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Credit rating culture deemed vital for transparency
Rated corporate bond issuances in Vietnam still trail behind regional peers, though efforts to enhance credit rating culture aim to expand the market significantly.
At last week’s seminar in Ho Chi Minh City on credit ratings, co-hosted by the Ministry of Finance (MoF), the Asian Development Bank, and the Australian Department of Foreign Affairs and Trade, a spokesperson from the ministry emphasised the importance of developing a credit rating culture.
“This initiative is crucial for enhancing transparency and aiding in the development of soft market infrastructure through the establishment of yield curves and bond pricing. What is more, it is part of a broader government strategy aimed at expanding the corporate bond market to 20 per cent of the GDP by 2025 and 30 per cent by 2030, up from the current 10 per cent,” the spokesperson said.
Currently, only 9 per cent of the bonds issued are from rated businesses, which underscores a significant developmental gap. The seminar highlighted that despite strong growth in contracts for rating services recently, their number is still disproportionally small relative to the corporate bond market size.
In contrast, ASEAN peers such as Indonesia, Malaysia, the Philippines, and Singapore have higher percentages of rated corporate bonds, at 82, 54, 26, and 30 per cent, respectively.
Vietnam currently hosts four credit rating agencies, yet the penetration of corporate credit ratings remains limited, with no corporate debt instruments formally rated.
“At present, we only rate the organisations themselves, not their financial products,” said Nguyen Quang Thuan, chairman of Fiin Group.
Reflecting on the progress of Vietnam’s corporate bond market, Ho Viet Huong, a representative from the MoF’s Banking and Financial Institutions Department, said the market is showing signs of improvement, and investor confidence is beginning to stabilise.
“In Q1, there were 29 issuances of private corporate bonds, with a total value of about VND25.3 trillion (approximately $1.05 billion), marking a modest 0.8 per cent increase from the previous year,” Huong said. “The total value of bonds issued by enterprises involved in credit rating reached nearly VND27 trillion ($1.125 billion) in 2023, which is 10 times that of 2022, representing about 9 per cent of the total private corporate bond issuance.”
According to Huong, market development faces major challenges due to the limited base of investors and their reluctance to invest in corporate bonds, stemming from a lack of trust in the issuing institutions following recent infractions.
“The market currently lacks a standard yield curve that is closely linked to corporate credit ratings, and the cost of capital for businesses is not yet closely tied to the issuer’s risk level,” Huong said.
“Out of 215 separate corporate bond issuances from 73 companies, 38 issuances by 26 companies were required to undergo credit rating, which constitutes 18 per cent of the total issuances.”
Maria Joao Pateguana, the ADB’s senior private sector development specialist, highlighted proactive measures taken by the MoF to stabilise the corporate bond market and foster a dependable credit rating culture.
“Over the past three decades, the ADB has supported the development of Vietnam’s financial sector, working closely with the MoF and other stakeholders to implement reforms and promote the bond market,” Pateguana said.
She also stressed the ADB’s commitment to improving the regulatory and oversight framework for credit rating agencies and enhancing the capabilities of licensed agencies through educational initiatives and awareness programmes.
Michael Foley, vice president for Asia-Pacific at Moody’s, addressed the concentration in the global credit rating market, where just three firms - S&P, Moody’s, and Fitch Ratings - command nearly 95 per cent of the market share.
“Good corporate governance is essential for ensuring high-quality credit ratings. High-quality ratings build trust in the market and attract suitable investors, which is especially crucial during market upheavals or when adverse factors are at play,” Foley said.
“The core principles vital for credit rating agencies include the quality and integrity of the rating process, independence and the management of conflicts of interest, timely and transparent rating disclosures, and stringent confidentiality of information,” he added.
In line with the discussions, representatives from the Banking and Financial Institutions Department revealed plans to collaborate with local rating agencies to design extensive programmes promoting a culture of credit rating among investors and issuers alike. Additionally, a review of the legal framework is anticipated to further refine and ensure the reliability of credit rating services.
This approach is expected to meet the growing demands of the market, as outlined by government goals to increase the corporate bond market to 20 per cent of GDP by 2025 and 30 per cent by 2030.
Data from the Vietnam Bond Market Association shows that public bond issuances have shown a significant increase in early 2024, now constituting 34 per cent of total issuances, up from 4.1 per cent in 2021. Private placements remain dominant, accounting for 66 per cent of the market.
“However, the total value of corporate bond issuances in the first quarter has declined by about 21 per cent on-year. Real estate dominates the issuance landscape, representing 58 per cent of the total, followed by banking at 18 per cent. Interest rates on issuances have been rising, particularly in the real estate sector, which faces the highest risk-adjusted interest rates,” the association said.
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