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STATE BANK OF VIET
NAM

MINISTRY OF EDUCATION AND TRAINING

BANKING ACADEMY OF VIET NAM
---------------------------

TRAN THI THU HUONG

DEVELOPING THE VIETNAM GOVERNMENT BOND
MARKET IN THE CONTEXT OF FINANCIAL
INTEGRATION

Major: Finance- Banking
Code: 62.34.02.01

SUMMARY OF DOCTORAL DISSERTATION IN ECONOMICS


2


HA NOI, 2019


THE DISSERTATION WAS COMPLETED AT
BANKING ACADEMY OF VIET NAM
--------------------------

Academic Supervisors:
1. Assoc.Prof, Dr TO KIM NGOC
2. Assoc.Prof, Dr TRAN DANG KHAM
Referee 1 :
Referee 2 :

The dissertation is defended against University-level Examination
Board at Banking Academy of Vietnam
Time: ………… date …… month …… year 2018

The dissertation could be found at:
- Library of Banking Academy of Vietnam
- National Library of Vietnam



INTRODUCTION
1. Significance of the research
Formed in the 1990s, the Vietnam government bond market, though being
born later than other countries in the region and the world, has also had certain
successes, becoming an important capital mobilization channel for the state budget
and for development investment. However, the Government bond market still has
some limitations and has not been developed to match its potential. Market size is
still small, the market is mainly developed in width without depth. There are many
outstanding issues such as simple goods on the market, non-diversified investor
base, under-developed infrastructure. Government bond market has not yet fulfilled
the benchmark market role as a reference for other parts of the financial market. In
addition, Vietnam ‘s economy in general and the financial market in particular are in
the process of integration very quickly through a series of newly signed trade
agreements. Regional and global financial integration brings many benefits and
challenges to Vietnam’s fledgling financial market. In this situation, the Government
bond market needs further development steps to meet the requirements of integration
and take advantages that integration offers. Recognizing the necessity of developing
the Vietnam governmnet bond market, the PhD candidate has choosen the topic
Developing the Vietnam government bond market in the context of financial
integration. This dissertation aims to study and contribute to the theory of the
development of Government bond market in financial integration context and to
assess the status of Vietnam Government bond market under the effects of financial
integration. Thereby, some solutions are suggested to develop this market.
2. Objectives of the research
The main objectives of the dissertation are:
- Build a theoretical framework for developing the Government bond market in the
context of financial integration.
- Analyze the development status of Vietnam government bond market, then assess
the development level of this market in the context of financial integration.
- Build an econometric model to determine factors and effect of each factor on the
development of Government bond market.


- Propose a system of solutions to develop Vietnam government bond market in the
financial integration context.
3. Subjects and scope of the research
- Research subjects : the development of government bond market
- Scope on space: Vietnam government bond market, including the primary
market and the secondary market
Scope on time : the dissertation has studied the Vietnam government bond
market since the market was formed, but focused mainly in the period of 2000-2017.
4. New contributions of the dissertation
The new academic, theoretical contributions
- The dissertation has systematized the basic theoretical issues of government bond
market, financial integration, and developing government bond market in the context
of financial integration.
- The dissertation has built a complete and comprehensive measures to evaluate the
development level of government bonds market in financial integration context. It is
very improtant new point of the dissertation.
The new practical contributions
- The dissertation has analyzied situations of the Vietnam’s government bond market
comprehensively in different dimensions under the impacts of financial integration.
- The dissertation has evaluated the development level of Vietnam Government bond
market via the measures that are mentioned in theoretical framework. Several
achievements, limitations, and causes are concluded as a base of suggested
solutions.
- The dissertation examines the determinants of government bond market
development in financial integration context and the association between each factor
and the development of government bond market using the regression method.
- According to the theoretical and practical research results, the dissertation has
proposed a system of scientific solutions to develop the Vietnam government bond
market by taking advantages and reducing risks of financial integration.
5. The structure of Dissertation
Besides the introduction, conclusion and references, the dissertation is
organized in five chapters as follows :


Chapter 1 : Literature review and research methods
Chapter 2 : Theoretical framework on the development of Government
bond market in the context of financial integration
Chapter 3 : Situation of the development of Vietnam Government bond
market in the context of financial integration
Chapter 4 : Empirical model to examine factors affecting the development
of Government bond market in the context of financial integration.
Chapter 5 : Solutions to develop Vietnam government bond market in the
context of financial integration
CHAPTER 1 : LITERATURE REVIEW AND RESEARCH
METHODS
1.1.

