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MANILA, PHILIPPINES - The Asian Development Bank (ADB) has approved a $135 million loan program cluster to support the development of Viet Nam’s capital markets, in line with efforts to create a deeper and more resilient financial sector in the country.
“There is a need to foster a diversified financial sector in Viet Nam to sustain high investment and growth by developing the capital markets,” said Pradeep Srivastava, an economist for regional cooperation of ADB’s Southeast Asia Department.
The state-dominated financial sector in Viet Nam remains underdeveloped, inefficient and fragmented. The banking system still dominates the sector and is limited in its ability to transform its short-term liabilities into long-term financing. While domestic savings rates are high and are likely to continue to improve, and foreign direct investment into the economy is increasing, the ability to sustain economic growth will require increased financial intermediation and improved efficiency.
Given the complexity of developing capital markets, the Third Financial Sector Program Loan will comprise two subprograms, the first of which will be supported by a $75 million loan. The financial sector development and reform agenda of the entire program is structured around four components – enhanced market liquidity by lowering of transaction costs; an improved institutional framework for securities issuance; stronger investor and consumer protection; and improved regional cooperation in securities market regulation.
After 30 months, ADB will evaluate the first part of the program before authorizing continued funding.
According to Ayumi Konishi, ADB’s Country Director for Vietnam, the program is expected to increase the capital markets’ share of domestic investment financing, make resource allocation more efficient and the macroeconomic environment more resilient to external shocks. The program is also expected to support government efforts to promote greater regional cooperation by cultivating synergies with regulators of other securities markets in the region.
Well-developed capital markets will provide the government and the private sector with access to medium- and long-term funds that should support a wider variety of projects to promote economic expansion. Diversified capital markets will also provide competition to the banking sector, encouraging banks to improve their efficiency. Debt market development also should provide a benchmark yield curve that can help price other, riskier assets and contribute to the development of markets for such assets.
The loan program supports the government’s Socio-Economic Development Plan 2006-2010, which not only targets a middle income status for Viet Nam by 2010, but also an industrial country status by 2020. The development plan emphasizes business development, private investment and a continuing transition to a market-based system with greater integration with the global economy.
Over the past decade, ADB has actively supported financial sector reforms in Viet Nam through two program loans in 1996 and 2002. The First Financial Sector Program Loan created the legal and regulatory basis for commercial banking while promoting the development of more diverse institutions, instruments and markets. The Second Financial Sector Program Loan strengthened alternative channels for market-based financial intermediation.
For 2002-2006, Viet Nam posted an average gross domestic product growth rate of 7%, and the rate of expansion is expected to exceed 8% from 2007 to 2010. The poverty rate in the country has also been on the decline, falling to 19.5% in 2004 from 37.4% in 1998. Other social indicators of development are also showing improvement, including infant and maternal mortality, child malnutrition and access to safe water.