Dollar bonds talked down

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Don Lam, CEO of VinaCapital, said Vietnam’s dollar bonds were the best performers in Asia this year with the government’s efforts to curb inflation, but there were challenges ahead.

“High inflation and a large trade deficit need to be brought under control. The reform programme should stay in place all year to re-establish market confidence in government policy.

“Even though Vietnam’s five-year credit default swap (CDS) spreads have fallen to about 300 basis points (bps), they are still higher than those of neighbouring ASEAN nations, which have a CDS of around 100-150 bps,” Don told VIR.

Earlier, foreign media quoted HSBC Holdings Plc. as saying Vietnam’s dollar bonds were the best performers in Asia this year, yielding 5.1 per cent per annum, compared with 3 per cent and 2.8 per cent for Korea and Thailand, respectively.

Meanwhile, the yield on Vietnam’s 6.75 per cent dollar bonds due in January 2020 fell 125 bps, or 1.25 percentage point, after the government devalued the dong on February 11 to 6.04 per cent on May 5, according to Royal Bank of Scotland Group.

That yield compares with 4.67 per cent and 4.48 per cent for similar-maturity notes from Indonesia and the Philippines, the other two countries in the region whose debt is rated junk, or below investment grade.

However, Baker & McKenzie managing partner Fred Burke said high interest rates in the primary market were not necessarily a good thing for Vietnam. It simply meant Vietnam was paying more for the capital it was raising when it issued bonds. “Also, falling yields are not necessarily a good thing - it means that confidence has weakened a bit and so the price for re-sales in the secondary market is lower,” he said.

Burke argued that issues like the resolution of Vinashin’s debt and its knock-on effect in the domestic economy, as well as questions over foreign exchange reserves, the ability of the state to efficiently implement necessary infrastructure projects and the balance between growth versus stability all came into play when international bond investors looked at Vietnam.

But, Don Lam of VinaCapital said investors’ confidence in Vietnam’s US dollar bonds had improved.

“Demand for Vietnam bonds on international market has risen, pushing up their prices given a constant supply of outstanding bonds. Therefore, the yield has dropped by 125 bps since February 11 when the reform programme was released,” he said.

Don added that the five-year CDS spreads on Vietnam bonds have declined from about 400 bps to nearly 300 bps. This was a concrete judgment from market professionals that credit risk on Vietnam bonds had improved substantially.

“Plans of major state-owned enterprises like EVN and Vinacomin to issue debt – initially postponed because of unfavourable fall out from the debt problems of another state-owned enterprise [Vinashin] – could now proceed because the market environment has improved.”

Don said those SOEs now needed financing to improve the country’s infrastructure, which would in turn help attract more foreign direct investment flows from overseas.

Meanwhile, Burke noted Vietnam had plenty of counterbalancing strengths compared with other countries in the region. These strengths included its abundant natural resources and diversified export portfolio, its stable socio-political situation, a young workforce and an apparent commitment to continuing reform and integration into the global economy.

“These should enable Vietnam to improve its credit rating if it makes progress on the other issues, thereby allowing Vietnam to raise funds more economically for its key development priorities,” Burke said.