Vietnam refusal to budge on bond yields puts growth plan at risk

Bloomberg

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Vietnam’s government has sold only about half of the bonds offered at auctions this year, leading to a funding shortfall that threatens its ability to give the economy a boost via state spending.
The State Treasury has sold just VND96.47 trillion (US$4.3 billion) of debt so far in 2015, 38 percent of its VND250 trillion full-year goal. The relatively low yields the government has been willing to pay at auctions has damped demand, according to Bank for Investment & Development of Vietnam, the country’s second-largest lender by assets.
Vietnam is seeking to accelerate economic growth by spending on transport, hydro-power and health-care projects, while keeping its budget deficit within a target of 5 percent of gross domestic product. Policy makers are having to rely more on fiscal policy to spur expansion as interest rates can’t fall much further, according to VinaCapital Group.
 
“The sale of bonds is important for the economy,” said Alan Pham, the Ho Chi Minh City-based chief economist at VinaCapital, the country’s largest fund manager. “If bond sale goals are missed and with a growing deficit, the government has to look for alternatives” like offering dollar debt or borrowing from the central bank, he said.
The Ministry of Finance may cut the regular budget of ministries and government agencies by 10 percent in 2016 and spending on some, unspecified, projects may be slashed by 50 percent, according to a Sept. 11 report by state-run news service VietnamNet that cited a report from the ministry.
Sales slowing
The government is encouraging state-owned firms to sell global bonds to help bridge the budget deficit, Dang Quyet Tien, deputy general director of the finance ministry’s corporate finance department, said in July. The ministry has asked the central bank for VND30 trillion of loans as the state budget is constrained, Deputy Finance Minister Huynh Quang Hai said July 31.
Vietnam has issued bonds in 2015 with tenors from five to 15 years at yields of 5.1 percent to 6.9 percent, the lowest levels since at least 2010, according to data from the Hanoi Stock Exchange. It sold only 12 percent of the VND3 trillion of debt offered at the latest auction on Sept. 23. Sales have slowed from VND55.99 trillion in the first three months to VND19.3 trillion in the next and VND21.1 trillion so far this quarter.
The yield on Vietnam’s five-year bonds has risen 47 basis points to 6.70 percent this year, having fallen from levels exceeding 13 percent in 2011. Yields on same-tenor notes from India and Indonesia are 7.72 percent and 9.55 percent, respectively. The two nations are rated at the lowest investment grade by Moody’s Investors Services, four levels higher than Vietnam.
‘Pressure increasing’
“Given the need to fund the fiscal deficit, the pressure is increasing to raise yields at forthcoming auctions,” said Tu Vu, the Ho Chi Minh City-based head of research at Viet Capital Securities JSC, the country’s third-largest brokerage. “Concerns on currency stability after the third devaluation of the dong this year also raised yield expectations but the Treasury didn’t budge.”
The State Bank of Vietnam weakened the dong’s reference rate by 1 percent on Aug. 19, the third such move in 2015. That monetary authority has also widened the currency’s trading band from 1 percent to 3 percent this year. The dong has fallen 4.8 percent against the dollar in 2015, trailing drops of 9.1 percent in Thailand’s baht, 16 percent in Indonesia’s rupiah and 20 percent in Malaysia’s ringgit.
Following a government decree issued last November, Vietnam has only sold debt with terms of five years or more. This has damped demand from commercial banks, said Nguyen Tan Thang, head of the fixed-income investment at Ho Chi Minh City Securities JSC, the nation’s second-biggest brokerage.
“Banks, which account for 80 percent of investors, are most interested in short-term bonds, so the government should diversify the tenors to lure demand back.”
The Ministry of Finance is seeking National Assembly approval to issue notes with a wider range of maturities, Dau Tu Chung Khoan magazine reported Sept. 22, citing Phan Thi Thu Hien, an official at the ministry. The ministry didn’t respond to Bloomberg enquiries made last week regarding its financing plans.
Lending rates
Medium- and long-term loan rates range from 9.3 percent to 11 percent, central bank data show, and the monetary authority estimates credit growth will reach 16.5 percent this year, more than its target of 15 percent. Interest rates have bottomed out and will start rising due to loan growth and the need to support the dong, said VinaCapital’s Pham.
Gross domestic product increased 6.28 percent in the first six months of 2015 from the same period last year. The government is targeting full-year growth of 6.2 percent, compared with 5.98 percent in 2014, and is aiming for expansion of 6.7 percent next year. It ran a budget deficit of VND100.7 trillion in the first seven months of 2015, 45 percent of the full-year target.
Vietnam will need an estimated $48 billion to fund transport infrastructure projects over the next five years, the Saigon Times reported this month, citing information from a conference held by the Vietnam Institute of Economics and the BIDV. The nation’s fiscal accounts are emerging as a source of concern and debt-servicing costs could pose an increasing burden on its finances, the World Bank warned in July.
Local banks are opting to lend more rather than park their funds in sovereign debt, said Tran Kieu Hung, head of the bond trading desk in Hanoi at Bank for Investment & Development of Vietnam.
“The risk of missing the target this year is high,” he said, referring to the government’s debt-issuance goal. “Investors are still hoping for higher yields to compensate them for the uncertainty risks they may have to face.”

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