Literature review

1.1.1.

Foreign studies overview

1.1.1.1. Research on Government bond market and developing
Government bond market
The theoretical thesis on the development of the Government bond market
was proposed by World Bank and International Monetary Fund in the study
“Developing a government bond market: A handbook” in 2001 và research “FS
series 12: Developing Government Bond Markets. Primer, Diagnostic Checklist, and
Guidelines for the Preparation of a Model Scope of Work” (2010). In addition to
studies of the entire market, there are also studies on a market issue such as the
issuance of government bonds or secondary markets like studies of Claessens,
Klingebiel, Schmukler (2007) and Siegfried, Simeonova, Vespo (2007).
1.1.1.2. Researches on financial integration and Government bond market
in the context of integration
Researches on financial integration
Many studies in the world on financial integration have been made, from the
basic issues such as concepts, characteristics, to deeper issues such as benefits and
risks of financial integration including researches by Stavarek et al (2011), Kenan
(2007) [75], Mougani (2011) [94], Agenor (2001) [24]...Research by Baele et al
2004 has developed a set of indicators to measure the level of financial integration


for the European region based on price-based measures, news-based measures and
quantity measures.
Researches on government bond market integration
The previous researches on Government bond market integration were
focused mainly on the European region such as the sutdy of Baele et al in 2004.
Government bond market integration in Asian countries is also mentioned in some
previous studies but very limited as research by Yu et al. 2007, Lian 2016.
Research on the impact of financial integration on the Government bond
market
Financial integration has direct and indirect impacts on the Government
bond market. Previous studies have investigated some specific impacts of financial
integration on the Government bond market such as Claeys et al. (2010), Claeys et
al. (2012), Manganelli et al. (2007), Furceri et al. (2012), Bolton et.al (2011).
1.1.2.

Studies overview in Viet Nam

1.1.2.1. Research on Government bond market and development of
Government bond market in Viet Nam
There are some researches on the development of Viet Nam government
bond market such as the master thesis of Trinh Mai Van (2005), the dissertation of
Le Anh Tuan (2011). Besides the overall market researches, there are studies that
focus on one aspect of the market such as bond issuance, bond trading.
1.1.2.2. Research on financial integration and developing Viet Nam
Government bond market in the context of financial integration
Regarding to integration issues in general and financial integration in
Vietnam, although there have been a number of published researches, the number is
still very limited. There is no specific, systematic research on financial integration,
especially on the development of Government bond market in the financial
integration context.
1.2. Research gap of topic
1.2.1. Research gap
In theory:


Firstly, there is no general, systematic study on developing government
bond market in the context of financial integration
Secondly, most of the studies when evaluating the development of the
Government bond market have not yet built specific indicators to assess the
development level of the market, especially when placed in the context of financial
integration.
Thirdly, there is no specific regression model to assess the factors affecting
the Government bond market accordance with Vietnam’s market and the ASEAN
region.
In practice:
Firstly, studies on Vietnam’s government bond market have not been
updated before changes in the socical- economic situation, not set in the context of
deeper region and the world integration.
Secondly, there is no research that has measures the degree of integration of
Vietnam’s Government bond market.
1.2.2. Research question
The biggest research question of the topic is problems in the development of
Vietnam’s Government bond market in the context of financial integration. In order
to find an answer to the main question, a number of sub-questions were raised,
including:
Firstly, how does financial integration affect the government bond market?
Secondly, how has Vietnam Government bond market developed in all
aspects in the context of financial integration in recent time?
Thirdly, What are factors affecting the development of Government bond
market in the context of financial integration?
Fourthly, What is the appropriate solutions to develop Vietnam’s
Government bond market in the current financial integration context in order to
exploit the benefits of financial integration while reducing risks?
1.3. Research methods
Research methods


