Gov't Bonds Fail to Attract Investors

Gov’t Bonds Fail to Attract Investors 

The Development Assistance Fund (DAF) sold only VND35 billion (USUSUS$2.18 million) worth government bonds (out of an offering of VND200 billion (USUSUS$12.5) via auctions at the Hanoi Securities Trading Center (HASTC) in recent days. This is an evident truth about the unattractiveness of the government bonds to investors. 

Low interest rate 

The auction results showed that the winning interest rate for the five-year maturity bond stayed at 8.6 per cent a year. The highest tendering interest rate for this kind of bonds was 9.15 per cent and the lowest was 8.55 per cent per year. The winning interest rate for the 15-year maturity government bonds stood at 9.1 per cent. The highest bidding interest rate was 10.1 per cent per annum and the 9.1 per cent rate was the lowest. 

The actual winning interest of government bonds was a minus digit in comparison with the inflation rate of 9.5 per cent in 2004. The government bond interest rate was much worse if compared with those of commercial banks. Currently, the interest rate of the Bank for Foreign Trade of Vietnam (Vietcombank) for the five-year deposit is some 9 per cent per annum. Bankers now tend to raise interest rates for promissory notes. In the meantime, all banks now need more capital to expand business, and therefore, it is not easy to convince them to put tenders to bond auctions, one of the main reasons hampering government bond issue. 

Meanwhile, according to the Circular No. 100/2004/TT-BTC issued by the Ministry of Finance, bond buyers are subjected to pay an annual 20 per cent income tax for their bond interests. Consequently, if the annual bond interest is 8.6 per cent, it will be actually less than 7 per cent after tax payments. According to experts, if the Ministry of Finance doesn’t increase bond the interest rate (to at least the rate of inflation) in the coming time, bonds will be rejected. 

No Transaction on open market 

Ms Le Thi Mai Linh, deputy director of the Hanoi Securities Trading Centre (HASTC), said DAF government bonds are currently less attractive than government bonds issued by the State Treasury because the latter bonds are allowed to auction on the open market while the former is not. This explained why only VND35 billion (USUSUS$2.18 million) out of VND200 billion (USUSUS$12.5 million) worth of DAF’s bidding government bonds were sold recently. She added that leaders of the State Securities Commission (SSC) are working with leaders of the Ministry of Finance and the State Bank of Vietnam to allow the DAF bonds to be auctioned on the open market. 

Should local bonds and construction bonds be issued? 

 Besides the government bond issue, HASTC plans to allow local government bonds and public construction bonds to be traded. These kinds of bonds will be much more attractive to investors, according to experts. However, it is not easy to announce a common interest rate for issuing these bonds. 

According to specialists from the Japan’s Nomura Institute, local government bonds are public duty bonds and the law system mainly focuses on purposes of utilising them but not on debt returns. As a result, to smoothen the issue of the government bonds and especially construction bonds and attract investors especially insurance companies and investment funds, information must be sufficient. 

• Lan Anh