Vietnam Seeks Capital Market Modernization to Fuel Growth

Vietnam's financial market, including government bonds, corporate bonds, and securities, currently equals 90% of GDP

Great growth potential

A special topic in the World Bank's recent Vietnam economic assessment report showed that developing capital markets will create an important source of long-term capital for the economy, helping Vietnam achieve its goal of becoming a high-income country by 2045. Well-functioning capital markets are an important condition for resource mobilization in the overall financial market that is inclusive, resilient and modern. If we evaluate the success of market development by the function of financial intermediation, Vietnam's capital market indicators still show opportunities for continued growth.

It is important to look at three financial intermediation functions of capital markets: Funding function, savings function and pricing function. Regarding funding function, despite the large size of equity market capitalization, the amount of funds actually raised through shares over the past five years is relatively small. Fund mobilization in the bond markets, especially corporate bonds, is relatively more significant. However, long-term capital sources are still limit ed and weaknesses in market fundamentals have begun to emerge.

With respect to savings function, the total amount of savings mobilized through institutional investors remains low, reaching only 19% of GDP, lower than that of comparable countries in the region, causing limit ations in financial resources for long-term investment.

As for the pricing function, capital markets have not yet produced good benchmark prices due to unclear short-term interest benchmarks, inefficiencies in the government bond market, and large volatility in stock prices.

VSS - the largest institutional investor in Vietnam

To unlock the potential of the capital markets, according to the WB, Vietnam needs to remove specific obstacles to ensure healthy and sustainable growth. The fundamental issue is the underdevelopment of the institutional investor base, including underutilization of the Vietnam Social Security Fund (VSS), a potentially dominant force in driving capital market development. Due to the absence of a large weight of domestic institutional investors in the equity markets, individual investors dominate, which can create volatility as a result of herd behavior This also triggers the accumulation of risks in the corporate bond market and limit s the development of the stock market as a fundraising channel for the business sector. VSS’s investment portfolio consists mainly of government bonds, thus limit ing investment profits, lacking pricing performance and negatively affecting the development of the financial sector. Managing a portfolio equivalent to 10% of GDP, VSS is the largest institutional investor in Vietnam, larger than all other domestic institutional investors combined.

Due to legal constraints, VSS’s assets are concentrated mainly in government bonds. VSS has become an insider investor in government bonds, causing significantly lower yields in auctions, thus distorting the pricing function of the government bond market. Diversification of VSS investment will support the modernization of Vietnam’s financial system from several distinct angles. This will help reduce captive investment in the government bond market, reduce market distortions and improve pricing signals. In addition, VSS’s diversification into corporate securities markets - stocks and bonds - will support the development of those markets by diversifying the investor base and creating relative stability as a long-term investor. If implemented properly in small steps, investment diversification will increase the investment returns for VSS in the long term.

At the same time, according to the WB, other institutional investors should have a larger presence to promote the development of the corporate sector. Apart from VSS, only life insurance companies are relatively large investments, but they also focus on government bonds and bank deposits. This also means that other high-quality issuers across economic sectors have not been encouraged to participate in the market. In developed markets, pension funds and institutional investors are the main buyers of stocks, corporate bonds, money market funds and niche funds, and are the driving force for the development of other instruments. To reverse this situation, the measure that goes hand in hand with VSS’s diversification is social insurance companies should be encouraged to diversify into the corporate sector, investment funds and private pension funds and facilitate them to provide more niche services for individual investors.

In addition, according to the WB, to catch the eye of institutional investors, corporate bonds need reforms, especially transparency and investor protection. This is necessary to rebalance individual investors to institutional investors.

In particular, the stock market has great potential to develop into an important source of capital mobilization for the corporate sector. According to the WB, although the overall figures on market capitalization are impressive, the volume mobilized is insignificant. The strong interest of international investors in Vietnam's stock market is still restrained, waiting for institutional adjustments to be implemented and demonstrated. Competent authorities are making significant efforts to address three critical elements - pre-trading margin requirements, maximum percentage of shares allowed to be owned due to foreign equity ownership limit s, and fair access to information – to meet these expectations. Ongoing dialogues with the international investor community are critical in this process.

Effective fundraising tool

If properly integrated, Vietnam's capital market can become an effective tool for funding, savings and pricing, which are necessary factors for the efficient allocation of economic resources. Reasonable reforms, if implemented carefully, will help open up a large additional long-term fundraising channel for the corporate sector in Vietnam.

WB suggested that if VSS only allocates a modest level of investment into corporate securities, it means adding an additional US$20 billion to the corporate sector by 2030. The cumulative additional profits could reach US$4 billion by 2030. Similarly, if life insurance companies reallocate a portion of their investment capital to corporate securities, an additional US$15 billion could be mobilized over the same period. Healthy growth in private equity funds and pension funds could bring in around US$14 billion.

At the same time, if Vietnam is upgraded to an emerging market by MSCI and FTSE Russell, it will mean a net inflow of US$5 billion into Vietnam’s equity market as the global emerging market portfolio is reallocated to Vietnam after the upgrade. The inflow could reach US$25 billion by 2030 if strong reforms continue and the global investment environment remains healthy.

In total, this means that capital markets alone will provide around US$87 billion to the corporate sector by the end of the decade. This is a huge source of capital that is extremely important to promote Vietnam’s economic development in the coming time.