The dissertation uses both qualitative research method and quantitative
method, combined with statistical method, analysis and synthesis. Econometric
model is also used.
Data source
The dissertation uses both primary and secondary data sources.
CHAPTER 2 : THEORETICAL FRAMEWORK ON THE
DEVELOPMENT OF GOVERNMENT BOND MARKET IN THE CONTEXT
OF FINANCIAL INTEGRATION
2.1. Government bond market
2.2. Developing Government bond market in the context of financial
integration
2.2.1. Financial integration
2.2.1.1. Definition of financial integration
Financial integration is the process of a country’s financial market becoming
increasingly connected to the financail markets of other countries in the region and
the world, leading to the free capital and financial services transfer among countries,
non- discrimination between market participants, making financial assets with
similar characteristics will be traded at the same price regardless of the origin.
2.2.1.2. Types of financial integration
2.2.1.3. Financial integration contents
Standardize the legal framework for financial activities
The entry of foreign elements and participation in the international market
of domestic organizations and individuals
Capital account liberalization
Monetary integration through monetary union formation
2.2.2. Impact of financial integration on the Government bond market
2.2.2.1. Positive impact
Increasing market size and liquidity
Reducing capital cost – interest rate
Improving investor base on the market
Improving the infrastructure and micro-structure of the market
Enhancing market discipline


2.2.2.2. Negative impact
Increasing market risk
Impact on raising interest rate
The risk of public debt crisis
2.2.3. Developing the Government bond market in the context of
financial integration
2.2.3.1. Viewpoint of Government bond market development in the context
of financial integration
Developing the Government bond market in the context of financial
integration requires a change in both quality and quantity in the market to enhance
the efficiency of the market in order to meet the requirements of integration process,
take advantages and limit risks that financial integration brings.
2.2.3.2. Indicators of assessing the development level of Government bond
market in the context of financial integration
- Indicators of market size: Government bond market size/GDP, domestic
government bond market size/ regional government bond market size, government
bond market trading value/ GDP, government bond market trading value/ regional
government bond market trading value.
- Indicators of market sustainability: Government bond interest rates in all
maturity, proportion of long-term government bonds, proportion of government
bonds/ total bonds, risk monitoring and warning indicators system.
- Indicators of the level of market integration: spread of government bond’s
interest rate and bond interest rate of benchmark country, the convergence beta index
and coefficient index.
- Indicators of market access: For issuers, market access, especially for
domestic market is only useful and effective when the cost of capital mobilization is
low and the capital mobilization process is easy (FSDI) [60]. For investors, it is easy
to participate, access and trade in the market. Therefor, in order to assess the level of
access to the Government bond market, the author has built some indicators: ratio of
government bond that is issued in domestic market, total value of international
government bonds/ GDP, investor base (types, proportion of goverment bonds held


by foreign investors), diversified issuance, distribution, and trading methods,
instruments are diversified and synchronized to international standards, modern and
synchronic infrastructure.
- Indicators of effectiveness: bid- ask spreads, turnover of government bonds
on exchange.
- Indicators of stability: daily return of government bond index, volatility of
government bond index (annual standard deviation), ratio of long-term investors
holding government bonds.
2.3. Factors affecting the development of Government bond market in
the context of financial integration
A number of factors affecting the development of government bond market
are proposed such as size of the economy, macroeconomic conditions, the credibility
of the government as an issuer, financial sector characteristics, legal framework and
market transparency.
2.4. Lessons on developing Government bond market in the context of
financial integration from international experiences
Developing government bond market must be associated with economic
development and strengthening the basic conditions for the market
Developing government bodn market in the direction of complying with
market laws, limiting and gradually eliminating the market manipulation and
intervention.
Investor base is an important factor affecting the development of the
Government bond market
CHAPTER 3: SITUATION OF THE DEVELOPMENT OF VIETNAM
GOVERNMENT BOND MARKET IN THE CONTEXT OF FINANCIAL
INTEGRATION
3.1. The process of Vietnam financial integration and integration of
Vietnam Government bond market
3.1.1. The process of Vietnam financial integration
1986 marked an important milestone for Vietnam’s economy when the
country began to carry out the renovation and proactive international economic
integration. Since then, Vietnam has continuously expanded bilateral and


