Reforms Needed to Unleash the Potential of Capital Markets

11:43:31 AM | 27/12/2019

While capital markets have expanded rapidly in Vietnam over the past few years, they remain 1.5 to 2 times smaller than in Thailand and Malaysia, respectively, and are largely dominated by a few big players, including the government.

This is the remark in Taking Stock, the World Bank’s bi-annual economic report on Vietnam, released recently in Hanoi.

According to WB, Vietnam’s economy has performed well in 2019, with GDP expanding by an estimated 6.8%, public debt reduced by almost 8 percentage points of GDP since 2016, and a trade balance surplus for the fourth year in a row. These results are remarkable in the context of a slowing global economy.

The resilience of the Vietnamese economy before world volatility is highly appreciated by economic specialists. Mr. Jacques Morisset, WB’s Lead Economist and Program Leader for Vietnam, said, GDP growth has continued to be driven by a strong external sector with exports expanding by about 8% in 2019 - nearly 4 times faster than the world average. Steady growth has resulted from two main factors: export growth and domestic demand by businesses and households. This growth rate was unchanged from its previous forecast.

He said, the Government has maintained a wise and prudent fiscal policy to lower the debt to GDP ratio to 56% by the end of 2019, down nearly 8 percentage points from the peak as reported in 2016. With a fiscal policy to cope with such cycle fluctuations, authorities not only give positive and strong signals to the market about commitments to keep debt and sustain macroeconomic performance, but also create more fiscal space.

Vietnam’s external economic position remains strong in 2019, with a current account surplus equal to approximately 2% of GDP thanks to an increase in trade surplus and strong inflows of foreign direct investment (FDI). According to Mr. Jacques Morisset, that stability shows that Vietnam's foreign economic sector is capable of resisting external shocks, and emerging market economies are facing a decline in trade flow and investment flow.

Vietnam has also remained an attractive destination for foreign investors, with FDI inflows averaging US$3 billion per month. In addition, private consumption has emerged as an important contributor to GDP growth as the result of an expanding middle-income class and rising wages. Private firms also increased investment by 17% during the same period.

Prospects for the short to medium term are good as the World Bank forecasts a GDP growth of around 6.5% over the next few years. Vietnam’s economic fundamentals appear robust, and the government has built some fiscal space through its prudent fiscal policy. However, the country is not completely immune to external shocks, as demonstrated by the gradual decline in export growth from 21% to 8% between 2017 and 2019. This decline in export growth has been even more pronounced in non-US markets, up by only 3.6% during the first 11 months of 2019. Greenfield FDI has also slowed by about 30% over the past two years, even if it has been compensated by an increase in mergers and acquisitions (M&A).

To account for these external risks, and to bring an additional engine of growth to the economy, the WB recommends making the development of a strong and dynamic private sector a priority. However, many firms operating in the domestic market face severe obstacles preventing their expansion, with the most pertinent being access to credit.

Mr. Ousmane Dione, World Bank Country Director for Vietnam, said, addressing the financing constraint of firms should receive the greatest attention from policy makers if Vietnam wants to continue on its trajectory of rapid and inclusive growth and reach high-income status in the coming decades.

While capital markets have expanded rapidly in Vietnam over the past few years, they remain 1.5 to 2 times smaller than in Thailand and Malaysia respectively, and are largely dominated by a few big players, including the government. The report advocates for the development of well-functioning capital markets as a foundation for Vietnam’s future prosperity.

As experienced by many countries in the world, including in East Asia, well-functioning debt and equity markets can help finance the domestic productive sector and complement lending from the banking system and diversify sources of financing. They also contribute to the resilience of the financial system as a whole by ensuring deeper liquidity and diversifying risks.

According to the WB, five areas policy makers should focus on to advance the development of the capital markets are: modernizing the legal and regulatory foundation of the capital markets; improving governance and information disclosure; broadening the investor base; developing innovative products; and strengthening the government’s role in the development of long-term finance.

Quynh Chi (Vietnam Business Forum)