Vietnam primed for credit rating agency to boost bond market

06:00 | 20/01/2021 Economy

(VEN) - Credit rating agencies are crucial for the development of Vietnam’s corporate bond market, the ability to raise capital for trade and production activities and market openness and transparency. However, lack of credit culture is impeding the licensing of domestic credit agencies.

vietnam primed for credit rating agency to boost bond market

Promoting market development

The need for domestic credit rating agencies in Vietnam has become particularly urgent given the January 1, 2021 entry into force of the Law on Securities that requires some public bond issues to be rated. The lack of a credit culture poses significant risks to the bond market and the financial sector, particularly as individual investors currently own almost a fourth of all bond issues.

Vietnam’s first credit rating agency opened in 2005 but shut down a year later due to lack of demand. In July 2017, Phattinh Rating was the first Vietnamese credit rating agency to be licensed and in March 2020, FiinGroup became the second credit rating agency to be licensed by the Ministry of Finance. The Ministry of Finance has the authority to grant up to five credit rating licenses.

Bond defaults of property issuers in China between 2018 and 2019 have convinced authorities in Vietnam of the critical need for a domestic credit rating agency to help its own market avoid such losses, according to a September 2020 report by the Asian Development Bank (ADB).

Nguyen Hoang Duong, deputy director-general of the Department of Banking and Financial Institutions under the Ministry of Finance, says Vietnam’s handling of the Covid-19 crisis has boosted the prestige and ranking of its financial market, further underscoring the need for credit rating agencies to improve its openness and transparency.

Focusing on credit ratings

Huynh Minh Tuan, brokerage director of Mirae Asset Vietnam Securities, said credit ratings would contribute to further improving the efficiency of capital supply and demand, as well as operating the debt market in an effective manner and improving liquidity.

According to draft regulations on the implementation of the new Law on Securities, issuers of public bonds, whose total bonds outstanding as of the registration of public bond issuance is greater than 100 percent of equity and whose total bond issuance value in the last 12 months is greater than 50 percent of equity, must perform a credit rating. These regulations will create demand for using credit rating service and encourage development of a credit culture.

The development of credit rating service is also the basis for ministries and departments to amend and supplement regulations on capital adequacy of businesses in the banking, securities and insurance sectors, encouraging financial institutions to prioritize investments in corporate bonds with good credit ratings.

With a fully completed legal framework, the Ministry of Finance will choose to license the best enterprises, while strengthening information dissemination on the use of credit ratings at the time of bond issuance.

The authors of the ADB report recommend that if “issuers remain slow to adopt credit ratings, the government should consider a universal mandate for credit ratings encompassing all publicly and privately listed issuances. While such a requirement will add to transaction costs, it will lead to the development of a credit culture, which is crucial for the development of a vibrant bond market.”

A steady pace of market reforms in Vietnam, supported by a growing need of issuers for funding, have led to annual bond issuance growing from US$92 million in 2000 to US$24 billion in 2019. Total bond issuances more than doubled between 2012 and 2019 growing from US$11 billion in 2012 to US$24 billion in 2019.

Ngoc Thao