multilateral external economic cooperation with many partners, in many forms,
fields, including the financial sector.
3.1.2. Vietnam government bond market integration
After becoming a member of WTO, the Vietnam government bond market
has gradually integrated more and more deeply into regional and world markets.
3.2. Overview of the process of formation and development situation of
Vietnam government bond market
3.3. Analyzing the development of Vietnam government bond market in
the context of financial integration
3.3.1. Using the set of indicators to evaluate the development of Vietnam
government bond market in the context of financial integration
3.3.1.1. Indicators of market size
Government bond market size
Looking at the size of Vietnam government bond market, it can be seen the
growth of the market over the years.
Domestic government bond market size/ regional government bond market
size
Comparing size of Vietnam Government bond market with other countries’
market in ASEAN+3 area over the last 5 year, the size of Vietnam government bond
market has been still small.
Trading value of government bond market/ GDP: the ratio of trading value
of Vietnam secondary government bond market to GDP is low, reaching the highest
in 2016 at only 35% GDP.
Trading value of government bond market/ regional trading value:
Compared to the trading value of some regional market such as Indonesia, Malaysia,
Thailand, it is clear that Vietnam government bond market has gradually increase in
trading value over the year.
3.3.1.2. Indicators of market sustainability
Government bond interest rates in all maturity
Interest rates of government bonds tend to decrease over the years in all
maturity. The process of liberalizing Government bond interest rates, following the


market rules, has been advocated very soon but the implementation has been slow.
The introduction of the directing interest rate into bond auction has affected the level
of freedom of Government bond market. The interest rates have not reflected the
market’s assessment of government bonds.
Ratio of long-term government bond market/ total government bonds
Along with the development of the market, the maturity of government bond
has been changed in positive trend, that is longer in line with the capital utilization
maturity of government. Issuance maturity of Vietnam government bonds has been
longer to improve maturity structure of government bonds, reduce risks, enhance the
market sustainability. In 2017, the remaining time to maturity of government bonds
under 5 year is only about 60%, significantly lower than the rate of 88% in 2013 and
100% in 2000.
Ratio of government bonds/ total bonds: Vietnam government bonds
account for a large part of the total bonds in Vietnam bond market while corporate
bonds account for a very small part, leading to the crowding out effect.
Risk monitoring and warning indicators system: not yet available
3.3.1.3. Indicators of level of market integration
Spread of Vietnam government bond’s interest rate and Thailand
government bond interest rate: the spread has decreased gradually over the years,
reflecting the increasing integration of Vietnam government bond market. However,
this indicator is still quite high in recent years (about 2%), proving that Vietnam
government bond market still has a gap of integration with the regional market.
The convergence beta index: While Thailand’s beta with US is quite stable
and tend to progress to 1 (about 0,8 in recent years), showing a high integration level
of Thailand government bond market, the beta indicators of Vietnam with Thailand’s
has been unstable and often low, average about 0,2, confirming Vietnam’s regional
integration level is still low.
Coefficient: α of Vietnam shows that the level of Vietnam interest rate
fluctuation is quite large in a systematic and independent way compared to the
fluctuation of Thailand. It is suggested that Vietnam government bond market is
weakly integrated with the region.
3.3.1.4. Indicators of the level of market access


