The Perils of Corporate Bonds Relying on Real Estate and Banking

Bond Market Update

Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council, observes that the corporate bond market in Vietnam is still largely reliant on two sectors: banking and real estate. “If this situation persists, our corporate bond market will face significant challenges,” he warns.

Indeed, over the past eleven months, banks have remained the dominant issuers of corporate bonds in the market. The shift in the composition of corporate bond issuers has been most evident from 2023 onwards.

While there wasn’t a significant difference between the volume of corporate bonds issued by real estate and banking groups during the July-September 2023 period, the majority of newly issued corporate bonds in the market today are from credit institutions. Nonetheless, real estate remains the second-largest sector in terms of bond issuance.

The corporate bond market has not effectively served its purpose as a medium to long-term capital-raising channel for the economy, as key manufacturing and agricultural businesses are absent. Meanwhile, banks’ capital raising through corporate bonds primarily serves to increase Tier 2 capital, enabling them to expand their lending and borrowing capabilities.

Mr. Nghia points out that the corporate bond market accurately reflects the structure of the Vietnamese economy. While Vietnam’s GDP growth is high, it heavily relies on exports, investments, and retail. However, foreign-invested enterprises (FIEs) dominate these sectors, with domestic enterprises contributing only a small portion.

This situation arises because domestic enterprises suffer from a severe lack of capital but are unable to raise funds through the corporate bond market, which is currently dominated by banks and real estate. If the growth of the corporate bond market continues to depend mainly on real estate and banking, the economy’s growth will remain reliant on FIEs.

Diversifying the Economic Landscape

Nguyen Khac Hai, Director of the Legal and Compliance Control Division at SSI, suggests attracting more foreign investors to diversify the investor base in the corporate bond market.

“Instead of tightening regulations, we should consider amending them to facilitate foreign investors’ participation in the corporate bond market,” says Mr. Hai. “Along with legal framework changes, the prospects for this capital-raising channel could be more positive before we open up and make it easier for foreign capital to access the market.”

As of the end of 2023, foreign investors participated in only about 3% of the corporate bond market, mostly through investment funds investing in large enterprises’ bonds. Encouraging foreign investors to enter the corporate bond market will help meet Vietnamese enterprises’ long-term capital needs in the future.

Nguyen Quang Thuan, Chairman of Fiingroup, believes that policies should be implemented to incentivize institutional investors such as investment funds, insurance companies, and voluntary pension funds to participate in this market.

“Despite their vast potential, this group currently accounts for less than 10% of the value of outstanding bonds,” Mr. Thuan notes. “Therefore, new regulations and policies are needed to enable these financial institutions to engage more deeply in the corporate bond market. Additionally, standardizing transparent information disclosure, diversifying products, and promoting corporate bond rating activities are also matters that require attention.”