Communist Review - In the context of the world’s economic instabilities from the US-China trade war and the hesitancy of Britain’s “staying” or “leaving” the European Union (EU), Viet Nam economy remains stable and has represented remarkable achievements, notably those of the financial market.

Achievements of the financial market

According to the General Statistics Office, through the first 11 months of 2019, the realized capital from the state budget reckoned at VND 299.4 trillion, up 5.5% over the same period last year. Centrally-managed capital amounted to VND 43.7 trillion, accounting for 72.6% of the year’s plan and down 15.8% as compared to the same period last year; locally-managed capital reached VND 255.7 trillion, accounting for 79.7% of the year’s plan and up 10.3% over the same period of 2018. Through 11 months of 2019, total retail sales of goods and services reached VND 4,481 trillion, an increase of 11.8% over the same period last year, which played as an important source for reinvestment. Specifically, the total foreign direct investment (FDI) in Viet Nam up to 20 November 2019, including newly registered, adjusted capital, capital contributed and share purchased by foreign investors was nearly USD 31.8 billion, increased by 3.1% as compared to the same period in 2018. The processing and manufacturing industries attracted the largest FDI with newly licensed capital, accounting for 71.2% of the total newly registered capital; real estate business 10%; other industries 18.8%. Among 74 countries and territories having had newly licensed investment projects in Viet Nam in the first 11 months, South Korea came on top investing 21.5% of the total newly registered capital; followed by China at 16.5%; Singapore at 14.3%; Japan at 12.7%. The year’s state budget revenue until 15 November 2019 totalled VND 1,299.6 trillion, accounting for 92.1% of the annual estimate. While the world economy and global financial markets are witnessing unpredictable fluctuations, Viet Nam's macroeconomy remains stable due to controlled inflation, exchange rates stability, and increased foreign exchange reserves. In the domestic financial market, current account deficit continued the downward trend to below 1.75 times (compared to 2.8 times in 2016, 1.94 times in 2017). In the period of 2016-2017, capital flows contributed 57% of the total capital investment; in 2018 and the first 11 months of 2019, bank capital flows only constituted approximately 46%. Obviously, non-bank capital flows from the private and equity sectors, together with FDI proved their strength and efficiency. So far, Viet Nam financial market has grown quite healthily in great security with increasingly rational structures among the sub-markets harmonized and provided capital for economic development.

The stock market capitalization to GDP ratio has increased from 32% in 2015 to current 75%, exceeding the target. The corporate bond market to GDP ratio nearly doubled (from 3.4% in 2015 up to 6.7%). The government bond market to GDP ratio has also increased from 16.1% to 27.4%. By means of the capital market and equitization sales, yet slow state divestments from commercial banks and state-owned enterprises, state budget revenue has generated hundreds of trillion VND, contributed to swell the foreign exchange reserves. The capital market created flexible, direct and effective capital mobilization channel for private enterprises. The proportion of state bonds owned by non-bank financial institutions reached 53% (an increase of 0.8% as compared to 52.2% at the end of 2018), those owned by banks accounted for only 47%.

In the money market over the past 5 years, the average credit growth rate has dropped to approximately 17%/year; however, liquidity of the banking system has always remained stable. Funds from the credit institution system have been widely spread to all economic sectors, especially the encouraged ones and effectively supported economic growth and its stability on macro scale. Bad debts have been basically solved; the bad debt ratio has decreased, especially after the National Assembly issued Resolution No. 42/2017/QH14, dated 21 June 2017, on the pilot settlement of bad debts of credit institutions. In 2019, the State Bank continued its proactive, flexible and prudent monetary policies in coordination with fiscal and other macroeconomic policies in order to control inflation, support economic growth, and stabilize the money and foreign exchange markets. Total means of payment in the whole year 2019 increased by about 13%, total outstanding loans risen by around 14%, adjusted in accordance with the actual situations. On 30 September 2019, the total means of payment increased by 8.86% as compared to the end of 2018; outstanding loans of the economy climbed by 9.4% that was lower than the same period in 2018. As a result, there has been a positive shift of capital flows and reduced dependence on bank credits. While credit in potentially risky areas has been tightly controlled, credit in encouraged and prioritized areas has surged; for example, credit of high-tech enterprises went up by 22.04%; of exports by 13.2%; that of small and medium enterprises improved by 11.42%; and credit in agriculture and rural areas exceeded by 6%. Evaluating macroeconomic developments and analyzing changes of domestic and international money markets, the State Bank has timely adjusted the interest rate down by 0.25%/year with the purpose of facilitating the economy and liquidity of the credit institution system.

