyond the engineering agreement and equity investment in an already established domestic credit rating company or a new unit, the report emphasized.

 

Category: Finance, Vietnam

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