Banks’ bond buys could leave firms in the lurch

Capital-starved firms are looking to banks for salvation

“The more bonds the government issues, the more capital shortages enterprises will suffer from, as banks will pour their money into buying government bonds,” the economic expert said.

For example, in mid-2010, while enterprises were lamenting capital shortages, the Ministry of Finance raised the interest rate of government bonds to 10.5 per cent, then banks spent VND48 trillion ($2.32 billion) on this asset. “Thus, banks had little cash to lend enterprises. This also affected the economy’s competitiveness,” Lich said.

In a specific example, 90 per cent of government bonds for constructing Ho Chi Minh City’s Nguyen Tat Thanh road were bought by commercial banks, Lich said.

The government mobilised VND65 trillion ($3.14 billion) from bond issuance last year, up VND9 trillion ($435 million) compared with the National Assembly’s earlier plan. The National Assembly’s Finance and Budget Committee reported that the demand for government bonds for 2011-2015 was estimated to be VND500 trillion ($24.15 billion), which was too big. Then the committee recommended that the sum be reduced to VND225 trillion ($10.87 billion) to ensure national financial security. Thus on average, each year would see VND45 trillion ($2.17 billion) worth of government bonds.

“If the situation continues, the race to seek capital in the market between the government and enterprises will become increasingly tense. And the losers will no doubt be enterprises, because the government is the safest debtor,” said Hanoi’s National Assembly deputy Nguyen Nguyet Huong, who is chairwoman of Vietnam Development Investment Group.

Deputies also underscored a question about how the 2011-2015 government bond-based capital would be used, because the VND45 trillion ($2.17 billion) worth of government bond-based capital earmarked for each year from now to 2015 would meet nearly 36 per cent of total demand by 2,343 government bond-funded projects listed by the government.

“Thus, the number of projects will have to be trimmed and localities will have to find all ways for their projects to be built with sufficient capital. Negative phenomena like bribery will surely happen,” said Ho Chi Minh City’s National Assembly deputy Tran Hoang Ngan. Ngan said the government had never publicized any reports reviewing government bond-based capital investment effectiveness.

“We need a clear report about this,” Ngan said.

Deputies said government bond-based capital, first and foremost, should be pumped exclusively into urgent projects in 2011 and 2012, particularly projects in service of the public and national energy security. Then capital for 2013-2015 projects would be taken into account.

“It is also necessary to examine plans of all 2011-2012 projects and make clear the responsibility of these projects’ investors before investing capital into them to ensure investment effectiveness,” Huong said.