Bonds away in Vietnam

Vietnam promises reforms to stoke growth in local bond market.

Vietnam is planning to kick-start its bond market by setting up a credit rating agency and an independent custodian, and is even considering a debut sovereign bond offer says Nguyen Doan Hung, vice-chairman of the State Securities Commission.

At the same time, the finance ministry is also working to develop a benchmark yield curve for government bonds and to boost liquidity in those bonds in the hope that such measures will help pave the way for more active corporate issuance, which has been pitiful to date.

With so little of the necessary infrastructure in place there are still plenty of obstacles to stimulating the debt market, but this latest announcement is a signal that the Vietnamese are moving in the right direction, or at least talking about moving in the right direction.

Speaking at a conference on developing Vietnam's bond market, vice-chairman Nguyen Doan Hung said a plan for the Hanoi-based custody centre had been submitted to the ministry of finance in July. "Depending on the ministry's response we will roll up our sleeves and get the work done," he said.

However, plans to create a rating agency are still in the early stages. "A proposal is being put forward," he said. "But there are different viewpoints: some say we should form a state-owned credit rating agency and others say we should link with an established agency like Moody's."

Either way, things can only get better. Corporate issuance has been close to non-existent so far - the Bank for Investment and Development of Vietnam has twice sold bonds and PetroVietnam raised VND300 billion in September 2003, which is widely considered to be the first real corporate bond. Besides these offers the market has solely comprised government and municipal offers.

The domestic market's immaturity has not tempered the ambition of ministry of finance officials, who are still keen to launch a sovereign bond offer. Investment bankers have also been hoping for a deal since it was first mooted back in 2002, but objections from the State Bank of Vietnam have proved tough to surmount -- the central bank reckons that borrowing dollars at commercial rates is unnecessary given the availability of cheaper sources such as international development aid.

Still, hopes remain high the two organizations will resolve their differences. Flushed with the success of deals for Indonesia and Pakistan, Deutsche Bank was in Hanoi on Monday to meet with the ministry and help lay down the arguments in favour. "It's important to promote the credit profile for international investors, to tell the real story behind Vietnam," says Michael Luk, head of cross-border debt capital markets at Deutsche. "Vietnam has a tremendous growth story and rarity value. That's something Vietnam can crystallize on; investors are looking for fresh credits, benchmark US interest rates remain attractive and recent deals have priced tightly."

A sovereign deal would certainly help those Vietnamese corporates also looking to tap the offshore market. PetroVietnam and Morgan Stanley, its underwriter, have been sitting on their hands for two years waiting for a sovereign deal to benchmark against. If the government does come out with a deal the company is expected to follow close behind with a $300 million to $500 million offer.

However, nobody is betting the bank on Vietnam doing anything just yet. Over the past decade or so it has demonstrated a frustrating ability to disappoint. The stock market was on the table for almost a decade before it finally opened and today, four years later, it is home to just 24 stocks, with few of the country's well-known companies among them.

The Ministry of Finance and State Securities Commission are working together on some of the problems, such as more effective market supervision, better disclosure standards, efficient clearing and settlement, and the creation of an over-the-counter market in Hanoi.