Proportion of government bonds that are issued in domestic market to
total bonds: Government bonds of Vietnam are mainly issued on the domestic
market. The number of international bonds is very limited.
International bonds value/ GDP: insignificant
Investors base
Diversity of types of investors in Government bond market: Investors in the
market has made positive progress. However, it can be seen that the base of
investors still has no diversity.
Proportion of government bonds held by foreign investors: this indicator has
increased gradually over the years, from 5-6% in 2014 to 8,35% in 2015 and 12,38%
in 2016. However, these numbers are still low.
Issuance and trading methods
Issuance method: auction has become the most popular issuance method and
accounted for a large proportion of the total issued government bonds in Vietnam. It
is consistent with international practice.
Trading method: When the specialized government bond market was
established, only agreement trading method has been applied. It was suitable to the
current characteristics of Vietnam market that the transaction frequency is not much,
but the value of each transaction is high. Investors could perform electronic or
conventional agreement transactions.
Repo transaction: Sine the specialized government bond market was
established in 2009, repo transactions began to be seperated form outright
transactions. In the first three years, the value of repo transactions was low,
insignificant compared to outright transactions’ value. The later accounted for over
90% of total market trading value. In the following years, the value of repo
transactions reached to 47% of total trading value, continuing to follow the outright
value.
Quality and diversity of instruments on the market: instruments are simple
despite the addition of other instrument other than periodic interest – paying bonds.
Besides, the quality of instruments is not good when there are too many bonds codes
on the market and the volume of bonds for each code is small.
Mordern and synchronic infrastructue.


3.3.1.5. Indicators of effectiveness
Bid-ask spread (for 10 year government bonds): the bid- ask spread in
Vietnam government bond market has been high, average about 25 basis points. In
10 years form 2007 to 2017, the volatility in the bid- ask spread in Vietnam has been
large, especially when compared to some countries in the region such as Philippines
or Malaysia.
Government bonds turnover ratio: In the first years of the secondary
market, government bonds turnover ratio was very low, only 0,000089. Then it has
increased over the years, up to 1,22 in 2008. Bon turnover ratio has reached 2,25971
in 2017, the highest ratio.
3.3.1.6. Indicators of stability
Volatility of government bond index (standard deviation): Vietnam
government bond return is quite high compared to some countries in the region.
However, the coefficient of variation of Vietnam government bonds is lowest
compared to those of other countries. It has proved that Vietnam government bond is
less risky. Skewness of goevrnment bond index has a positive deviation like
Thailand and Indonesia but has the largest deviation. It has indicated that the market
is volatile and has very high positive return.
Ratio of long-term investors holding government bonds : reducing the
holding government bonds proportion of commercial banks, increasing the rate of
holding government bonds of long-term investors.
3.3.2. Assessing the development of Vietnam government bond market
in the context of integration
3.3.2.1. Results
Firstly, Vietnam government bond market has expanded significantly in
scale.
Secondly, development of the market is moving towards sustainability
Thirdly, the Government bond market has more integrated with the region.
Fourthly, most of Vietnam’s government bonds are issued on the domestic
financial market. It is an important and sustainable source of capital for the market.
Fifthly, the government bond market has become more accessible with
investors when investors’ bases are increasingly diversified.


Sixthly, the type of bonds issued has more diversity. Besides traditional
instruments that are periodic interest payment bonds, the market has non- periodic
interest payment bonds and shorter or longer first interest payment period bonds.
Seventhly, the government bond market has been more effective with better
government bonds turnover ratio.
Eighthly, the stability of the market has significantly improved through the
improvement of maturity and investor structure.
3.3.2.2. Limitations
Firstly, the market size is still limited.
Secondly, the market is not sustainable.
Thirdly, the level of integration is still low.
Fourthly, the level of access to international capital market of Vietnam is
limited.
Fifthly, the level of access of investors to the Government bond market is
limited. The market lacks the active participation of long-term investors with strong
financial potentials such as investment funds and insurance companies. The
instruments in this market are quite simple, there are no complicated instruments.
Sixthly, the Government bond market has not operated effectively, has not
shown the benchmark roles. The bid- ask spread has been large.
Seventhly, the market lacks the stability.
3.3.2.3. Causes
The size of Vietnam economy is still small
Macroeconomic conditions are low
The government’s credibility as an issuer is limited
The development of the financial sector is still low
The legal framework related to government bond market and market
participants is still limited.
Market transparency level is not high.


