TheVietnamese government is to try its hand at another treasury bond issue following a widely criticized debut last July. However, observers say that by the look of the prospective coupon, the new deal is unlikely to be any better received from foreign investors, or give the domestic debt capital markets a much needed kickstart.
The new D5 trillion ($342.6 million) offering, to be listed today (Monday) on the Stock Exchange Centre of Ho Chi Minh City, will offer two-year paper carrying an annual coupon of 6.8%.
The communist government, who recently reported that Vietnam requires D150 trillion in investment funds this year, says proceeds from the transaction will be used to cover budget requirements.
Last year's five-year D300 billion issue carried a yield of 6.5%, which like the current deal, is less than the one-year interbank rate of 7%.
The main problem with these treasury bonds is not that they fail to attract buyers, more a case of who buys them and the fact that they hold them until maturity, preventing any secondary trading. "The bond market in Vietnam is non-existent," claims one foreign banker. "Basically, all the bonds that are issued go to government-owned banks. They keep hold of them and there is therefore nothing available on the secondary market."
The banker also added that there might also be some pressure put on the banks to buy bonds. "I would say that from time-to-time they might have been instructed to do that," he adds.
"One factor driving banks to invest in the bonds, is that over the past two years there has been too much liquidity in the banking system and this is one of the few places to put funds," the banker adds. "Vietnam has quite a high level of non-performing loans, so banks either invest in government paper or lend offshore. There isn't much interest in lending domestically."
The banker argues that although yields might look fairly reasonable on paper, the lack of a developed yield curve makes it difficult to assess. "The coupon on these bonds is just under the 7% one-year rate, and above the 5% yields on one-year discounted notes," he says. "But there isn't any benchmark, and whether investors offload them or use them for other purposes, for example, to repo the central bank, makes them look less attractive."
As it is an extremely new market, the banker did not want to seem too critical of the government's attempt at getting things moving, but it seems clear that its inexperience in developing the capital markets is not helping matters.
"The government is trying, but doesn't have much experience and has quite a bit to learn," the banker notes. "There is the lack of a benchmark or accessible rate, as well as clearing system problems means that without such basic requirements means you cannot expect to have an efficient, working bond market."
In the light of these difficulties, it is hardly surprising that the corporate bond sector is also practically non-existent. So far, the only issuer to launch a deal has been the Bank for Investment and Development of Vietnam, a state-owned organization, which issued D1 trillion in five-year paper last year. The deal, called Bid1_200, was structured to carry a 6.55% coupon in the first year and then a yield of 50bp over the bank's standard one-year deposit rate for the years up to maturity.