Credit over-reliance creating imbalance and stagnation

Nguyen Nhu Quynh, director of the Institute of Financial Strategy and Policy at the Ministry of Finance, underscored the need for a long-term vision to balance Vietnam’s capital and monetary markets at last week’s event on optimising capital resources for national economic development.

“The capital market has not met expectations, with many of the goals set in 2019 still far from being realised,” Quynh said.

Credit over-reliance creating imbalance and stagnation, photo freepik.com

Data from BIDV’s Training and Research Institute points to a sharp rise in credit flows, increasing from 40.71 per cent in 2019 to 53.54 per cent in the first half of 2024.

This over-reliance on credit has created a systemic imbalance. While Vietnam’s credit-to-GDP ratio has hovered between 130 and 133 per cent - one of the highest globally - the World Bank has raised red flags, advising Vietnam to bring down this figure.

“The economy remains heavily dependent on bank credit,” a representative from the State Bank of Vietnam (SBV) warned. “The rising credit-to-GDP ratio has heightened the risk of systemic failure. In 2023, the ratio stood at about 130 per cent, highlighting the need for urgent reforms. The supply of medium- and long-term capital remains critically underdeveloped, with bank credit bearing the brunt of the capital needs.”

To alleviate the burden on banks, there is a pressing need to expand Vietnam’s capital markets - including equities, corporate bonds, and insurance - to diversify the sources of funding.

“Reforming the regulatory framework to encourage the growth of these markets is essential for mobilising domestic resources and reducing dependency on bank credit,” said the SBV official.

Quynh also highlighted the corporate bond market’s uneven performance. While the number of listed bonds grew by 16.5 per cent in 2023, totalling 460 bonds and accounting for 20 per cent of GDP, outstanding corporate bonds had fallen sharply by June 2024, down to 9.64 per cent of GDP. This is well below the 20 per cent target set for 2025 in the financial strategy to 2030.

“Volatility in the corporate bond market has created concerns about its ability to act as a reliable source of medium- and long-term capital,” Quynh said. While corporate bonds were once a promising source of funding, the market has seen considerable instability since peaking in 2021, further exacerbating the pressure on Vietnam’s banking sector.

In the insurance sector, growth has been robust, with the number of companies rising from 67 in 2019 to 82 by the end of 2023. Total assets reached approximately $36.53 billion, an on-year increase of 11.12 per cent and double the figure from 2019. However, challenges persist. Risk management remains underdeveloped, with delays in detecting operational risks, while the quality of insurance agents continues to lag.

Nguyen Hoai Thu, chairwoman at VinaCapital Fund Management, pointed to the life insurance sector’s recent crisis, which has stagnated growth over the past two years.

“This crisis underscores the urgent need for stronger regulatory frameworks to prevent future disruptions,” she said. “Vietnam’s life insurance penetration remains low compared to regional benchmarks, reflecting a broader gap in financial product development.”

Thu also touched on the underdeveloped voluntary pension fund market. “In developed countries, pension funds are a significant part of the economy - accounting for 140 per cent of GDP in the United States, 83 per cent in the United Kingdom, and 86 per cent in Singapore. Vietnam has barely scratched the surface,” she said.

Current regulations mandating that half of voluntary pension fund investments be allocated to government bonds create operational challenges, especially with historically low yields. Thu also pointed to restrictive rules on early withdrawals and the tax-free cap of $40 per month for workers participating in voluntary pension schemes.

“These outdated regulations need reform to align with market conditions and unlock the full potential of voluntary pension funds as a source of long-term capital,” she said.

Looking to Vietnam’s stock market, Ketut Ariadi Kusuma, senior financial sector specialist at the World Bank, said that Vietnam held strong potential to become a key source of capital for the corporate sector. “As a frontier market, Vietnam must implement specific improvements to achieve emerging market status, which would significantly boost global investment,” Kusuma said.

He emphasised the importance of well-managed capital markets, suggesting that Vietnam could become an efficient mechanism for raising capital, fostering savings, and providing essential pricing signals.

“This is crucial for the efficient allocation of economic resources, and such progress could enable Vietnam to achieve higher economic growth by utilising domestic resources more effectively while attracting the international capital needed to become a high-income nation,” Kusuma added.

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