Vietnam's dollar bonds are beating their Southeast Asian peers as the region's highest yields attract investors confident the government can revive an economy growing at the slowest pace in 13 years.
The notes have returned 5.5 percent in 2013, well ahead of the next best gain of 1.3 percent in Thailand, according to bond indexes compiled by HSBC Holdings Plc. The average extra yield investors demand to hold Vietnamese debt over similar-maturity Treasuries is 320 basis points, compared with 270 in Indonesia and 211 in the Philippines.
Prime Minister Nguyen Tan Dung this week approved the formation of an asset management company to acquire non- performing loans from lenders, a move aimed at boosting credit growth in an economy that expanded at the weakest pace since 1999 last year. Inflation slowed to 6.6 percent in April from as high as 23 percent in August 2011, allowing the central bank to cut borrowing costs eight times since the start of 2012.
"If you look at the fundamentals of Vietnam, the macroeconomic conditions have improved," Takahide Irimura, the head of emerging-market research at Kokusai Asset Management Co. in Tokyo, which runs Japan's biggest mutual fund, said in a May 21 interview. "The authorities acknowledge the need to improve the banking sector and are beginning to take steps."
The yield on Vietnam's 6.75 percent dollar notes due January 2020 rose one basis point to 3.67 percent today, paring its decline this year to 78 basis points, according to data compiled by Bloomberg. That compares with a rate of 3.09 percent on Indonesia's 5.875 percent securities due March 2020 and 2.39 percent on the Philippines 6.5 percent bonds due January 2020.
Moody's Investors Service cut Vietnam's credit rating to its fifth-highest junk level of B2 on Sept. 28, citing an "elevated risk" the government will have to bear the cost of recapitalizing banks. The company rates the Philippines and Indonesia four and five levels higher, respectively.
Vietnam's economic growth slowed to 5 percent last year from 5.9 percent in 2011 and 6.8 percent in 2010, trailing expansion of 6.6 percent in the Philippines and 6.2 percent in Indonesia in 2012, official data show. Vietnam may record a balance-of-payments surplus of $4 billion to $5 billion this year, the central bank forecast May 21.
The nation had more than $30 billion of foreign-currency reserves at the beginning of this year, Tuoi Tre newspaper reported this month, citing Prime Minister Dung. That is more than double the $13.5 billion of reserves in May 2011, according to a June 2011 International Monetary Fund report.
The dong has weakened 0.6 percent to 20,975 per dollar this year as of 10:42 a.m. in Hanoi, according to data compiled by Bloomberg. The currency strengthened 0.9 percent in 2012 after losing 24 percent over the previous four years. The Philippine peso declined 1.3 percent this year to 41.615 and Indonesia's rupiah fell 1.4 percent to 9,775.
"The story of macro improvement is still there and their performance reflects that," Pongtharin Sapayanon, head of fixed income in Bangkok at Aberdeen Asset Management Plc, which manages $322 billion globally, said in an interview yesterday, referring to the Vietnamese dollar notes. "There's been improvement in the balance of payments, stability in the dong and a slowdown of inflation as they benefitted from slower growth."
Non-performing loans reported by commercial lenders stood at 4.51 percent at the end of March, the government said this week, although market participants and credit-rating companies estimate bad debt may be between 10 percent and 20 percent, JPMorgan Chase & Co. said in a research note last month.
The reluctance of banks to lend may result in economic growth remaining below 6 percent this year, the IMF and World Bank forecast.
The debt asset-management company being set up by the government is expected to resolve about 100 trillion dong ($4.8 billion) of bad loans, Vu Viet Ngoan, chairman of the National Financial Supervisory Commission, said last week.
"The banking sector reform is positive and it's in the right direction," Sean Chang, Hong Kong-based head of Asian debt at Baring Asset Management, which oversees $52 billion, said in an interview yesterday. "A benign inflation environment would help global bonds because it strengthens the credit and helps growth in Vietnam," he said, adding that the wide spread over Treasuries is attracting investors to an extent.
The yield on 10-year U.S. Treasuries increased 35 basis points to 2.02 percent this month, the fastest pace since December 2010, on speculation the Federal Reserve will scale back its $85 billion of monthly bond-buying that has increased the flow of funds to emerging markets. Fed Chairman Ben S. Bernanke said May 22 the monetary authority may taper purchases if it's confident of sustained improvement in the U.S. economy.
The cost of insuring Vietnamese sovereign debt using five-year credit-default swaps fell one basis point this year to 210, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That compares with a decline of 12 basis points to 94 for Philippine debt, and an increase of 14 basis points to 150 in Indonesia.
Investors may be deterred by the rising U.S. yields and the slowing growth in Vietnam, said Rees Kam, a strategist at SJS Markets Ltd., a Hong Kong-based financial services company that specializes in fixed income.
"A Vietnamese dollar bond is a bit riskier," he said. "Fundamentally, the economy is not as stable as the Philippines or Indonesia."
Global investors are accelerating purchases of higher- yielding assets in developing countries as central banks in advanced nations maintain borrowing costs near zero to spur growth. Funds focused on emerging-market debt had inflows of $2.8 billion this year through May 8, up from $724 million in the same period in 2012, data from EPFR Global show.
"Demand for lower-rated countries' dollar bonds has been increasing as the monetary easing in developed nations boosts liquidity," Irimura at Kokusai, which manages $37 billion of assets, said. "There is some more room for the Vietnam dollar bond yields to go lower from here."