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Thursday, December 2, 2021

Financial market development: bright future for stock market?

By Trieu Duong

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The economic restructuring plan for 2021-2025, recently unveiled by the Ministry of Planning and Investment, has set out the objective of developing a balanced financial market to really transform the stock market into a major channel for raising medium and long-term capital, improve openness and transparency, diversify financial institutions, address a diversity of needs and promote economic innovations

Vietnam’s economy remains heavily dependent on banks’ capital mobilization, whereas credit risks are always lurking, especially during times of economic crisis, as is the case now. It is therefore understandable why the Government always looks to change the task of capital mobilization from short-term money markets into a longer-term capital market where stability can be better maintained. Among them, the stock market, stocks and bonds alike, plays a crucial role.

To meet such a broad objective, the Ministry of Planning and Investment has come up with a seven-point plan.

First, the size of the stock market is equivalent to 120% of GDP (Gross Domestic Product), and that of the bond market to 55%.

As of late September, the stock market capitalization attained nearly VND6.47 million billion, or 107% of GDP in 2020, meaning the target of reaching 120% of GDP by 2025 may be attainable, especially when the market is expected to maintain its growth momentum in the coming years.

In addition, the new trading system for the Ho Chi Minh City Stock Exchange (HOSE), which was set up with assistance from a Korean partner, scheduled for application later this year, will be able to list more companies, while attracting extra cash flows. The process of flotation and divestment at State-owned enterprises is predicted to flow at a remarkably fast pace in the coming time to cope with the demand of the State budget and increase the number of listed firms.

Meanwhile, the bond market is currently worth more than VND2.4 million billion, including VND1.4 million billion worth of government bonds and over VND1 million billion of corporate bonds, equivalent to 7% of GDP in 2020. As it is forecast that the corporate bond channel will continue to achieve spectacular growth relying upon the yields it produces far more tempting than bank deposits, and government bonds may also grow strongly again in the coming period in response to the need for greater public investment to stimulate the economy, the aforesaid goal will hopefully be accomplished soon.

The second goal is that 5% of the population will become investors in the market. It seems this goal can be attained the soonest, because the current percentage is already around 3.8%, mainly thanks to the surge in the number of new accounts opened in the past year and a half. Given the fact that investment will further rise, spurred by an easier access—when most securities companies now allow online account opening and authentication—as well as stock investment knowledge now rampant, an annual 0.3% increase over the next four years is within reach to meet that target.

The third goal is to diversify products on the stock market, step by step introducing options and futures contracts on securities before 2025. Since those VN30 futures contracts and warrants already available have yet piqued the interest of so many investors, or even said to be subject to manipulation at times, it is apparent this goal will be more challenging. Remarkably, even when a new product is launched, it is only considered successful if it has transparency and harbors investors’ interest.

Market outlook

As mentioned earlier, transparency is the most important condition for the market to develop sustainably in the long run. It is because, even with a larger part of the population involved, if the market fails to protect the interests of investors, many of them will certainly feel disappointed and discouraged, and look to withdraw from this investment channel, something that already happened 13 years ago. In that case, even though the number of accounts is impressive statistically, the number of investors who are actually active will make up just a small percentage, which no longer means much.

Which is why the enhancement of openness and transparency is mentioned in the overall objective, and the fourth goal requires corporate governance within listed companies in Vietnam to reach the average level of ASEAN-6. However, this goal is considered fairly humble, and it is still unclear how it will be evaluated. In fact, the key remains minimizing insider trading and market manipulation by imposing stricter sanctions against violations related to such activities for the good of retail investors.

The fifth goal sets out the task of upgrading the stock market of Vietnam to an emerging market by 2025. This is also what investors are most looking forward to, because once successful, it will attract a huge amount of capital from foreign investment funds and take the market at home to the next level. So far, quite a few organizations have predicted Vietnam will soon be upgraded to the status within the next two years.

Last but not least, the remaining two goals are aimed at developing the insurance market: 15% of the population are covered by life insurance and the average premium revenue is 3.5% of GDP by 2025. In 2020, only nearly 11% of the Vietnamese population signed a life insurance scheme, and the average premium revenue was just 3% of GDP, way lower than in other countries in the region. However, given the increasing per capita income, plus easier access created by new products such as bancassurance distributed via the banking network, this goal may be soon attained as well.

More importantly, once the insurance market becomes developed, it will indirectly promote the growth of the bond market, as the capital of insurance companies is now mainly concentrated in safe investment channels, government bonds, for example.

Apparently, if serious efforts are undertaken to achieve all the above targets, the outlook for the stock market’s future development is really bright in the coming time. However, challenges will certainly surface and hinder the fulfillment of such goals, the most challenging issues of which relate to macroeconomic balance and stability. In an unstable economy, fostering an efficient and sustainable financial market is virtually infeasible.

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