Vietnam Government's G-Bond Raising - Lower than Expected

In 2008, the Government mobilised more than VND39,000 billion (US$2.2 billion0 from bond issue, fulfilling 62 per cent of the plan. The Hanoi Securities Trading Centre (HASTC) conducted 44 tranches guaranteed by the Government to raise over VND7,000 billion, equal to 22.1 per cent of the initial target and nearly 37 per cent of total proceeds in 2007. Although the coupon rates of bonds were quite attractive in relation to bank rates (the coupon rate was around 7.6-10 per cent per annum in the first half of 2008 but at some 15 per cent from June and October, averaging 9 per cent per annum for 2-5-year bonds.). Macroeconomic volatility caused unsuccessful auctions.

 

In the first quarter of 2009, HASTC auctioneered eight tranches of government bond issue in the domination of Vietnam dong but only one tranche raised VND100 billion from two-year bonds issued by the State Treasury. The unsuccessfulness was attributed to investor expectations of higher levels of ceiling rates imposed by the Ministry of Finance. Besides, on March 20, 24 and 27, the Government issued USD-denominated bonds worth of US$300 million, with maturity of one, two and three years (US$100 million each maturity). Bidders at HASTC were mainly commercial banks. The Government raised US$230.11 million. After three sessions, the demand exceeded the supply, especially in one-year term bonds. This showed that banks were rich in foreign currencies.

 

Bond investment was a safe shelter for investors in 2009 amid of global economic slump. Therefore, the liquidity of bonds in the secondary market was significantly boosted. In the first quarter of 2009 alone, the trading value of bonds on HASTC reached VND45,005 billion, doubling the amount in the same period of 2008. Government bonds accounted for 99.2 per cent of bond market value.

In February 2009, the Government expected to raise an addition of VND11,500 billion, totalling VND55,000 billion in 2009. It also allowed issuing bonds in US dollars to raise funds to boost investment, implement social security policy and offset the budget deficit in 2009 (budget deficit was estimated at VND50,000 to VND90,000 billion due to economic recession and crude oil price fall.) Besides, the Ministry of Finance said it would raise bonds in large lots and restructure bond issues in 2009 to boost liquidity on the secondary market.

 

However, according to many specialists, due to economic slump, the recovery of the equity market in general and the bond market in particular remains an unknown. Especially, according to Master Trinh Mai Van of the National University of Economics, the incomplete disbursement of proceeds from government bond issues from 2003 to 2008 (the proceeds were VND300,000 billion but the disbursement was only VND65,000 billion, or 54 per cent of the target) partially impacted the plan to raise capital of the Government in 2009.

 

In addition, it is more difficult to have successful bond issue when the economy is in crisis, capital is withdrawn from the market and investors wait for better economic outlooks or presence of more foreign entities.

 

Besides, strong bond investments in 2008 by domestic investors, especially banks, limited their market penetration in 2009. Even, in the first quarter of 2009, commercial banks sold bonds to restructure their portfolios.

 

Ms Mai Van said the fixing of ceiling interest by the Ministry of Finance raised a high barrier to selling government bonds because this made coupon rates lower than expectations of investors. This led to the unsuccessfulness in the past months.

 

“In addition, the absence of derivative instruments, unclearness of issue criteria regulations, insufficiency of information, absence of credit ratings and asynchrony of bond trading system also sank liquidity of the market,” Van said.

In 2009, the Government makes bond issuance the major channel to raise capital. According to Ms Van, the Government needs to focus on stabilising macro economy to boost confidence of domestic and international investors and have plans to use proceeds effectively. “The Government also needs to make good forecasts of GDP, budget deficit, investment demand, and economic fluctuations to produce good G-bond issue plan, set reasonable value and volume to ensure high feasibility,” said Ms Van.

 

Especially, the Ministry of Finance needs to adjust ceiling rate regime to get close to market rate to draw more interest from investors. At the same time, it should also build a standard interest rate curve for other types of bond in the market. Besides, the Government necessarily focuses on issuing G-bonds in large lots because there are 527 different types of bonds but the volume of each type is too small to meet big investors, leading to weak liquidity. Importantly, it needs to consider more proper time to issue bonds and to encouragement policies like tax, fee, privilege to take part in primary market, consulting assistance, training and human resource development to attract investors, especially commercial banks, insurers, investment funds, financial companies and other intermediaries.

 

If Vietnam can make changes to those weaknesses, it will see more successes in government bond issuances.