Success in bond capital mobilisation

In the first half of this year, the State Treasury successfully mobilised 83.3 per cent of the year’s whole capital mobilisation target. Still many said that such a success was thanks to attractive interest rates. What is your view?

It is not relevant to say that the level of bond interest rates makes firms’ offers less attractive. The capital market consists of the securities market and the bond market, whose functions and characteristics are different from the bank credit market.

On the other hand, interest rate levels by the end of June dropped in comparison with the same period last year. According to the Vietnam Bond Market Association’s (VBMA) data, there was a decrease of 53 basis points in the three-to-five-year term’s interest rate and 30 per cent in the 10 year term’s. This is proof that the Ministry of Finance did not raise the interest rate offered, to lure more capital.

Then why was the government bond issuance attractive to investors?

Many factors have contributed to the mobilisation success. Firstly, by June 20 the banking system’s credit growth was only 6.2 per cent (lower than the same period last year’s rate of 6.28 per cent and far below this year’ target of 18-20 per cent, set by the State Bank of Vietnam.) Meanwhile, the deposit growth rate was much higher, at 9 per cent on-year, urging commercial banks - the main buyers of g-bonds, to acquire the issuance.

Besides the government’s policy to stabilise and lower the interest rate level, the decreasing trend of real interest levels on the interbank market and foreign exchange rates increases bond demand. At the same time, the issuance of Circular No.06/2016/TT-NHNN [amending Circular No.36/2014/TT-NHNN on prudential ratios for the operations of credit institutions and foreign bank branches] gave banks more space for bond investment, with the ceiling investment rate lifted to 25 per cent from the previous level of 15 per cent (of total short-term funds). .

In addition, the participation of insurance companies in acquiring long-term bonds with maturity over 10 years significantly improved market demand and also lengthened the list of investors.

The participation of foreign investors is also one of the market drivers. According to Circular 06, a Vietnam-based branch of foreign banks can use up to 35 per cent of their short-term funds (earlier the ceiling level was only 15 per cent) to buy bonds. Additionally, the new regulation allows foreign banks to conduct entrusted investments in bonds without being calculated as their own investment and not subject to the aforementioned limitation, as was previously regulated.

Has the secondary market been as dynamic as the primary market?

The primary market’s hustle usually spreads to the secondary one. According to VBMA, average trading volume was recorded at roughly VND3 trillion ($136.97 million) per outright session, up 23 per cent on year.

Will the market remain attractive in the remaining months of 2016, especially amid the effects of Brexit on global finance?

The government bond market is likely to be affected more significantly by domestic factors than external ones, like Brexit. However, it is undeniable that the incident is imposing both direct and indirect impacts on Vietnam’s economy in the short and medium term.

Banks will have to boost their credit growth to meet the target of 18-20 per cent. In particular they need to double the growth rate of the first half for the remainder of the year. Once they concentrate on doing so, the capital scale for bond investment will shrink.

However, as a result of Brexit, the Fed may still hesitate to conduct its next interest hike later this year. Together with the sound foreign direct investment flow and trade surplus, it will lessen the pressure faced by forex managers.

Stable interest rate movements, coupled with the relatively large difference between the VND and USD interest rates will continue attracting foreign investors and local finance institutions.