Record-breaking bond issuance to restructure debts

Analysts say it is important to reduce the short-term payment pressures with longer tenors
Photo: Le Toan

The bonds would have terms of 10-30 years, which will be the longest tenors ever issued. Interest rates are to be set depending on international capital market conditions at the time of issuance.

“The issuance is to aid the restructuring of domestic debts arising during 2015-2016”, the government reported to the National Assembly’s Standing Committee last week.

Since the existing Law on Public Debt Management does not permit of borrowing foreign currencies to restructure debts in dong, the issuance of the bonds can only take place in 2017, after the new Law on State Budget comes into effect, allowing the release of international bonds to cover budget overspending.

Matching price and yield with demand

“Huge demand for the bonds can be expected at the time of issuance,” Ho Chi Minh City Securities Company (HSC) said in a report.

It said that demand for long-tenor bonds was always high amongst big life insurers, such as Prudential, Bao Viet, or AIA, who acquired about VND4 trillion ($183.5 million) of 20-year government bonds earlier this year.

However, HSC analysts suggested that since a 30-year tenor was quite long and in order to get high demand for it, the yield should be high enough to compensate for the inflation risk which, for Vietnam, might still be high given the historical record of high volatility in inflation during the last 20 years.

Generally the longer the maturity of a bond, the higher the risk associated with it, hence the bond will pay out higher interest rates. Higher interest rates compensate investors for taking on the greater risk.

Vietnam Bond Market Association’s general secretary Do Ngoc Quynh echoed this view point.

“A high interest rate is possible due to the small size of the equity market in Vietnam, which has not yet become a reputable market globally,” added Quynh.

Quynh said that the 30-year bonds were not currently available in many countries, mainly in well-developed equity markets such as the US, Germany or Japan.

Public debt offset

According to The Economist, Vietnam’s public debts totalled $92.64 billion as of October 12, equivalent to about $1,017 per capita.

Minister of Finance Dinh Tien Dung said that the amount of state bonds maturing during 2015-2016 was estimated to be approximately VND363.17 trillion ($16.14 billion).

However, for the first nine months of this year, government bond issuances totalled less than VND127.50 trillion ($5.67 billion), or about half of the year’s total target.

“Fund raising has been given utmost priority and effort”, said Dung, but these funds remained inadequate in covering the national budget’s overspending, which reached some $1.22 billion in September, driving the cumulative overspending for the first nine months of this year up to $6.27 billion.

Alan Pham, chief economist of VinaCapital, said: “Due to a 34 per cent decline in revenues from oil exports, budget receipts have fallen short quite substantially. The original budget numbers were based on an oil price of $100 per barrel and not $40-50 per barrel.”

So far the government has borrowed $2 billion from Vietcombank, as well as VND30 trillion ($1.37 trillion) from the State Bank of Vietnam. It is requesting SCIC to divest its holdings from several companies, such as Vinamilk and FPT, which can bring in an additional $3–4 billion.

According to HSC’s experts, with the equitisation of state owned enterprises and further divestments from non-core businesses, the government will have bigger funds to pay back external debts in the future.

“However, that is apparently still not enough,” said Pham.

Killing two birds with one stone

Pham said at present it was important to relax the mounting budget constraints, restructure the Ministry of Finance (MoF)’s bond portfolio and reduce the short-term payment pressures with longer tenors.

“The MOF is obviously concerned about borrowing too much from the domestic credit market for fear of leading to a crowding-out effect, especially at a time when private business demand for bank loans is rising on the back of a good economic recovery,” he said.

According to Pham, it would be a good idea to reach out to the international bond market in this case.

“We all know that monetary policy has reached its limit in promoting growth because interest rates have bottomed out and are slowly inching upwards. So now fiscal policy comes into play,” Pham concluded.

MoF’s Dung affirmed that the issuance would leave foreign debts at no more than half of the total government debts, in accordance with the country’s strategy to manage public debts.

The government also expected to help domestic banks ease the pressure on their foreign currency sources, and maintain low interest rates to support local enterprises.