Financial Markets Remain Resilient Thanks to Solid Economic Fundamentals

According to Mr. Andrew Jeffries, ADB's Country Director for Vietnam, despite difficulties and challenges from the pandemic, Vietnam's financial market still maintains resilience in 2021 and 2022 thanks to the strong economic foundation. However, risks are emerging in financial markets. Nonperforming loans are expected to increase rapidly when some regulatory policies expire. Recent frauds in the corporate bond market highlight shortcomings in corporate governance and legal loopholes.

Vietnam's economy is expected to recover strongly in 2022 and is expected to grow even higher in 2023. However, the global economic and geopolitical context is riskier and more complicated. Higher prices of goods and services, especially rising global oil prices, disruption of global value chains and rapid contraction of fiscal and monetary policies of developed economies have increased inflationary pressures, slowing the global economic recovery and increasing financial-monetary risks.

In that context, Vietnam's financial market maintained its growth momentum thanks to a stable macro-economy. The net profit margin of commercial banks increased by more than 39% in 2021 compared to 2020. The capitalization of the stock market increased by 48% in 2021 compared to 2020. The insurance market also grew, up 19% in 2021 compared to 14% growth in 2020.

According to Report "Vietnam's financial market 2021 and prospects for 2022" by the Institute for Training & Research - Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) and the Asian Development Bank (ADB), in 2022, the world economy is forecast to continue to recover, but it will be slower (growth of 3.2-3.6%) due to complicated disease developments, the Russia-Ukraine conflict along with sanctions will continue to disrupt the supply chain, push prices of goods and services higher and prompt global inflation (from 3.8% in 2021, possibly to 6% in 2022), forcing countries to officially shrink their main monetary and fiscal policies, raising interest rates, slowing the recovery momentum and increasing financial-monetary risks. The stock market has adjusted down (from the beginning of the year until now, the global stock index - MSCI ACWI has decreased by 13%), towards more stability.

For Vietnam, the report said with the process of opening the economy, sticking to the strategy of "safe coexistence with COVID-19", the country has adopted many solutions to minimize the negative impacts of the Russia-Ukraine conflict and control the inflation, along with the implementation of the program of socio-economic recovery and development 2022-2023. Vietnam's economy is forecast to recover better in 2022, likely to achieve 5.5-6% (base scenario) and higher in 2023. However, inflation is forecast to increase quite strongly, possibly to 3.8-4.2% in 2022 and 4% in 2023.

In that context, Vietnam's financial market in 2022 will also benefit from this recovery, but there will also be downward corrections along with the general momentum of world stocks, along with the impact of policies to correct the market by the Government and the authorities, the market is expected to develop stably, healthily and sustainably.

As for the banking market, according to the report, the profit of the whole industry is expected to grow by an average of 20-25% compared to 2021 with credit growth expected at 14-15%. Institutional improvement (including bad debt settlement mechanism, new business model management), coordination of policies to control macro stability (inflation, exchange rate, interest rate), capital increase, digital transformation and implementation of the recovery program of the banking system will continue to be focused on.

The stock market is forecast to have necessary adjustments, and become more stable and healthier, with the VNIndex possibly increasing slightly (+8% to 1,610 points, according to the positive scenario) or decreasing slightly (-4% to 1,440 points, according to the negative scenario). Government bond issuance volume is expected to remain unchanged compared to 2021 due to the lower maturity scale of government bonds compared to previous years, contributing to reducing the pressure of issuing more government bonds to restructure public debt. The corporate bond market is forecast to continue to develop in a more transparent and healthy direction when regulations are issued in a stricter direction along with enhanced management and supervision to reduce risks. Meanwhile, the insurance market is forecast to maintain its growth momentum, with premium revenue increasing by about 18-20%, of which life insurance acts as the main driver of growth. Along with that, the process of institutional improvement, digital transformation and green finance is promoted. Systematic risks (especially the spillover between banking - securities - insurance - real estate) are forecast to be under control, which is also a necessary step to stabilize and healthy the market.

Dr. Can Van Luc, BIDV's chief economist and director of the BIDV Training and Research Institute, said that the risks of the financial market in Vietnam come from both objective and subjective factors (adjustment, speculation, leverage, crowd psychology). However, there is still plenty of room and opportunity to develop a safer and more sustainable market. The process of ensuring market health is necessary, but the approach should be "maintaining development, but still controlling risks".

According to many experts, in order for the financial market to develop safely and sustainably in the coming time, it is necessary to create conditions for credit institutions to increase capital; improve the legal framework and policies related to bad debt settlement, ensure healthy stock market, corporate bond market; strengthen risk management of the financial system; accelerate the building of institutions and legal corridors for the management and development of the digital economy, finance - digital banking; encourage the development of green finance such as green credit, green bonds.

By Quynh Chi, Vietnam Business Forum