CHAPTER 4: EMPIRICAL MODEL TO EXAMINE FACTORS
AFFECTING THE DEVELOPMENT OF GOVERNMENT BOND MARKET
IN THE CONTEXT OF FINANCIAL INTEGRATION
4.1. Database and methods
The data used in the study are balanced panel data, including 9 countries in
the ASEAN+ 3 with 3 non-ASEAN countries Japan, South Korea, and China and 6
ASEAN countries Indonesia, Malaysia, Philippines, Singapore, Thailand and
Vietnam. The dissertation examines factors affecting the development of the
government bond market in the context of financial integration on data of these
countries because all countries are located in the East Asia integration area which
has many agreements including the Asian bond market initiative to develop the
regional bond market. Data of relevant variables in the model were collected in 17
years period from 2000 to 2016.
4.1.3. Hypothesis and research model
The regression model:
GBMsizeit = βo + β1t*GDPit + β2t*EXFLUCit + β3t*KAOPENit +
β4t*FISBALit + β5t*BANKSIZEit + β6t* SPREADit + β7t* MONFREEit +
β8t*GOVSTABit + Uit
i : ith country (i = 1-9)
t: year (from 2000-2016)
Dependent variable:
- GBMsize it : government bond market size (% GDP) in country i in year t
Independent variables:
- GDPit: Purchasing power parity gross domestic product (GDP PPP) of
country i in year t
- EXFLUCit: exchange rate fluctuation between national currency i and the
dollar at time t
- KAOPENit : national capital account openness of country i at time t
- FISBALit : the rate of surplus or deficit of the state budget / GDP (%) of
country i at time t
- BANKSIZEit : credit ratio provided by commercial banks (%GDP) in
country i at time t


- SPREADit : the spread between deposit and lending interest rate of country
i at time t
- MONFREEit : the level of national curreny’s freedom of country i at time t
- GOVSTABit : the government stability index of country i at time t
- Uit : error term
Research hypotheses:
Hypothesis H1: The size of the economy has a postive relationship with the
size of government bond market.
Hypothesis H2: Exchange rate fluctuations have an inverse relationship with
the size of government bond market
Hypothesis H3: the level of financial integration has a positive or negative
with the size of government bond market
Hypothesis H4: the level of budget balance has an inverse relationship with
the size of government bond market
Hypothesis H5: Bank size has a positive or negative relationship with the size
of government bond market
Hypothesis H6: interest rate spread is inversely related to the size of
government bond market.
Hypothesis H7: the level of monetary freedom is positively related to the size
of government bond market
Hypothesis H8: the government stability has a positive relationship with the
size of government bond market.
4.2. Empirical results
4.2.1. Statistic analysis
4.2.2. Regression results
The dissertation regressed the regression model using the pooled ordinary
least squares regression, fixed effects model FEM, random effects model REM.
Hausman test for the purpose of checking the consistency between FEM,
REM or Pooled OLS has result that FEM is more suitable to explain the results.
Modified Wald test was performed to test heteroskedasticity, showing that FEM has
heteroskedasticity. Because of heteroskedasticity and autocorrelation of FEM, the
dissertation used generalized least squares to overcome the above phenomena.


