New law paves way for stronger bond market

Do Ngoc Quynh

VIR talked with Do Ngoc Quynh, general secretary of Vietnam Bond Market Association, about this decree.

What is new in this decree compared with the previous regulations set out in Decree 141/2003/ND-CP on the issuance of government bonds, bonds guaranteed by the government and local government bonds?

General speaking, the Decree 01 contains many new messages on the formation of a professional and effective bond market in accordance with standard international practices. This new decree makes many important changes such as linking government bonds issuance activity with public debt management under the new Law on Public Debt Management, effective from last year.

The decree also unifies both foreign and local government bond issuance in a single decree instead of two decrees as previously, namely the Decree 141 and Decree 53/2009/ND-CP regarding the issuance of international bonds.

In addition, the decree allows government bond issuance to be used to restructure debts and debt portfolios, as well as allowing bond swapping and the buying back of bonds before the due date. This is an important step as it paves the way to restructuring the currently small and fragmented bond market.

Another positive aspect of the Decree 01 is that it requires Ministry of Finance (MoF) to gradually set up a market maker system to raise bond market liquidity. Membership conditions have been prescribed by the MoF and are outlined in the decree. Participants in bidding and bond underwriting practices specified in the decree will be considered and recognised as system members provided they satisfy these conditions.

The new decree provides clearer and stricter regulations regarding bond issuance and buying and this will allow for more effective control of capital usage for government bonds. While the Decree 141 restricted the use of capital from bond issuance to offset the budget deficit in the annual estimation approved by the National Assembly, the Decree 01 allows government bond issuance not only to compensate the temporary deficit budget and to be used as budget expenditure for developing investment, but also to restructure government debts by lending to other organisations as well as to ensure national financial security. As such, it will help issuers to use the government bond capital more flexibly and effectively and create conditions favourable to maintaining continuous and regular issuance to help develop the market.

How important is this decree to Vietnam’s young bond market?

Vietnam’s bond market is in the first stage of its development. There are many limitations on the quality of goods and market liquidity and the country currently lacks a market maker system. The small size of the bond market, at about 16 per cent of gross domestic product (GDP) - is much lower than other countries in the regions such as Thailand, Malaysia or the Philippines where bonds make up from about 37 per cent to 95 per cent of GDP. In Japan, this figure is around 194 per cent.

The products on the market here have not been diverse, mostly government bonds. The bond term is usually from two to five years. Long term bonds of 10 to 15 years make up only about 10 per cent of all Vietnam bonds. Because of this, the bond market has not really become an effective channel for capital mobilisation to serve economic and social development, nor is it strong enough to serve as a solid foundation for Vietnam’s financial market.

With the goal of developing the Vietnamese government bond market, the MoF has set up a scheme to develop the bond market which includes a development roadmap for both primary and secondary markets. The special bond market, which officially came into operation in September 2009, has been important in developing the secondary market.

After one year of operation, the government bond market saw positive changes such as increased convenience in bond trading and the support of more transparent and professional information for investors.

The Decree 01, which was released to replace the Decree 141, will be the legal basis for standardise activities in the primary government bond market.

In addition, public debt in general and public investment quality in particular are becoming more vital than ever in our society. Improving public investment quality, including capital mobilised by government bond issuance, is essential when it comes to winning the trust of both foreign and local investors to the Vietnamese government

How will this decree impact on the corporate bond market in the country?

Government bond markets are always considered the standard ones and corporate bond market develops from them. As such, the important amendments mentioned above which help the government bond markets to develop more professionally will have a positive albeit indirect effect on the corporate bond market in the future. One significant early impact will be to set the standard interest rate as a basis for corporate bonds. The current corporate bond market is poor in liquidity. This is partly because the market has not had a standard interest rate. The rate is currently based on the mobilisation interest rate of the big banks.

General speaking, the Decree 01 contains many new messages on the formation of a professional and effective bond market in accordance with standard international practices. This new decree makes many important changes such as linking government bonds issuance activity with public debt management under the new Law on Public Debt Management, effective from last year.

The decree also unifies both foreign and local government bond issuance in a single decree instead of two decrees as previously, namely the Decree 141 and Decree 53/2009/ND-CP regarding the issuance of international bonds.

In addition, the decree allows government bond issuance to be used to restructure debts and debt portfolios, as well as allowing bond swapping and the buying back of bonds before the due date. This is an important step as it paves the way to restructuring the currently small and fragmented bond market.

Another positive aspect of the Decree 01 is that it requires Ministry of Finance (MoF) to gradually set up a market maker system to raise bond market liquidity. Membership conditions have been prescribed by the MoF and are outlined in the decree. Participants in bidding and bond underwriting practices specified in the decree will be considered and recognised as system members provided they satisfy these conditions.

The new decree provides clearer and stricter regulations regarding bond issuance and buying and this will allow for more effective control of capital usage for government bonds. While the Decree 141 restricted the use of capital from bond issuance to offset the budget deficit in the annual estimation approved by the National Assembly, the Decree 01 allows government bond issuance not only to compensate the temporary deficit budget and to be used as budget expenditure for developing investment, but also to restructure government debts by lending to other organisations as well as to ensure national financial security. As such, it will help issuers to use the government bond capital more flexibly and effectively and create conditions favourable to maintaining continuous and regular issuance to help develop the market.