After 20 years of waiting, the corporate bond market in 2018 and 2019 have been growing impressively. In the first six months of 2019 alone, businesses issued 89 trillion dong of bonds, up by 34 percent.
Objectively, there are positive points when the corporate bond market develops. Firstly, businesses have actively mobilise capital for themselves when they are really reputable and operating efficiently. Secondly, that helps reduce the risk burden on the banking system, because in essence, banks just mainly mobilise capital for short-term lending. The medium and long-term capital burden on the economy will further create pressure for banks if it continues, and it will be difficult to escape from the risk of term difference when short-term funds are used for medium and long-term loans. Banks will always have to be wary of liquidity.
Thirdly, when corporate bond market develops, that will create a full thinking and more open approach to the market. From there, it is hoped that businesses will no longer come to banks first when they lack of capital a reverse thinking which has led to an inefficient allocation of financial resources in the economy.
Risks will increase if the growth is uncontrolled.
However, the concern is that the impressive growth rate of the corporate bond market has reminded of the hot credit growth period in 2007 2011.
In that period, the average credit growth was over 33 percent and reached above 54 percent in 2007, resulting in a serious bad debt consequence which takes Vietnam many more years to overcome.
When the 2018 annual white book was published by the Ministry of Planning and Investment, the very high growth of Vietnamese businesses’ debt ratio was very worrisome. For state-owned businesses, this ratio reached up to 4.1 times of equity, while this ratio was 2.3 times for private businesses and 1.6 times for Foreign-invested businesses.
The overall debt ratio of businesses in the economy was 2.5 times of equity, while this ratio in international practice is only about 1.5 1.6 times.
This ratio is a very concerning issue when the corporate financial leverage has been overused, making the debts of businesses to become bigger and bigger. Risks will pile up when there is hot growth, which is very unpredictable for businesses in particular and the economy in general.
Market transparency needs to be improved
According to the plan to carry out Financial Strategy to 2020 approved by the prime minister in Decision 450/QD-TTg dated April 18th 2012, by 2020, Vietnam will have about five rating companies established, but so far only one company has been licensed but has not provided services.
For financial investment, information is the most important material to solve the problem of disproportionate information, which Vietnam’s market lacks of. Thus, the questions are what is the capital mobilised via corporate bond channel use for? Is it effective? How are the cash flows? etc.
The accompanying risks include the ambiguity in investors’ bond purchase contracts, which are too long, contain many points and annexes. If customers do not check carefully, it is not clear whether it is a bond guaranteed by the bank, a bond with secured asset, or a bond without secured asset, etc. Thus, Vietnamese investors need to be careful when investing in corporate bonds.
In addition, under the new regulation on conditions for businesses to issue bonds, businesses only need to have operating time of at least one year from the date of the first issuance of Certificate of Business Registration or equivalent licenses in accordance with the law (Decree 163/2018), while in the past, Decree 90 clearly required businesses to have two consecutive profitable years.
The mobilisation of corporate bonds with interest rates of up to 12 14 percent per annum will be a competitive for other channels such as depositing at banks, investing in securities or buying real estate, buying gold. Although they are different channels, they are connected.
Immediately, banks also increase mobilisation interest rates. Without good control, the interest rate race in the economy and the risk of financial bubbles may increase. More importantly, there is hardly a sector on the economy of which profit can withstand interest rates of up to 14 percent per annum. The lessons on the cases of mobilising capital over the ceiling interest rates of banks in 2011 2012 are still valuable.
When assessing risks in general, it is necessary to have an overall view of the economy and the whole market. It should be noted that if the risk of bankruptcy increases, the financial system in general and banking system in particular will also be affected.
