Viet Nam: Third Financial Sector Program Loan Cluster - Subprogram 2

Finance / Banking systems and nonbank financial institutions - Insurance and contractual savings - Money and capital markets

Output 1: Enhanced capital market liquidity through improved information disclosure. Timely disclosure of material information reduces information asymmetries among market participants, strengthening investor confidence and supporting market liquidity. Subprogram 2 supports a new core policy action covering the new regulation issued by MOF covering information disclosure for listed and unlisted public companies which moves them closer to the adoption of international best practices. Under a new core policy action, SSC completed a comprehensive analysis of a strategic development and sector road map for 2010 to 2020 to address market infrastructure bottlenecks for capital market growth. To address accounting standards, the government initiated a gap assessment to more closely align Vietnamese accounting standards with the IAS and developed an implementation timeline. To enhance market information standards, the draft Law on Independent Audit was submitted to the government. To enhance information disclosure, the Vietnam Securities Depository (VSD) completed the pilot implementation of the automatic synchronization of records between its head office and branches for public companies registered with VSD. To strengthen VSD s risk management capacity, a risk assessment of its central depository and clearing functions benchmarked against international practices will be undertaken.

Output 2: Strengthened institutional framework for securities issuance. To develop the government securities market, the program supports institutional reforms such as the establishment of Public Debt Management Office (PDMO). Together with the Banking and Financial Institutions Department of MOF, PDMO will provide an institutional focal point to support a range of key reforms in the bond markets. To improve the risk management and the operating efficiency of the money market, and open market operations for the development of a liquid secondary market, SBV will incorporate the short-term risk mitigation measures identified in the ADB TA report.

Output 3: Enhanced legal and regulatory framework for investor and consumer protection and financial sector stability. The program supports a review of the legal framework for the Securities Law with a view to strengthening enforcement powers and investor protection. State Bank of Viet Nam (SBV), as part of its response to the global financial crisis, introduced measures to strengthen commercial banks including (i) adopting new corporate governance requirements based on the corporate governance principles of the Organization for Economic Co-operation and Development; (ii) increasing the charter capital of banks; and (iii) amending the SBV Law, Credit Institutions Law, and application of Bankruptcy Law on credit institutions, including special control by SBV in an effort to drive banking consolidation. As part of its efforts to strengthen its anti-money laundering regime, Viet Nam joined the Asia/Pacific Group on Money Laundering and in July 2009 was evaluated by the group. A new core policy action supported under subprogram 2 is the submission of the draft amendments to the insurance law to the government by August 2010 and the issuance of a decree on administrative penalties for insurance businesses.

Output 4: Improved regional cooperation and human resource development. One of the conditions stipulated in subprogram 1 is for the State Securities Commission (SSC) to assess its ability to meet benchmarks under the International Organization of Securities Regulators (IOSCO) multilateral memorandum of understanding (MMOU) and to develop a road map for it to become a signatory to Annex B of the IOSCO MMOU. Viet Nam has been accepted as an IOSCO MMOU Annex B signatory, which is subject to government approval. The reformulated policy action for subprogram 2 requires MOF to submit a request to the government to approve Viet Nam s membership in the MMOU Annex B signatory. Subprogram 2 supports a systematic approach to capacity building for financial sector development. SBV is developing a 5-year human resource development plan to 2015 with a vision up to 2020. In line with this move, SBV will conduct a skill gap assessment to formulate a comprehensive capacity-building program.

Financial sector reforms require support over the medium to long term. Reforms supported under this and earlier programs have been integral to supporting Viet Nam s gradual transition from a centrally planned to a market-based economy and in helping the government achieve and sustain high rates of economic growth. This growth was instrumental in the country's remarkable progress with poverty reduction over the last decade. Viet Nam's recent rapid rate of economic growth has been underpinned by record investment. Investment by the private sector, moreover, has grown much faster than that by the public sector. Following the acceleration of economic reforms, private sector investment has supplanted the public sector as the main contributor to capital accumulation during the program period, accounting for over 60% of total capital accumulation by 2007.

While progress in developing the financial sector has been impressive, banking continues to dominate the sector, and in particular the state-owned commercial banks, which account for 51% of total aggregate loans. The IMF 2010 Article IV Consultation with Vietnam concludes that one of the fundamental problems facing Viet Nam is overbanking. While asset remains sound, constraints to the continuing intermediation of banks include their limited scale of operations, rising credit risk, and funding mismatches. By increasing the share of nonbank financial markets in financing investments, subprogram 2 will continue to enable sustained high economic growth with reduced risks due to funding mismatch.

In addition, the Global Financial Crisis presented an opportunity for the Government to further refine its development goals as regards the financial sector. In evaluating the effects of the crisis, the Government noted that total stock market capitalization declining to 15.19% of GDP in 2008 from its peak at 43.26% in 2007. Likewise, the total outstanding value of gvernment bonds as a percentage of GDP declining to 8.25% in 2009 after reachin its peak in 2007 at 10.28% of GDP. As a result, the government is increasingly recognizing the need to create an institutional basis for its debt management. In addition, the Government has recognized the need to development money markets and the short end of the government yield curve.

To support the government in meeting these revised priorities, subprogram 2 was refined based on four key considerations. First, the reformulation recognizes the significant shift in government policy priorities for the financial sector, and most notably the increased emphasis on the transparency, soundness, and stability of banking system. Second, the reformulation recognizes and supports the Government s efforts to develop holistic reforms of its debt operations prior to embarking on significant market structure reforms. Within this context, and has prioritized the creation of an institutional basis for debt management and the development of more effective and efficient debt issuance mechanisms. Third, the government has recognized the need to develop the short end of the government securities market and to further augment the short term money market as part of a sequential approach to bond market development. As part of this effort, subprogram 2 will support the government in improving the risk management and operating efficiency of open market operations of SBV. Finally, the Government has recognized that finance sector reforms require a clearly defined step-by-step approach over the medium-to-long term as new institutions and concepts are introduced and related capacity development needs addressed.