The government of Vietnam deserves praise for steadily enhancing the regulatory environment that has allowed for the development of the corporate bond market, which has expanded quickly over the past several years.

Ketut Ariadi Kusuma, a senior financial sector specialist for the World Bank (WB), made the statement in an interview with the VGP regarding the potential growth of Vietnam’s corporate bond market.

Regarding the importance of the corporate bond market for Viet Nam, a representative fr om WB said: Fr om a macro perspective, the development of the corporate bond market will provide diversification of Vietnam investment fund. In the past, Viet Nam relied heavily on its banking system to channel both short-term and long-term financing to fund economic growth.

However, because most of the bank funding is short-term, relying heavily on the banking sector for long-term financing poses significant maturity and liquidity risks to the banking system.

Furthermore, the public debt constraint necessitates a significant shift in economic development financing from the government to the capital market and private sector funding.

Enterprises, whether private or state-owned, would require alternative funding outside of the banking sector, which is constrained by the single-borrower lim it for critical infrastructure sectors such as energy.

Even the banking industry will require capital market financing to enhance the average maturity of its total funding and recapitalize the sector.

Investors can also find alternate investments in the corporate bond market. The emergence of sophisticated Vietnam investment funds in a more developed economy with a growing middle class will need a variety of investment avenues with different risk and return profiles.

Long-term institutional investors, such as Vietnam investment funds, life insurance companies, and pension funds (public and private) will also need to diversify their portfolios beyond traditional holdings of government bonds.

From these angles, corporate bonds present an investment profile that is distinct from that of bank deposits, stocks, real estate investment, and other options.

A well-developed corporate bond market, with sufficient liquidity and market transparency, would be useful to attract more Vietnam investment funds so that PPP modalities can be used to finance development not only in both the public and private sectors of the economy.

Enhance regulatory framework for the development of the corporate bond market

WB’s representative said appreciation should be given to the Government of Vietnam for gradually improving the enabling regulatory framework for developing the corporate bond market.

As a result, the market has experienced fast growth over the past few years (compounding growth rate of over 40 percent per annum in terms of the number of bonds issued in the past five years).

This reflects a genuine demand for this market both from enterprises that need financing and from Vietnam investment funds that need investment opportunities. However, the market is still at an early stage of development.

WB’s representative however said certain gaps in the regulations and their implementation remain, although the Government has spent great efforts to address them through new regulations.

An inefficient separation between the public market and the private placement market is one of the key weaknesses in the Vietnamese corporate bond market. The public market is wh ere bonds are eligible to be sold to all types of investors, including retail/individual investors and Vietnam investment funds.

Bonds issued in this market must meet strict disclosure requirements and be certified by a government body, in this case, the State Securities Commission, to safeguard the public's interests.

Bonds, on the other hand, are only sold to professional investors in the private placement market who possess the necessary financial and technical capacity to conduct informational analysis and make investment decisions.

The boundaries dividing these two markets are not very strong, even though the law and regulations clearly distinguish between them. Private placement market participants develop ways to sell private placement bonds to individual investors who might not be truly sophisticated but appear "professional" if they have the necessary paperwork.

Individual investors may be exposed to products that are inappropriate for them when this occurs. Bad actors may also take advantage of this chance to exploit investors' gullibility and desire for larger rewards despite increasing risk exposure.

A corporate bond market failure might become a systemic concern because the market is expanding quickly. If barriers separating both markets are not strict, there is a substantial correlation between the deposit market and the corporate bond market since the investors are mostly identical.

Given that they share the same market architecture, the corporate bond market and the stock market are also closely related.Therefore, there is a need to strengthen regulations not only for the corporate bond market, but also for the banking and stock markets to attract Vietnam investment funds.

In a bid to well manage and advance the development of the corporate bond market, WB stated that improving the rules for private placement is important to avoid inappropriate risk undertaking by investors.

It is necessary to define and apply professional investors more strictly. The law ought to establish fundamental values and criteria for sophisticated or professional investors.

The implementing regulations ought to be flexible enough to change with the market. The authorities may consider raising the minimum investment amount in the private placement corporate bond market to weed out small investors who are unable to bear losses, do in-depth risk assessments, or seek expert guidance.

It's important to take care not to place too many restrictions on how businesses can reach the market. If they have genuine intentions, all businesses, large or small, public or private, should be able to join the corporate bond market.

Retail and individual investors can, however, immediately access publicly offered corporate bonds. The government must make the approval procedure for the issuing and listing of corporate bonds more efficient.

This would increase the appeal of issuing bonds on the public market for businesses. The private placement market is not a location for retail investors to purchase corporate bonds.

Supervision of the market should be strengthened. More significantly, market intermediaries who are advising, selling, or distributing the bonds to individual investors should be subject to more oversight than only the businesses that issue the bonds.

Their actions should be closely monitored because they are licensed businesses. They should take into consideration not only the qualification of the investors but also the suitability of the investment for these investors, including Vietnam investment fund.

Misconduct by companies that issue securities, investors, and intermediaries should be strongly enforced. The development of institutional investors, such as Vietnam investment funds and private pension funds, is important in channeling retail/individual savings into a pool of funds which in turn can be invested in corporate bonds.

The growth of these sectors will raise both the general level of market professionalism and criterion market practices.

The presence of high-quality credit rating services would also help increase transparency and market quality in general, thus attracting more Vietnam investment funds. While it wouldn't stop wrongdoing, it may lessen the frequency and seriousness of such occurrences.