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US$ government bonds: “interest rate of 4%... successful”
Mac Quang Huy, an independent financial expert, talked about the issuance of $300mil worth of government bonds in March 2009.
Do you think it is now the right time to issue government bonds in dollars?
I think that issuing bonds in the domestic market at this moment is a wise move, because the government can reduce expenses for the bond issuance in comparison with an issuance on the international market.
At the end of February 2009, Indonesia issued $3bil worth of international bonds, including $2bil worth of 10-year bonds (11.75% per annum), and $1bil worth of 5-year bonds (10.5%). As Vietnam and Indonesia have similar credit rankings, if issuing bonds on the international market, Vietnam would have to offer the bond yield of 10% per annum. Meanwhile, the US$ interest rate on the domestic market is just 3% for less-than-five-year capital.
I think that the interest rate of 4% would be high enough to make the bond issuance successful. As such, the government could save 6% per annum on interest rate expenses. Besides, when issuing bonds domestically, the government can save expenses on the issuance, including money for advertising, getting a credit ranking.
What would you say about the attractiveness of the government bonds to foreign investors?
I think the possibility of foreign investors purchasing is low. Foreign investors would rather purchase Indonesian or Filipino government bonds, which offer much more attractive bond yields.
Foreign investors who purchase Vietnamese government bonds have to purchase CDS on the international market to minimise risks. Currently, the CDS spread for Vietnam’s bonds is at 7%, very high.
Meanwhile, domestic investors do not bear sovereign risks, and they do not have to purchase CDS, therefore, they accept lower bond yields.
I think that Vietnamese and foreign commercial banks in Vietnam will be the main buyers of the government’s bonds as they have profuse capital in dollars they have mobilised from Vietnam’s market.
However, foreign investors in Vietnam might invest in the bonds as a way to manage their money flexibly.
What do you think about the way of issuing bonds?
I don’t think that we should issue bonds under the mode of public auction with the participation of individual investors. It would be better to offer to sell to specific banks which have excessive foreign currency, like Vietcombank, BIDV or ACB.
Vietcombank, for example, now has several billion dollars deposited at foreign banks with relatively low yields. The bank is now mobilising capital at 3.2%. Therefore, the government could easily entice Vietcombank to purchase bonds at 4%.
If so, the government would have to pay higher interest rates than the interest rates at which commercial banks are mobilising capital from the public, though Government bonds have the risk at 0%. However, this will ensure the success of the bond issuance.
What do you think about the purposes of the bond issuance?
I do not know exactly how the capital will be used, except covering the state budget deficit and investment project funding. However, as the issuance is small scale, I think that the government is taking cautious steps. It wants to test the reaction of the market before conducting the next issuances.
As far as I know, the government has a plan to issue $1bil worth of bonds on the international market in 2009. Vinashin also plans to issue $400mil.
VietNamNet/TBKTVN
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