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Engagement with government monetary policy bodies facilitates the growth of local currency bond markets.

Monetary policy and central bank operations impact the development of a local currency bond market. For example, excessive liquidity is not conducive to the development of a debt market. Interest rate ceilings, which are frequently used in Viet Nam and other developing member countries (DMCs) of the Asian Development Bank (ADB), distort markets. Volatile interest rates and unpredictable monetary policy preclude planning and typically drive creditors to increase their risk premium. Moreover, monetary policy that is not market based will negate private sectors efforts to identify and use a short-term market−determined benchmark interest rate. In view of these impacts, it would be advisable for ADB to vigorously engage DMC monetary policy bodies to speed the development of local currency bond markets and deepen financial sector reforms.

Addressing the sources of potential systemic risk contributes significantly to the development of the local currency debt markets.

Financial sector stability, the resolution of nonperforming loans (NPL), and financial sector development are mutually reinforcing reforms that increase investor confidence and participation. At the outset, the banking sector typically plays a key role in financial sector development by purchasing government securities for its own account and for the accounts of others. However, the banking sector in Viet Nam remains pressured by inadequate capitalization and a large NPL overhead. In a weakened state, especially when accompanied by a lack of transparency, banks assume less risk, trade less with one another, invest less in technology upgrades, and typically divert resources toward NPL resolution. International investors typically avoid poorly rated debt securities and do not readily invest in countries known to have high levels of systemic risk. Therefore, while foundational reforms had proceeded smoothly in Viet Nam, efforts to further develop the local currency debt markets should also address the sources of potential systemic risk on which success more heavily depends.

Coordination becomes increasingly necessary as the complexity of finance sector reforms increases.

ADB underscored and strongly encouraged inter-departmental and intra-ministry coordination under this program. However, experience had reinforced earlier lessons that widespread coordination in the Vietnamese context is difficult to achieve. But as the complexity of government-mandated reforms increases, coordination within and between ministries will need to be strengthened. Besides the State Bank of Viet Nam (SBV) and the Ministry of Finance (MOF) that had to coordinate for the development of the money market under this program, the Ha Noi Stock Exchange, the Vietnamese Securities Depository, and other ministries should also be included in the ambit of coordination.

 

Background

Earnest efforts to develop the financial sector have supported Viet Nam’s aspiration to rise to higher middle-income status by 2020. The Asian Development Bank (ADB) has backed these efforts since 1993 by providing 3 program loans that assisted in developing a market−based financial system, including establishing a legal framework for negotiable instruments and secured transactions, strengthening the banking sector’s capacity in credit risk management and deposits generation, encouraging banking sector competition, developing the non-banking sector as an alternative source of intermediation, and increasing the transparency of the securities market while enhancing consumer protection and financial stability.

In August 2011, ADB approved the Financial Sector Deepening Program, comprising 2 single-tranche subprogram loans, totaling 100,651,000 in special drawing rights. Building on the lessons from previous projects, the program introduced a more focused and structured delivery, which recognized that the process of financial sector development needs to be properly sequenced over the medium to long term. It had 3 planned outputs: (i) a well-functioning money market, (ii) a deepened and more liquid government bond market, and (iii) improved capacity of public institutions in the finance sector.

 Key accomplishments under output 1 included enhancing the coordination between the State Bank of Viet Nam (SBV) and Ministry of Finance (MOF), establishing an enabling environment for short-term loans, improving brokerage regulations, initiating a formal repo market, stimulating the short-term money market, strengthening bank prudential liquidity standards, and improving the transparency of the foreign exchange interbank market.

For output 2, the program supported the adoption of a bond market development road map; and helped strengthen the legal framework governing public debt issuance and management, increase the liquidity of the government bond market, develop the corporate bond market, and accelerate the resolution of nonperforming loans. It also introduced new measures to reduce systemic risk and increase investor confidence; and supported efforts to develop a primary dealer system with basic rights and obligations.

For output 3, the program provided a human resources development plan for the SBV and assessed the Viet Nam Accounting Standards against the International Financial Reporting Standards.

Overall, outputs one and two achieved their performance targets. As of program completion, the money market exhibited increased trading volumes while government bond market manifested a nascent structure for interest rates up to 15-year terms. The foundation for a primary dealer system had been completed and steps had been taken to integrate Viet Nam’s bond market into the Association of Southeast Asian Nations. For output 3, while performance targets for capacity development were achieved, this was not enough to enable government institutions to supervise a more developed financial sector.

Although data limitations had prevented a thorough assessment of program performance in relation to its outcome targets, there were indications that the significant delivery of the planned outputs led to increased investor confidence in the country.

ADB’s Southeast Asia Department rated the program successful. The SBV was the executing agency, while the implementing agencies comprised the MOF, the State Securities Commission, the Ha Noi Stock Exchange, and SBV.

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