The results are as follows:
Table 4.4: The regression results using GLS to overcome
heteroskedasticity and autocorrelation
Variables
EXFLUC
KAOPEN
FISBAL
MONFREE
GDP
BANKSIZE
SPREAD
GOVSTAB
-cons
Prob> chi2
Significance

Co.efficient
-0,0026645
7,779302
-0,9457525
-0,0727044
0,0014773
0,0508646
-2,641492
0.0926638
43,10171

Std. Err
0,0449527
1,239365 ***
0,2416386 ***
0,1315124
0,0002671 ***
0,268586 *
0,5432186 ***
0,209063
9,248769 ***

0,0000
* 10%; ** 5%; *** 1%
Source: Author’s test

4.3. Research results discussion
- Capital account openness has a positive relationship with the size of the
Government bond market. The more deeply a country integrates in finance, the more
opportunity the government bond market will receive.
- Fiscal balance has an negative relationship with the size of the market.
However, a country should not rely on the state budget deficit to develop the
Government bond market.
- The size of the economy has positive relationship with size of government
bond market. A country that wants to develop the government bond market needs to
focus on promoting the economy
- The size of banking system is positively related to the size of the
Government bond market with 1% significance. The spread of deposit and lending
interest rates has negative relationship with size of the government bond market.
Improving size, quality and efficiency of the banking system is one of the solutions
to develop government bond market.
- The stability of the government has positive impact on size of government
bond market but there is not statistically significant. It could be explained that the
government bond market does not seem to respond to changes in government
stability immediately because the government stability assessment score is not easy


to calculate and quantify immediately. Although there is no statistical significance,
the positive relationship is a suggestion for market development solution.
- Exchange rate fluctuations are not statistically significant but the reverse
correlation suggested marcroeconomic stability is the basis to enhance the
development of government bond market.
CHAPTER 5: SOLUTIONS TO DEVELOP VIETNAM
GOVERNMENT BOND MARKET IN THE CONTEXT OF FINANCIAL
INTEGRATION
5.1. Vietnam government bond market development orientation in the
context of financial integration
5.1.1. Financial integration orientation in Vietnam
In January 2016, the Prime Minister approved the overall international
integration strategy to 2020 and vision to 2030 in Decision No. 40/ QD-TTg,
including contents related to financial integration.
5.1.2. Vietnam government bond market development orientation in the
context of financial integration
According to the bond market development roadmap for the period of 20172020, vision to 2030 in the Decision 1191/QD-TTg issued on 14/8/2017, the
Government bond market is required to become a benchmark for financial market.
The goal is to develop a stable, well-structured government bond market, expand
investor base, increase size and quality of operations, ensure effective market, and
become main channel to mobilize capital for state budget. At the same time, it is
required to ensure market transparency and protect investors’ interest and
proactively integrate into international market, access international norms.
5.2. Solutions to develop Vietnam government bond market in the
context of financial integration

5.2.1. Developing government bond market associated with economic
development
Expanding size of government bond market must be in line with the level of
economic development to create sustainability in the development. Empirical


research has shown that the size of economy positively affects the size of
government bond market and the development of government bond market.
5.2.2. Maitaining macroeconomic stability
5.2.3. Strengthening the government credibility as an issuer
5.2.3.1. Increasing efficiency of public debt management
5.2.3.2. Maintaining social and political stability
5.2.3.3. Developing the Government bond market follows the market rules,
reducing the intervention
- Market- oriented market development
- Prices are determined by supply and demand.
- Continue the process of interest rate liberalization in government bond
market
- Limit and gradually eliminate regulations to force buying and holding
government bonds.
5.2.4. Developing financial system to create foundation for the
sustainable development of Government bond market
5.2.4.1. Promoting financial integration
- Strengthening research, forecasting and assessing the impact of financial
integration to serve as a basis for the process of setting mechanisms and policies
related to integration.
-Strictly enforce financial integration commitments including commitments
on taxes, custom, financial services such as insurance, securties, banking,
accounting, auditing and other services
- Build financial integration roadmap for each period.


2018-2030
Review and
improve the legal
framework to
comply with
regional and
international
standards,
strengthen the risk
management
system and ensure
the safety of
financial system.

