Dragon Capital: Vietnam has 3–5 years to cut bank reliance

Dragon Capital: Vietnam has 3–5 years to cut bank reliance

Vietnam has a three-to-five-year window to reduce its reliance on bank credit, making the restructuring of its capital channels an urgent priority, according to Dragon Capital.

Speaking at a seminar on restructuring capital channels hosted by VIR on July 15, Dang Nguyet Minh, head of Research at Dragon Capital, said Vietnam is standing at the threshold of a new growth cycle, requiring the capital market to become the primary channel for mobilising long-term resources rather than relying excessively on bank credit.

According to Minh, Vietnam's economy and financial market have achieved remarkable progress over the past decade. However, the country's ambition to become a high-income economy by 2045 requires a fundamentally different scale of capital and a higher quality of growth.

"Our estimates show that maintaining double-digit GDP growth over the coming years and achieving the 2045 development target will require around $1.46 trillion in total investment, equivalent to roughly 2.5 times Vietnam's 2025 GDP," she said. "Against this backdrop, developing the capital market is no longer an option, but a prerequisite for entering a new growth cycle. Bank credit can currently meet only around 20-25 per cent of the economy's financing needs, while foreign direct investment contributes another 15-25 per cent. The remaining funding will have to come from the bond and equity markets over the next five years."

Dang Nguyet Minh, head of Research at Dragon Capital. Photo: Chi Cuong

Minh noted that Vietnam's credit-to-GDP ratio currently stands at around 146 per cent. While this remains below the highest levels in Asia and has not yet reached a warning threshold, it already exceeds that of comparable emerging economies such as India.

"If bank credit continues to expand by 15-16 per cent annually, Vietnam's credit-to-GDP ratio will rank among the highest in Asia within the next three to five years, behind only China, South Korea and Singapore. We have only three to five years before a growth model driven primarily by bank lending reaches its limits," she warned.

"At the same time, rising capital demand will continue to put upward pressure on interest rates. The banking sector's capital adequacy ratio remains relatively thin at around 11-12 per cent, while deposit growth continues to lag credit growth, adding further pressure on system-wide liquidity. We cannot build a 40-year economy on funding with maturity of only 12 months," said Minh.

She explained that in developed economies, banks primarily provide financing to small- and medium-sized enterprises and retail customers, while long-term funding for infrastructure, large-scale manufacturing and innovation is mainly raised through the bond and equity markets.

"Equity is the longest-term source of capital, while bonds allow companies to raise funding for specific investment purposes with appropriate maturities, creating a better balance between financing needs and capital structure," said Minh. "To support Vietnam's development ambitions, the stock market should expand to around 120 per cent of GDP, compared with the current 60-70 per cent. Likewise, the bond market needs to grow to around 40 per cent of GDP, from less than 20 per cent today."

"This clearly shows that the stock market will play a pivotal role in mobilising long-term capital for the economy," she added.

Minh argued that Vietnam possesses many of the fundamentals needed to attract international capital, including sweeping administrative reforms, an increasingly important position in global supply chains, benefits from the China+1 manufacturing shift, favourable demographics and consumption trends, the prospect of a stock market upgrade, and ongoing market modernisation aligned with international standards.

"The paradox, however, is that FII continues to record persistent net outflows," she said. "Foreign investors now account for only around 12 per cent of total market capitalisation, roughly half the level recorded at the peak in 2016. While Indonesia and Malaysia have experienced similar trends, Vietnam's net outflows have been significantly larger."

According to Minh, the problem lies on both the supply and demand sides of the capital market. On the supply side, the structure of listed companies has failed to keep pace with the transformation of the economy.

"Financial services and real estate currently account for around 68 per cent of total market capitalisation, while manufacturing represents only about 15 per cent and services around 11 per cent. High-tech companies and large-scale manufacturers remain severely underrepresented," she said. "The market lacks high-quality listed companies capable of attracting long-term investment."

On the demand side, Minh pointed out that Vietnam still lacks sufficient pools of long-term domestic capital.

"We need to accelerate the development of domestic investment funds while introducing stronger incentives to expand long-term institutional capital, including pension funds, mutual funds and other long-term investment vehicles," she stressed. "If both the supply- and demand-side delays can be addressed simultaneously, Vietnam's capital market will be able to grow faster, become more resilient, and truly serve as a new engine of economic growth."

VIR