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Corporate bond regulation: taking responsibility and building confidence

At a recent seminar on the corporate bond market, participants heard surprising statements made by members of the National Financial and Monetary Policy Advisory Council.
Dr Le Xuan Nghia

Dr Le Xuan Nghia said: “If the bond market collapses and default occurs, this will be our fatal acupuncture point."

Dr Truong Van Phuoc went further when saying: “We have to erase (the corporate bond market) and redo."

The statements gave a start to Dr Vo Tri Thanh, who presided over the seminar. He said there was no need to "erase and redo" the Vietnamese bond market.

The theee experts' views are influential on financial and monetary policies. They all have supported the development of the corporate bond market through earlier statements or recommendations.

Corporate bond market is important

Nghia explained his statement about the "danger spot": as many as VND84 trillion worth of bonds will  mature by the end of the year and another VND140 trillion the next year.

The payment of bonds has been a challenge after the corporate bond market shrank significantly in the first eight months of the year, following the arrests of owners of several enterprises, who were accused of committing fraud in issuing and using corporate bonds earlier this year.

Meanwhile, the real estate market has been affected by credit tightening and  financial and land management policies. At the National Assembly’s forum, many deputies criticized the mass issuance of bonds and asked to tighten the market. 

Nghia said: “There is a view that corporate bond issuance is like the gambling of issuers, and that in many cases, investors suffer from the violations and fraud committed by issuers."

According to Nghia, the bond market is now valued at VND1.5 quadrillion and if it can develop in a healthy way, it will shoulder medium- and long-term capital, about VND5 quadrillion, of commercial banks.

“The corporate bond market is still an extremely important market,” he concluded.

Meanwhile, Phuoc said in order to develop a healthy and progressive capital market, Vietnam needs to have an independent institution which has the functions of organizing, inspecting, supervising and taking responsibility for the movement of the financial and capital markets. 

He seemed to imply that the National Financial Supervisory Council, where he was a leader, had not undertaken its role in the market.

Developing a corporate bond market is a good policy to ease enterprises’ reliance on commercial banks as the only capital mobilization channel. 

However, with the explosive growth rate of 56 percent in 2021 in corporate bonds, when the economy stalled because of the lockdown due to Covid-19, the market showed that businesses must have cash flow to ensure liquidity. 

Liquidity is the real problem of enterprises, and if enterprises in 2021 lacked capital from that channel, many of them might have had to shut down.

In the time to come, bond issuers will have to use different ways to handle due debts, including selling their assets or issuing more bonds. More bond issuance to pay debts has been seen in the government bond market in recent years.

Flexible solutions

In the 2011-2015 period, the government bond market fell into a state of high risk with very high interest rates and short terms of bonds. 

According to the Ministry of Finance (MOF), there were  debts with interest rates of 12-13 percent per annum and bonds due in three years. 

Short-term government bonds (1-3-year bonds) accounted for a very high proportion, 63 percent in 2011, 76 percent in 2012, and 77 percent in 2013. 

The bonds were issued to pay debts, not to be used in production and business, which worsened the problems of public debt and government debt at that time.

However, with clever solutions, government bond interest rates gradually fell to 3-4 percent per annum, while the term of the bonds increased to 20-30 years. 

So, the problem was solved not by abrupt, harsh moves but by flexible and mild solutions.

MOF is now amending Decree 153, with new regulations under the spirit of "tightening the control of the market", said MOF Minister Ho Duc Phoc.

The behavior might be what worried Nghia, who warned about the "important spot of the economy". The amendment of the decree is a necessity, said Prime Minister Pham Minh Chinh.

Nghia mentioned a story about a province in China where people protested against banks which did not continue to lend money to them, which led to the loss of their houses and other stalled real estate projects.

He said: “The biggest responsibility must be undertaken by the Government. Only on that basis will the confidence of the people and the market be created. The responsibility is on the shoulders of those who are amending Decree 153."

Tu Giang

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