Bond market stands at the crossroads

But , industry experts are undecided on the implications. Here we get the lowdown from the insiders.

A difficult economic situation still means opportunities

Trinh Hoai Giang - Vice chairman for Vietnam Bond Market Association (VBMA)

Economic woes in 2012 actually come with opportunities for the bond market, with the possibility of the government successfully raising funds via this channel being higher. As commercial banks are forced to lower their credit growth, they will have huge amounts of redundant funds that need to be invested.

But flows of such funds are obstructed on the interbank market because of banks’ increasingly low liquidity and tumbling confidence between banks. Therefore, almost no other invest channel is better than government bonds, which can satisfy banks’ requirements to quickly re-sell and re-sell at large volumes as needed.

In addition, inflation is expected to come down this year and I expect the consumer price index (CPI) hike [against December 2011] to lower to 11-12 per cent. Government bonds have fixed yields of around 12 per cent, which is unfavourable as depositing interest rates are significantly higher at 14 per cent and over. Once inflation cools, however, the possibility of successfully issuing bonds will be higher.

Thirdly, the volume of bonds maturing in 2012 is very high, which seriously boosts the demand for re-investment. Such funds will probably re-flow into government bonds – the only problem is the price the government will accept.

Meanwhile, the restructuring of the local bond market will significantly increase liquidity on the market in this year. Issued bond volumes will be much higher and the number of bond codes will be strongly reduced to make management easier.

But the restructuring project also faces some issues. The work of merging minor bond codes into the major ones is meeting with problems of pricing and accounting for those minor bond codes. Re-pricing can mean book losses for banks that hold these bonds, which makes them unhappy with this development.

 Besides, suggestions have already been made about yield ceilings being removed, but the regulators refused. With just a few players in the bond market to date, the regulators fear that the yields could be easily manipulated.

2012 will be a tough year for the bond market

Vu Anh Duc - Deputy director for investment at Vietinbank

Bad debts are increasing among banks, bank liquidity continues to be strained and State Bank of Vietnam will definitely continue tightening its monetary policy. Small banks are struggling with a lack of funds so they won’t have money to buy bonds while major banks will also have to mull over how to efficiently use their funds.

Bonds with fixed yields of around 12 per cent cannot bring profitablity given deposit interest rates remain significantly higher, with unofficial deposit rates in some banks amounting to 20 per cent. Meanwhile, many banks need much fund for lending and other purposes.

Last year, the secondary bond market saw more than  VND100 trillion ($4.83 billion) worth of bonds traded, but it’s important to understand that the figure does not reflect the actual demand of bond investors given the fact that commercial banks used government bonds as a tool to lend to each other.

Actual bond trading demand among banks is much lower. It’s understandable to some extent when someone says Vietnam does not have a bond market. There is no simultaneous selling and buying of bond investors at the same time. There is no benchmark yield curve. And there is no market maker who can satisfy both bond sellers and buyers at the same time.

Regulators are trying to restructure the local bond market and create bond market makers. The most noteworthy aspect in the bond market’s restructuring project is the merging of minor bond codes to reduce the number of bond codes .

However, such a project mainly helps in terms of administration. The basic issues for creating a real market have not yet been resolved: volumes of bond issuance remain low, maturities of bonds are few with the lack of long-term notes [mainly five-year and three-year notes], and it’s notable that the fixed yield ceiling has not yet been removed.

More twists and turns expected in 2012

Dan Svensson - Portfolio manager for Dragon Capital

We remain cautiously optimistic on both the currency and the macroeconomic stability although external factors may thwart any scenario. Vietnam’s monetary conditions are now very tight which may lead inflation towards 10 per cent or less by the second or third quarter.

We are also cautiously positive on the development of external balances and the government’s determination to control fiscal spending.

Although the real economy will need time to pick up speed we believe that lighter monetary conditions during the second half of the year will allow for lower government yields and also lending rates, which will give some support to asset prices. The need for the banking sector to restructure will hold back the corporate bond market short-term and in the big scheme the narrow and thin investor basis will continue to impede both market liquidity and growth.

In 2012, new regulations and restructuring in the banking sector and the investor basis will hold back the corporate bond market although we will see some improvements. Probably there will be solid demand for government bonds caused by large redemptions and also a more positive outlook on macro economic stability.

People are generally a bit impatient and underestimate the amount of work needed to develop a market. Evidence is many other countries around Vietnam which still after 10-15 years have a long way to go. In Vietnam’s case the macroeconomic volatility the last few years has contributed to slower development than expected.

So improvement will be gradual and we will see the first signs in 2012 assuming that macro economic conditions stabilise. Both the government and VBMA have initiated a number of projects to develop the market.

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ANZ reported in April 2011 that Vietnam was likely to see strong growth in the local bond market in 2012. Some VND80 trillion ($3.86 billion) worth of bonds will mature this year and most of this huge capital will be reinvested into Vietnamese bonds, along with VND55 trillion ($2.67 billion) worth of bonds that matured in 2011.