For much of the past year, it has been Vietnamese equities all the way for frontier market investors (up and down).
Their attitude seems unlikely to change much over the near-term despite a roughly 20% pullback since the VN Index peaked in early April.
Yet as the benchmark index started correcting, local observes noted how a handful of foreign life insurance companies, including Eastspring and Manulife, began parking funds in the domestic corporate bond market for the first time.
Their ability and willingness to do so shows how far the market has come over the past few years. It also reflects the government’s willingness to lead from the front and embrace reforms, which are progressively bringing Vietnam in line with international practices.
In 2017, the government unveiled a roadmap of where it wants the bond markets to be by 2030. Since 2016, it has also been seeking feedback on draft revisions to Decree 90, the rule under which corporate bonds are issued. These will make it far easier for Vietnamese companies to issue domestic and foreign currency debt. Bankers hope the revisions will be finalised by the end of the year.
The government wants to lift outstanding Treasury bonds to 38% of GDP and corporate bonds to 7% by 2020, then to 45% and 20% respectively by 2030. If this is achieved, the Vietnamese dong-denominated market will reach the same level the Thai baht-denominated bond market stands at today (see table).
And there have already been huge strides. From 2012 to 2017, outstanding government bonds doubled to $45 billion, or 20.3% of Vietnam’s $221 billion GDP.
The growth of the corporate bond market has been even faster, although there is some debate about its current size.
Techcom Securities estimates it stands at VND310.02 trillion ($13.58 billion), or 6.2% of GDP based on Vietnam Bond Market Association figures. The Asian Development Bank (ADB) calculates a 1.3% rate, which local bankers say is too low.
Deal sizes have been getting larger too, although the average is still about $50 million. It is perhaps fitting that the company which launched Vietnam’s largest ever IPO was also responsible for its biggest corporate bond in 2017. This is Vinhomes, which raised VND 5.5 trillion ($243 million) from a three-year deal last October.
The deal carried a 9% coupon for the first year, before switching to six-monthly resets at 3% over 12-month deposit rates. However, this funding level highlights one of the market’s major flaws.
Vinhomes had to pay roughly 500bp over three-year government paper, which was yielding about 4% at the time. By contrast, top tier Thai and Malaysian private sector entities typically pay about 70bp to 100bp over government benchmarks.
At issue is a severe asset-liability mismatch in the banking sector. Banks have historically funded long-term debt with short-term deposits and now offer rates up to 300bp over government debt to keep savers onboard.
Benchmarking corporate bonds to deposit rates rather than government bonds appears to leave borrowers holding the short straw. The ADB’s Credit Guarantee & Investment Facility (CGIF) has helped bridge the gap by providing credit guarantees to Masan (2014), Vingroup (2016) and most recently Mobile World (2017).
This has allowed all three to issue longer-term paper (10 years) at lower rates, which are also fixed until maturity. Consequently, Mobile World was able to issue at 6.55% for five-years and Vingroup at 8.5% for 10-years.
Nguyen Xuan Minh, chairman of Techcom Securities, says the government has been progressively adjusting banks’ lending ratios.
“Previously banks could use 50% of their short-term capital for medium- and long-term lending,” he said. “In 2018, the ratio will be 45% and in 2019, it’s dropping to 40%.”
The government is also encouraging the allocation of more bonds to non-bank investors.
In the absence of a deep institutional investor base, Techcom has pioneered distribution to retail investors. Since it launched its iBond platform in 2014, it has sold nearly VND40 trillion ($1.74 billion) of corporate paper to 14,000 retail investors.
As a result, Nguyen said that when Masan, Vietnam’s top private sector consumer group, issued its first listed bond in the fourth quarter of 2017, it was able to achieve balanced distribution, albeit to domestic investors. Roughly 30% of the VND3 trillion ($130 million deal) was placed with retail, 40% with banks, 20% with life insurers and 10% with asset managers.
Nguyen Ba Son, head of debt capital markets at BIDV, told FinanceAsia foreign investors should start to make their presence felt soon. “The macro situation has been stable in Vietnam for some time and yields for the country’s top corporate credits are attractive relative to the rest of the region,” he said.
Pham Xuan Anh, head of investment banking at MB Securities (MBS), notes how the government wants to shield retail investors from prospective sharp practices as the market becomes more active.
“One change to Decree 90 will be the limitation of private placements to a maximum of 100 investors,” he said. “Issuers that want to target retail investors will need to use a public offering format and also append historical audited financials.”
The government is also being very careful to increase transparency and risk assessment and is considering using the Hanoi Stock Exchange as a central information hub. Last July, it also set up domestic rating agency, Phat Thinh Ratings, although it has yet to do any business.
It seems Vietnam may go down the joint venture route. Malaysian ratings provider RAM is said to be in advanced discussions. Moody’s has also been approached by Vietnam’s MBS, which is keen to develop an MBS (mortgage backed securities) market.
Better hedging tools are on the way too. Government bond futures have been long anticipated and market participants believe they will come this year.
Subject to local liquidity, foreign issuance is also likely to pick up as Vietnamese companies increase in scale.
One likely change to Decree 90 will be the introduction of annual foreign borrowing quotas. In return, issuers will no longer need written approval once a quota has been granted.
All three bankers at BIDV, MBS and Techcom agree Vietnam has huge potential.
“The corporate bond market only represents 10% of the equity market,” Techcom’s Nguyen concluded. “It’s still in its high growth phase.”