The reduction in bid-winning interest rate of government bonds will put pressure on an interest rate reduction and stimulate more investment.
With the participation of international financial organisations like Standard Chartered Bank, Citibank and HSBC and domestic securities firms like Vietcombank Securities and Saigon Securities Co., the bond market has become more attractive and created preconditions for the formation of the specialised government bond market.
Initial successes
Mr. Nguyen Dinh Son, Deputy General Director of the State Treasury, said the issuance of treasury bonds and government bonds will bring in over VND54,000 billion (US$3.38 billion) in 2006. From the beginning of this year to September 15, the State Treasury has mobilised nearly VND40,000 billion (US$2.5 billion) or 73.4 per cent of the annual plan, including VND6,197 billion (US$387 million) through 18 bidding sessions at the Hanoi Securities Trading Centre (HaSTC) and the Ho Chi Minh City Securities Trading Centre (HSTC). Notably, after the decision on the government bond auction at HaSTC from June 20, 2006, HaSTC carried out four bidding sessions in three months to sell five-year government bonds worth of VND1,200 billion (US$75 million). Of the four bidding sessions, three reached 100 per cent of the selling plans and one (the third session) fulfilled only 40 per cent due to its low ceiling interest rate. In total, four sessions fulfilled 80 per cent of the bidding volume.
According to HaSTC, commercial banks have now raised interest rates on deposits, making the volume of idle capitals at banks temporarily superfluous. Therefore, the demand for bonds is very high, which caused consecutive falls in bid-winning interest rates, from 8.75 per cent (at the session on May 8, 2006) to 8.63 per cent (at the session on July 31, 2006) and then to 8.25 per cent (at the sessions on August 14 and 28, 2006). The reduction in tender-winning interest rates of government bonds will bring in huge economic benefits as it will put pressures on decreasing interest rates and stimulate investment.
According to Mr. Son, from now until the year’s end, between VND2,000 billion and VND3,000 billion worth of bonds will be sold at securities trading centres and some VND12,000 billion (out of VND63,500 billion (US$4 billion) will be used for the State Budget and for development investment in 2007.
Difficulties in government bond bidding
According to HaSTC, the auctioning of government bonds still faces many difficulties. Particularly, although the number of bidding attendants is large (34 attendants), they do not put in tender frequently. This diminishes the competition of the biddings.
On the other hand, the interest rate of government bonds is inflexible. This is one of the reasons for unsuccessful biddings. Mr. Nguyen Duc Chi of the Department of Finance and Banking under the Ministry of Finance said the current interest rate of government bonds is regulated by the Ministry of Finance. Although the regulation is quite flexible and is amended in 15 days, many think it is still irrational and the Ministry of Finance also concurs with this regulation. If the market is expanded, the Ministry of Finance will gradually loosen the interest rate regulation and then let the market decide the rate.
Besides, the maturity of government bonds is simple and fails to meet the diversified demand of investors. The employment of two issuing methods (bidding and issuance guarantee) in one issuance also triggers difficulties in the trading of bonds at securities trading centres.
Solutions to an effective government bond market
According to HaSTC, the State Securities Commission (SSC) needs to closely cooperate with monetary policy-making bodies to form and regulate the interest rate. From this rate, relevant bodies will introduce suitable interest rate frameworks for specific types of government bonds in different periods of time. At the same time, it is necessary to have specific regulations on time bond transactions, repo and contract transactions.
Regarding the issuing organisations, it is important to have regular issuing schedules and publicized bidding plans to enable bidders to prepare capitals, and to diversify bond sales modes (discount or denomination). Organisations also need orientation to shift from guaranteeing to bidding to promote the market aspects of government bonds - a prerequisite to form the interest rate curve for the bond market.
Meanwhile, the securities trading centres need to publicize bidding information transparently, accurately and in a timely manner and keep bidding information of their clients secretly.
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