Quang owns a small fruit processing company in Da Nang. Business has been good, and he is contemplating expansion beyond Vietnam. Yet, after visiting many banks, he has not been able to secure an additional credit line. This is the story of many entrepreneurs in Vietnam who have identified access to credit as the most severe obstacle to doing business, more than taxes, more than corruption and more than skills.
Figure 1: Access to finance is the most severe obstacle for businesses
Source: World Bank enterprise survey, 2016.
Part of the reason is lack of options, as the only potential source available to them are commercial banks. While the banking sector has been extremely generous with big firms, including state-owned enterprises and privileged clients, it has proved more difficult for small- and medium-size firms (SMEs). Only 29 percent of enterprises in Vietnam report using credit from a bank to finance their investment needs, compared to 35 percent in Malaysia or 52 percent in high-income economies. The main problem is not in the cost of financing but the banks’ unwillingness to take risks with smaller clients without traditional forms of collateral, primarily land. Moreover, loans from banks are typically short term and are not suited to the ambitions of SME entrepreneurs keen to invest in equipment to expand their businesses. As a result, it is estimated that only one-fifth of the bank’s credit portfolio is allocated to small and medium firms in Vietnam.
The latest World Bank economic report on Vietnam Taking Stock asserts that the country could finance its transition to a higher-income economy by unlocking the potential of its capital markets. Today, despite a rapid expansion over the past few years, Vietnam’s capital markets, measured by the total value of bonds and equities, is approximately equal to the country’s GDP, which is far from the levels reached in Thailand (154 percent of GDP) and Malaysia (219 percent of GDP).
Figure 2: Vietnam’s capital market is 1.5 and 2.2 times smaller than in Thailand and Malaysia, 2018
Source: World Bank.
Only a few private firms have raised funds through the capital markets in Vietnam. On the bond market, the main actor has the government. The value of public bonds is approximately three times higher than the value of those issued by private firms (mostly banks and insurance companies). However, it should be recognized that many domestic firms have used private placements that are, by definition, hard to measure. On the equity market, the concentration is even bigger, as only two companies (Techcombank and Vinhomes) accounted for two-thirds of total issuances in 2018.
For Vietnam, the challenge of unlocking capital markets to finance private firms will require improving the rules of the game. These are very important to incentivize both issuers and investors, as well as to manage risks. For example, disclosure practices must be improved by aligning them with international best practices. The establishment of a credit rating agency should help guarantee quality information to investors, including foreign investors, paving the way toward the inclusion of Vietnam in regional and global bond and equity indexes. Broadening the domestic investor base is also important as insurance and pension funds (including Vietnam Social Security Fund) could channel their savings into productive capital and achieve higher returns to fund their longer-term liabilities, as is the current practice in many countries around the world.
If Vietnam could address all of these obstacles and its capital market development were to rise to the level currently reported in countries like Thailand and Malaysia, this could release up to $100 billion in new funding. These new funds would in turn help many SMEs, including the one owned by Quang in Da Nang, so they could innovate, develop new markets, and hire new workers. The potential returns of unleashing capital markets are very high and could help realize the country’s quest to reach high-income status in the foreseeable future.
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