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Slippery slope

Released at: 04:12, 10/10/2014

Slippery slope

Hopes are high that the issuing of government bonds worth $1 billion in the international market will give Vietnam a viable means of scheduling its debt repayments, but it may only represent a quick-fix.

by Thong Dat

It seems that several favourable signs are now in place, even enough to make authorities confident about their plans to issue government bonds on the international market. Speaking at a recent government press conference, Minister and Chairman of the Office of the Government Nguyen Van Nen announced that Vietnam is considering issuing $1 billion worth of bonds in a move that will help it to roll over debts that become due next year. “Vietnam has about $1 billion in outstanding sovereign bond debt that will need to be converted,” the Minister added.

Favourable conditions

If the plan comes to fruition it will be the third time the government has issued international bonds in the last nine years. The government has been looking to return to the market since 2007, but unsettled markets and economic concerns disrupted such plans. Vietnam last raised $1 billion through a ten-year bond sale on the Singapore Exchange in 2010, which entered the market with a yield of 6.95 per cent. However, the first time the country issued international bonds was back in 2005, when it raised $750 million on the New York Stock Exchange by selling ten-year bonds at a coupon rate of 7.125 per cent.

Now is a very important time for Vietnam, as some of the country’s debts are due within a year or so. This is why 2014 holds great significance in mobilising long and medium-term investment capital to settle its debts, finance its budget deficit, and bolster economic recovery. Under a debt management scheme already approved by the government for 2013-2015, Vietnam plans to borrow $1.57 billion this year and $1.9 billion next year from overseas markets to finance its budget deficit. The issuance of government bonds on the international market will also help ease the pressure on domestic foreign currency loan sources and keep interest rates on foreign currencies at appropriate levels, to help local enterprises gain access to loans in foreign currencies. It will also have positive effect on controlling inflation and stabilising the foreign exchange rate.

As planned, the Ministry of Finance, in collaboration with the Office of the Government, will finalise a draft resolution on the international bond issuance for submission to the Prime Minister for approval. A source close to the matter said that the government is planning to conduct a roadshow soon so that the bond sale can take place during the fourth quarter. 
External conditions are now favourable for Vietnam to raise funds from the international market at a lower cost. For example, the recent move by Moody’s to upgrade Vietnam’s ratings may help this year’s bond sale. In July Moody’s raised Vietnam’s senior unsecured and issuer bond ratings by one notch, to B1 from B2, with a stable outlook, citing the country’s emerging track record of macro-economic stability. Meanwhile, assessments from other prestigious rating agencies such as Fitch Rating and Standard & Poors currently rate Vietnam with a stable outlook.

Another reason for Vietnam to issue US dollar bonds, according to Mr Barry Weisblatt, Head of the Research Department and Training at VPBank Securities, is to show the world that it can. A few years ago, if Vietnam offered bonds to global investors they would talk about three things: high inflation, a weak currency, and the Vinashin problem. “The rating agencies have recently indicated that the country’s economy has made good improvements but a successful, highly subscribed bond issuance at low interest rates would demonstrate to global markets that these three things are behind the country,” wrote Mr Weisblatt, adding that during the issuance, government officers would have the opportunity to meet potential bond investors and explain that Vietnam’s future is about low inflation, stable growth and strong exports.

Thus, spreading the message about the improvements in Vietnam’s economy could benefit Vietnamese companies just as much as the government, Mr Weisblatt noted. So far, only a small group of Vietnamese companies have been able to raise capital in the international bond market, including Vingroup, Hoang Anh Gia Lai, and VietinBank. But conditions in Vietnam’s banking sector have made it difficult for many companies - even healthy ones - to get the financing they need in order to take on new projects. By making investors familiar with the strength of the Vietnamese economy the government would pave the way for other companies to also access international bond markets.

The right solution?

The government’s plan is clear. In simple terms, it will take on new loans to pay off old debt. A large share of the new $1 billion bond sale may be spent on covering the maturing $750 million in bonds issued in 2005, which mature in 2016. The ten-year loan went to the debt-laden Vinashin, now known as the Shipbuilding Industry Corporation (SBIC). Meanwhile, the $1 billion the government borrowed from the second sovereign bond sale at a 6.75 per cent annual yield was assigned on paper to finance refinery, ship purchasing and power plant projects of PetroVietnam, Vinalines and Lilama. 

In theory, when borrowing one dong for investment, the government needs to expect profits higher than one dong to be able to pay its debts on schedule. However, it is unclear how much profit Vietnam can make from one dong of money it borrows, and how many dong of profits the country should reserve for debt repayment and how much for reinvestment. The problem is that there has been no official report on the issues.

Overall, analysts believe that the plan is just a quick-fix solution and it still needs to be evaluated based on potential cost, use of national resources for commercial purposes, and debt repayment capacity. Some say that the issuance of government bonds for debt roll-over is likely to be a last resort and doing so will make international investors think twice, because a company or government will often consider using this measure whenever faced with problems. 

Considering that a new $1 billion sale may cover the maturing $750 million in bonds issued in 2005, the other $1 billion in bonds which will mature in 2020 may require another bond issuance if Vietnam doesn’t have a sound strategy to repay this debt. In fact, the country always operates in a deficit, as its revenues are never enough to cover its spending, and every year the government has to set a ceiling on its expected annual debt. In 2013 the ceiling was 4.8 per cent of GDP while this year it rose to 5.3 per cent. “Spending part of the State’s reduced income paying off debts will cut into other expenses, like investments,” said Mr Do Thien Anh Tuan, a lecturer at the Fulbright Economics Teaching Program. “If the situation continues, the debt and its interest will eventually eat up the State’s revenues.”

He suggested Vietnam should not increasingly borrow to pay off its maturing short-term loans. “The golden rule is that the government should invest borrowed money, not spend it,” he said. “Investments create new income to pay off debt but in the case of Vietnam investments are not effective.” He further explained that the method of taking on new loans to pay old debts seems to leave the scale of the debt virtually unchanged and shows that Vietnam’s creditworthiness is decreasing. That’s why he believes that issuing roll-over bonds is only a last resort while building up a savings fund for foreign debt payments would be a better solution.

The issuance of government bonds on the international market may provide a textbook solution to pay off debts that are becoming due. However, as noted by Mr Weisblatt, the government should proceed with caution though, because conditions in the international bond market are subject to abrupt changes. “Currently, the US Fed and the European Central Bank have both indicated that they will keep interest rates low going into next year,” he wrote. “So there is a window of opportunity for Vietnam to issue successfully at low interest rates. If Vietnam is too slow and goes to issue after that window has closed, a less successful bond offering could undo the advantages.” 

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