Opening door to developing the corporate bond market – Final chapter: Recommending six solutions to achieve healthy growth

Ketut Ariadi Kusuma, Senior Financial Sector Specialist of World Bank (WB)

Could you tell us about the experience of other countries on corporate bond management?

The experience in corporate bond market management in each country was different because each country has its own conditions, characteristics and development orientations. However, countries that succeeded in developing the corporate bond market have acquired the following factors: the presence of a sufficient number of quality companies that have a real need to raise capital for development; the presence of domestic investors both organisations and individuals who have savings; supporting financial system with a strong legal foundation and good market orientation; strong legal framework and capital market management and supervision, including having credible supervisory organisations with sound strategies and effective market infrastructure.

Countries that were successful in developing the corporate bond market usually had three market channels: the public market, the private market, and the combined market.

In the public market, corporate bonds could be easily accessed by all investors, but high standards of information disclosure and credit quality were required to protect investors. On the other hand, in the pure private market, bonds were bought only by a small number of highly qualified investors who know the issuers well. Transaction in this market was not standardised because of depending on the specific needs of issuers and investors in each transaction. The combined market has some characteristics of the two markets mentioned above, it also had some regulations but was still relatively lax so as not to cause barriers to market access for issuers.

How do you assess the development of the corporate bond market in Vietnam?

Vietnam's corporate bond market already had all the factors with strong supply and demand. This was proved by the average annual growth rate of more than 40% over the years. The corporate bond market had grown, accounting for more than 15% of GDP in 2020 compared to 5% in 2015.

The policy on corporate bond market development was on the right track. The weaknesses in the legal framework creating legal loopholes have been fixed in the new Law on Securities and the decrees guiding on the implementation, otherwise it would create concerns about investor protection and hidden risks. The market had made a clear distinction between the public market,the listed market and the private market. However, the management and supervision of legal frameworks still needed to continue to be improved in the future.

What recommendations do you have for Vietnamese authorities for the development and management of the corporate bond market?

There are a number of areas that need improvement to further develop the corporate bond market.

Firstly, it is necessary to have a consistent bond issuancce process in the public market. Currently, retail investors often do not have extensive knowledge of bonds as well as bond issuers, so they need approval from the State Securities Commission, before corporate bonds are sold to the public. The approval process that took 3-6 months could reduce the attractiveness of corporate bonds, so the approval time should be reduced to a minimum. The bond issuance approval process also needed to be synchronised with the listing approval process at the Stock Exchange so that the bonds could be traded immediately after issuance. If there was a delay, it should be a few days.

Secondly, it was necessary to improve comprehensive disclosure standards of the issuer as well as corporate bonds to improve the decision-making process of investors. The information disclosure on the private bond market needed to be improved because this market was less transparent and standardised.

Thirdly, it needed to use credit ratings to improve transparency. The more transparent companies are, the better credit ratings, and enterpises that have better ratings are more attractive to investors. Vietnam still had no credit rating of corporate bonds, although several credit rating agencies have been licensed to operate. Furthermore, it was necessary to apply discrimination between rated corporate bonds and unrated corporate bonds to encourage the use of credit ratings.

Fourthly, there is a need to expand the investor base to be more diverse in both quantity and type, helping to increase the liquidity and attractiveness of the bond market. Currently, banks were still "monopolising" this market, but it had been seen an increase of individual investors entering the market. Promoting the development of investment funds and voluntary pension funds via a supportive management and policy framework for the market would help to develop the corporate bond market more effectively in mobilising savings for investment.

Fifthly, it was necessary to improve the organisation and liquidity of the secondary market. Special efforts to promote primary market functioning and transaction transparency might be important factors that need to consider. Centralised transaction information was also important, even when transactions were made through bilateral agreements or OTC (over the counter). Different trading systems can be used for bonds with different properties.

Sixth, it was necessary to encourage the development of new products and new tools to satisfy different capital mobilisation needs. For example, demand for infrastructure development in Vietnam is high, the development of a corporate bond framework for infrastructure projects would help to solve this problem. Similarly, the corporate bond market could be useful in alleviating pressures on the banking system via securitisation.