Bonds turning heads

Min-Hwa Hu Kupfer

What do you make of the fact that Vietnam’s dollar bonds are posting the best  performance in Asia this year?

It is true that since the beginning of this year, Vietnam’s dollar bonds have performed ahead of some regional peers.  However, it is worth noting that these Vietnam bonds suffered greatly last year. The Vinashin incident, coupled with accelerating inflation pressure and the weakening of the Vietnamese dong resulted in a rapid decline of the Vietnam dollar bonds.

Overseas investors considered Vietnam a higher risk and demanded higher compensation by paying lower prices for bonds.

The good performance this year reflects a recovery from a historical low, this has been primarily supported by the favourable market response towards the government’s policies aimed at tackling the country’s key economic challenges.

International investors, however,  expect that a lot more work will be done. Therefore, they continue to ask for a higher yield compared with similar bonds issued by other ASEAN countries. These higher yields compensate for the higher perceived risks they will be taking when holding these Vietnamese dollar bonds.      

According to the Royal Bank of Scotland Group Plc, the yield on Vietnam’s 6.75 per cent dollar bonds due in January 2020 has fallen 125 basis points, or 1.25 percentage point, since the government devalued the dong on February 11 to  6.04 per cent on May 5. The yields for similar-maturity notes from Indonesia and the Philippines were 4.61 percent and 4.43 percent, respectively. Does this mean foreign investors have more faith in Vietnam’s dollar bonds now?

Let’s keep in mind that when the price of bonds goes up, their yield drops. Both are the result of a sufficient number of buyers interested in Vietnam’s dollar bonds and bidding up the price of these bonds. 

The devaluation in February this year sent a signal to the market that the government was taking necessary steps to stabilise the value of the Vietnamese dong. The recent market statistics of foreign exchange transactions also seem to point to the positive trend of a steady local currency.  Please note that the strength of the local currency is one of the many barometers that investors may evaluate when investing in USDdenominated bonds. 

There remain other macroeconomic considerations, such as rising inflation, that may affect investors’ outlook towards Vietnamese dollar bonds.  As the government continues to strengthen the country’s balance sheet by improving its balance of payments, growing its foreign exchange reserves, and responsibly managing its fiscal position, we are more likely to see greater investor interest for Vietnam’s existing dollar bonds – as well as in Vietnamese shares. At that time, the market may also be ready for foreign currency bonds at reasonably attractive interest rates.        

Apart from the yield question, what difficulties and challenges does Vietnam face with when issuing international bonds? What should Vietnam do to successfully issue sovereign bonds in the near future?  

Fostering confidence among the international investment community is important and to reduce the sense of uncertainty is key. The investor confidence is a fickle thing, subject to mood swings, which may be caused by issues such as how the Vinashin bondholders are being treated during the inevitable restructure of their bonds. 

Since 2006, the economic measures of Vietnam monitored by the investment community on a regular basis have fluctuated greatly. 

For instance, we have observed wide swings in the country’s foreign exchange reserves and the increases of consumer price index as a result of overly drastic changes in the government’s monetary policies. 

To the extent that Vietnam’s economic future may increasingly be subject to the fragile overall health of the global markets, it is even more crucial that Vietnam builds investor confidence by delivering strong and consistent economic performance, achieved through sustainable and balanced policies.  To that end, this is the same message relating to the stock market that VietNam Holding has conveyed to our overseas investors to help them understand the cause of Vietnam’s marginal economic results over the last few years.

We like to point out that Vietnam’s economy is still growing at a higher rate than most of their peer countries’ and that corporate earnings growth have also continued to be strong. This will enable the foreign investors to understand that the time to look at Vietnam equity investments again is when the government’s promise of delivering sustainable growth is clear in the macro-economic figures.