Restructuring of financial market needed to leverage economic growth

14:08 | 07/03/2019 Finance - Banking

(VEN) - Despite high growth in Vietnam’s capital market and money market stability, the Vietnamese financial market still faces imbalances that urgently necessitate a restructuring to achieve fast and sustainable economic growth.

restructuring of financial market needed to leverage economic growth

The capital market has gradually increased its contribution to capital supply for the economy. Vietnam’s stock market capitalization value increased from 32 percent of the country’s gross domestic product (GDP) in 2015 to 75 percent in 2018.

Dr. Truong Van Phuoc, acting chair of the National Financial Supervisory Commission (NFSC), said that through the capital market, equitization and state capital divestment from state-owned enterprises such as Sabeco and Vinamilk have netted several hundred trillion Vietnamese dong for the state budget, raising the country’s foreign exchange reserves.

The money market has developed and maintained its stability, ensuring capital supply for the economy. In the last five years, credit grew by an average of 17 percent a year, while the liquidity of the banking system remained stable.

However, the Vietnamese financial market still faces imbalances, especially in the market structure, which make it heavily dependent on the banking system. Currently, capital supply from the banking sector accounts for a major portion of total capital supply for the economy. Total assets held by Vietnam’s credit institutions make up 96 percent of total assets of the financial system, possibly creating long term maturity and liquidity risks.

Although the stock market has expanded, capital into the real economic sector through initial public offerings (IPO) is still small. The corporate bond market has not met standards of transparency.

According to Truong Van Phuoc, there are two basic directions to develop the financial market in order to promote growth and ensure macroeconomic stability until 2020, with a vision to 2030 - developing a modern money market and restructuring commercial banks to improve their financial capacity. A financial infrastructure system should be established in order to deal with bad debts, establishing a debt market to improve credit supply capacity to the real economy.

The effectiveness, competitiveness and financial capacity of commercial banks should be enhanced to ensure credit institutions have sufficient capital requirements in accordance with the Basel II guidelines. Risk management capacity of commercial banks should be strengthened in accordance with international standards and common practices. Credit should be directed to local manufacturing and trading, especially small and medium-sized enterprises and those in lucrative, productive and high-tech fields.

Financial and economic experts say Vietnam must develop the capital market as an effective supply channel in the medium- and long-term and enhance transparency and liquidity of the corporate bond market. Other steps include upgrading the Vietnamese stock market to emerging market status by gradually loosening control of capital transactions on the basis of improving the convertibility of the Vietnamese dong and flexible exchange rate mechanism, and growing the derivatives market.

Minh Duy