2018-2025
2018-2025
Improve
infrastructure and
market
microstructure

2018-2025
2021-2030
2021-2030

Enhancing the
competitiveness of Continue to
domestic financial implement the
institutions
deeper integration
commitments with
complex fiancial
services after
implementing
commitments to
basic financial
services

Fingure 5.1: Roadmap for financial integration to 2030
5.2.4.2. Developing financial institutions to create a strong investor base
for the government bond market
Solutions for pension funds
In order to promote size and quality of pension funds, policy makers need to
pay attention to overall operation of the social security system, create strong and
effective the legal framework.
Solutions for insurance companies
In order to develop the insurance industry in Vietnam, it is necessary to
continue to build and improve support mechanisms and policies, improve the
business environment, diversify products, invest in education and training, upgrade
competition ability of insurance companies.
Solutions for investment funds
- Create a clear and complete legal framwork for the establishment and
development of investment funds.
- To operate these funds requires a knowledgeable staffs, so training is very
important.


- In addition, there should be a mechanism to encourage the development of
various investment funds such as tax and fee incentives, simple procedures for
setting up investment funds, issuing fund certificates.
Solutions for commercial banks
Financial integration process requires a restructuring of banking system and
banks need major changes to meet integration requirements. To promote roles of
commercial banks in the development of Government bond market, in addition to
restructuring the system, improving the quality of commercial banks, it is necessary
to adjust investment policies of commercial banks when participating in the
government bond market, clearly define the role of credit institutions when
participating in the capital market and bond market.
5.2.4.3. Infrastructure improvement
5.2.4.4. Developing financial intermediaries to support the market
Building a system of primary dealers in government bond market
The main role of primary dealers is to participate in the market and ensure
the consumption of newly issued securities to final investors. The primary dealers
are required to be market makers, provide bid and ask prices to buy and sell
government bonds, improve bonds liquidity. Buiding the primary dealers is in line
with international standards. Under the Decree 95/2018/ND-CP on the issuance,
registration, deposit, listing and trading of government debt instruments, the concept
of a market maker was introduced. However, according to experience of some
countries, it is necessary to set a certain percentage for each type of different
investors in primary dealers system such as commercial banks, securities companies,
investment banks. The government also needs to attract foreign institutions to
become primary dealers, consider the benefits and costs.
Furthermore, it is necessary to determine size of primary dealers to be
suitable to the market size at each development period. Too few government bond
dealers can reduce the competitiveness, increase collusion capacity and reduce
efficiency. Too many primary dealers make high competition, reduce profit, leading
to the decrease in efficiency.


Improve the capacity of securities companies
Developing credit rating companies in Vietnam
5.2.5. Strengthening internal forces for government bond market
towards sustainable development
5.2.5.1. Issuing government bonds based on plan
- Issuing bonds to raise fund based on the Ministry of finance’s plan,
ensuring the target.
- Auction shoud be main issuance method to ensure marketability and
competitive market, in accordance with intenational practices.
- Restructuring government bond porfolio, issuing longer or shorter first
interest payment period bonds to decrease debt peaks in 2019 and 2020.
- Regularly organizing seminars, conferences through organizations and
associations to understand the needs of investors in the market, resulting in high
effectiveness in government bond issuance.
- Improving national credit rating to issue bonds on the international market
5.2.5.2. Improving the quality and diversity of instruments in government
bond market
- Reducing the number of codes of government bonds by re-selling smallsize codes to increase the size of each code, reduce number of codes in the market.
Reducing the issuance of government bond with fragmentation, inconsistency and
lacking of standard maturity. Government should apply the terms of repurchase.
- Research and develop new instruments which have been widely used in
developed markets such as STRIPS, inflation- adjusted bonds, floating interest rate
bonds.
- Applying derivatives to hedge risks such as future contracts, forwards,
options with underlying assets are government bonds.
5.2.5.3. Issuing green government bonds
5.2.5.4. Extending the maturity of Government bond portfolio
In order to prolong maturity of Government bonds, it is necessary to
consider the type of issued bonds and promote liquidity of these long-term bonds.
Derivatives like futures will be instruments that support investors hedge risks and
make long-term government bonds more attractive.


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