Last updated: Monday, May 20, 2013
Measures for Corporate HealthPosted: Thursday, April 05, 2012
Information publicity and transparency is one of the primary principles the World Trade Organisation (WTO) requires from all member states. If information disclosure is legislated, the corporate information system will be updated and made transparent, thus ending back-door information access. In Vietnam, credit rating initially aims at providing useful information for investors, enterprises and policymakers to reduce risks and losses, and to sustain development.
The release of the credit rating of a nation, an organisation or a company is very common. There are many reputable credit ratings agencies like Standard & Poor's, Moody's and Fitch Ratings.
Being rated good or higher means the company gets a passport to globalise its brand name and edge up its competitiveness. In fact, several banks and insurers in Vietnam were rated by world-leading credit ratings agencies like A.M. Best and Fitch Ratings. With ratings by these agencies, Vietnamese businesses can confidently stay abreast of leading financial groups in the world.
Structure of Vietnam credit rating index
If only basing on the definition of credit ratings: Assessing the capacity of an issuer to settle due payment of principal and interest of a debit security, a company only needs to provide credit ratings reports. Is this right? If this is right, the report compiled and announced by the Vietnam Chamber of Commerce and Industry (VCCI) and the Credit Rating of Vietnam Joint Stock Company (CRV) consists of Vietnam's economy in 2011, Vietnam’s Global Competitiveness Index in 2011 – 2012, financial capacity of some export-oriented industries, financial capacity of 100 large companies and banks in Vietnam and credit rating of listed companies.
The answer is the credit rating is not enough for investors, insurers and policymakers. Let’s look at the European debt crisis - a burning issue for the time being. The debt crisis has a huge impact on the global economy, and the credit rating downgrade of some European countries has shaken global stock markets, let alone downgraded companies in downgraded nations. This explains that macro factors play important roles on stock markets. This means CRV provides downward approach: The first is overall macroeconomic picture, the next is financial positions of industries and the final is the competitiveness of companies through technological progress index of 100 typical companies.
In the Vietnam credit ratings, each part has suitable approach and is measured by both qualitative and quantitative factors.
As regards credit ratings of listed companies, CRV combines both qualitative analysis and quantitative methods like linear probability model, Logit model, Probit model, and other analysis models. Normative statistics techniques are used to estimate the probability of insolvency based on historical corporate financial data. These techniques are different. Linear probability model assumes the existence of linear relationship between the probability of insolvency and other factors; Logit model assumes the probability of logistic distributive insolvency; and Probit model assumes the probability of cumulative insolvency. These methods help identify and categorise companies with high and low risks of insolvency.
In a market economy largely driven by globalisation and economic integration developments, economic relations are progressively expanded, but they also entail more risks. Besides, in a market economy, all participants always want to have independent assessments on operations, development prospects, and credit positions before making investment decisions, carrying out M&As (mergers and acquisitions), financing credit, forging partnership or supplying goods. Therefore, credit rating is an indispensable requirement, always exists in a market economy, and is also the most important factor for risk management.
Providing useful information
Under the sponsorship of the Presidential Office, Credit Rating of Vietnam Joint Stock Company (CRV) and the Vietnam Business Forum Magazine, several scientific organisations in collaboration studied and undertook the Vietnam Credit Rating Annual Report. What information does the Vietnam Credit Ratings Report express and who does it serve?
The 2012 report will be more of practical meaning than academic. Analyses on macroeconomic indicators, measurements of economic vulnerability, changes of economic competitiveness ranking, financial position indicators of export-oriented industries, and technological progress indicator of 100 leading listed enterprises and banks provide a complete overall economic picture for ministries and other central management agencies. Remarkably, this is a combination of general macroeconomic indicators, sector indicators, and rankings of companies into a unified document for central agencies providing a complete look, from top to bottom, helping them find appropriate solutions to push the development of industries and businesses. It also provides useful information about the better efficiency of merger or dissolution of enterprises.
For highly-rated businesses, CRV - with its methods and data - assesses the good ability of issuers to fulfil their liabilities. Therefore, they can easily issue securities and take part in other markets at a low cost. For low rated businesses, CRV is sending a warning to their operations.
For investors, this is a pretty good picture portrayed in the top-down approach. They have necessary information about macro economy, industry and companies. Such information is crucial for their decision-making. CRV will provide the Vietnam Credit Ratings Report 2012 in Vietnamese and English language to serve both Vietnamese and foreign investors.
In short, CRV supplies information that helps make the market more transparent. And, that information is useful not only for investors but also for banks, insurance companies and other State regulators.
Prof Nguyen Khac Minh, National Economics University