In the foreign exchange market, the exchange rate has remained constant despite some flexible and suitable changes. The anti-dollarization was strengthened by the amended Circular No. 42/2018/TT-NHNN issued by the State Bank, came into effect on October 1, 2019. It aimed at forcing credit institutions, foreign bank branches to stop lending medium and long-term foreign currencies to pay for imports and overseas services even if borrowers own enough foreign currencies from manufacturing and businesses. Lawfully, all domestic foreign currencies must be bought and sold. The indirect investment inflows and the purchase of Vietnamese large commercial banks’ share by foreign investors have grown dramatically, which has generated large foreign currency reserves. Consequently, foreign currency transactions have proceeded smoothly; legal foreign currency demands are fully and promptly met.

Entering 2019, the insurance market also flourished in all three areas: life, non-life and ancillary services (consulting) insurance, facilitating the sustainable and more efficient financial market. This owed a debt of gratitude to the safety insurance; temporary idle insurance payments’ participation in the financial markets constituted approximately 3% of GDP in 2018 and was expected up by 20% in 2019. Especially from November 2019, insurance enterprises and brokers are allowed to legally provide cross-border insurance and insurance consultancy services, regulated by the Government. The supplementation of cross-border insurance services to the newly amended Insurance Business Law 2019 has offered an opening door to the insurance market and insurance services for all insurers domestically and internationally.

Shortcomings and tendency of the financial markets

Although Vietnam’s financial markets have recognized positive changes, the non-bank capital market still has opportunities to overwhelm the credit one. There exists relatively huge imbalance between the money market and the capital market. Credit to GDP ratio is currently 1.34; therefore, the credit market is in desperate need of tight controls with gradual loosening routes. In the past few years, the commercial banking system has played the role as capital suppliers to the whole economy, which might result in term risks, systematic liquidity risks in medium and long-term. Even though the scale of the equity market has increased, capital inflows into the real economic sector via initial public offerings (IPO) are not large. The State still holds dominant shares in variety of state-owned enterprises after privatization. The corporate bond market has not yet met transparency standards due to the lack of a rating agency. Vietnam's corporate bond market has just reached 7% of GDP, equaling 1/3 the average of Asian countries (21% of GDP). Total assets of Vietnam's financial system were only about 203% of GDP, much lower than leading ASEAN countries (over 300% of GDP). The infrastructure of Viet Nam's financial market exist a number of limitations, for example financial products are still in its infancy and of no diversity; institutional investors are small; the quality of information provision and market transparency is still far from the international standards; the legal framework for market activities remains incomplete. Vietnam has become an attractive investment destination; nevertheless, it is essential for FDI projects of below expectation to be screened. In fact, there appear a large number of pretentious investment projects causing harms to the environment and society.

That the ongoing trade tensions are spreading globally affects the supply chain of goods, value of money and assets. Therefore, the future Viet Nam's economy by 2020 will become more unpredictable since it may be affected by economic shocks from the world markets and the domestic financial market structure. However, the growing US-China trade tensions and the monetary policies of the US Central Bank (FED) will continuously create impacts on the international stock markets. Investors are likely to divert their interests in emerging stock markets. Consequently, Viet Nam’s stock market will also have the opportunity to attract more foreign investors. Intrinsically, the stock market momentum will be maintained thanks to divestment, auction of commercial bank IPO shares, state-owned enterprises with large market capitalization, constant macroeconomic growth, and successful businesses. Listed companies will yield promising profits in 2019 and the following years.

Solutions for sustainable growth of Vietnam financial market

The most important task is to restructure the economy by renewing its growth model: development by enhancing production, innovations, expanding markets of reduced raw sales in domestic economic sectors. Not only commodity economy, but the financial market also needs restructuring to correct the current imbalance between the capital market and money market. Accordingly, the proportion of capital supply to the economy has changed very little while the capital supply from bank credit plays a key role. Investment attraction must adhere to Vietnam economy’s structure and development strategies. The State-owned enterprises without State’s large proportion of shares after equitization should be promoted and kept divesting capital for non-state economic sectors. It is necessary to resolutely prevent FDI or ODA projects from turning themselves into “foreign economic oases” situated on domestic land from “fencing, transfer pricing, conducting tax evasion, waste discharging, hiring cheap labour, etc.” Vietnam has to fully participate in the global value chains to sustainably develop its brands in the era of industrialization, modernization and international integration. It needs to facilitate and strongly encourage private investment to operate new production and business capacity. Specifically, it is essential to accelerate disbursement of public investment capital and improve public investment efficiency; simultaneously accelerate restructuring and divestment of State-owned enterprises for comprehensive internal restructuring of the financial markets.

In short, Vietnam’s financial markets in 2019 have been representing remarkable achievements. In particular, they were illustrated in the strong structural shift among the component markets of the financial market, between attracting FDI and domestic capital; and the drastically reduced risks in all its component markets. Those have proved the appropriate development trend of Vietnam's financial market in the growing demand of the market economy and its further integration with the global markets./.

Sourced: Communist Review Vol. 933, published January 2020