Despite positive signs of recovery, Vietnam’s corporate bond market remains fragile due to limited institutional investor presence, highlighting the need for increased participation to ensure long-term stability. There is.
According to VIS Ratings’ end-September report, most bonds issued and traded in the secondary market are private placements, usually by newly established companies with no core business. As a result, there is limited public information available to investors to effectively assess and manage risk.
“Our data shows that almost half of the 2022-2023 bond repayment delays involved start-up companies with weaker financial conditions, yet these companies continue to issue bonds at attractive interest rates. Many of these bonds still trade in the secondary market at high yields “not significantly higher than those issued by financially stable companies,” the report said.
VIS Ratings notes that compared to more developed corporate bond markets in the region, Vietnam lacks institutional investors with long-term investment strategies and the necessary risk tolerance to weather short-term market fluctuations. It is pointed out that there is.
In the draft securities law, expected to be passed in the fourth quarter of this year, regulators aim to introduce additional safeguards to curb excessive risk-taking. One such measure is to limit the issuance of privately placed bonds to professional institutional investors. As a result, increased participation by institutional investors is considered important for the sustainable growth of the corporate bond market.
As of the end of June, only 8% of corporate bonds in circulation were held by institutional investors such as insurance companies, pension funds and investment funds, according to Ministry of Finance data and the annual interim financial report. Vietnam Social Security Fund (VSSF), the country’s largest institutional investor, manages approximately $48 billion in assets as of December 2023, but has not yet started investing in corporate bonds.
Unlike individual investors, who often focus on short-term returns, institutional investors typically conduct thorough risk assessments, invest with a long-term perspective, and have the ability to manage short-term volatility. I am. The lack of such investors in Vietnam’s corporate bond market has been cited as a major weakness by several financial institutions.
The World Bank said in an August report that the dominance of retail investors in non-government debt markets has led to herd behavior, increased volatility and concentrated risk in corporate bonds. This also hampers the stock market’s ability to help companies raise capital.
According to the report, the core problem is that Vietnam’s institutional investor base is underdeveloped, including the limited role of social insurance funds, which have great potential to foster capital market growth. .
VSSF is Vietnam’s largest institutional investor with assets equivalent to 10 percent of GDP, exceeding the total assets of all other domestic institutional investors. However, due to legal restrictions, VSSF’s investments are mainly concentrated in government bonds and bank deposits.
Considering VSSF’s potential as a long-term investor, diversification of VSSF’s investments is considered essential to accelerate the modernization of Vietnam’s financial system and bring more stability to the market. In addition to the VSSF, other institutional investors such as life insurance companies and private pension funds should also be encouraged to participate in the corporate bond market to promote sustainable development.
The World Bank also recommended reforms to make corporate bonds more attractive to institutional investors, particularly through increased transparency and stronger investor protection. Such reforms are essential to moving the market from a retail-driven situation to an institutional investor-driven one.
“The criteria for defining a professional investor need to be improved so that they can properly assess risk, and the procedures for public bond issuance need to be further improved. “We need to expand credit rating requirements for products that are rated as such.” The World Bank report has been completed.
Financial institutions remain the most active in issuing corporate bonds
Vietnam’s corporate bond market is making a comeback, but payment delays and other factors continue to hurt the sector.
