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Vietnam dollar bonds best in Asia as Dung tackles inflation
Vietnam’s dollar bonds are posting the best performance in Asia this year as Prime Minister Nguyen Tan Dung’s efforts to curb inflation reduce the possibility of credit-rating downgrades.
The debt returned 5.1 percent this year, beating South Korea’s 3 percent and Thailand’s 2.8 percent gain, according to 10 dollar-debt indexes compiled by HSBC Holdings Plc. The bonds delivered losses of more than 8 percent in the final two months of 2010 and were the second-worst performer last year with an 8.9 percent return. Pictet Asset Management and Western Asset Management Company say they are sticking with the notes as the central bank raised its repurchase rate to 14 percent this week.
“The reason for the outperformance is the market sees the correct policies that are coming out of Vietnam,” said Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet, a unit of Switzerland’s largest privately held bank for the wealthy that oversees about $17 billion of emerging-market debt. “If the policies continue to fight inflation, it’s a good thing.”
The yield on Vietnam’s 6.75 percent dollar bond due in January 2020 fell 125 basis points, or 1.25 percentage point, since the government devalued the dong on Feb. 11 to 6.04 percent today, according to prices from Royal Bank of Scotland Group Plc. The yield compares with 4.61 percent and 4.43 percent for similar-maturity notes from Indonesia and the Philippines, the other two countries in the region whose debt is rated junk, or below investment grade.
Less risky
Vietnam’s bonds slumped at the end of 2010 as Moody’s Investors Service and Standard & Poor’s cut the nation’s credit rating in December with a negative outlook. Moody’s, which rates Vietnam four levels below investment grade at B1, cited the risk of a balance of payments crisis and a drop in foreign reserves as inflation accelerates and the currency weakens. S&P has concerns over Vietnam’s banking system and ranks the country at BB-, the third highest non-investment grade level.
Debt rallied as Dung approved a plan in February to tackle quickening inflation with higher interest rates while allowing the market to play a greater role in setting the currency’s value. Consumer prices rose 17.51 percent in April from a year earlier, the most in 28 months.
The State Bank of Vietnam has doubled its repurchase rate from 7 percent in early November. Policy makers also devalued the dong by about 7 percent against the dollar in February, the most since at least 1993.
Dong rallies
As confidence was restored, the dong rallied 1.8 percent in the week ended April 29, its best performance since Bloomberg began tracking the currency in 1997, after the government announced it would cut the target for credit growth to restrain price gains, cap rates payable on dollar deposits and lift reserve ratios for dollar deposits.
Dong forwards are reflecting bets the currency will weaken 9 percent in a year, less than the 15 percent decline expected at the start of the year.
The 12-month non-deliverable forward contracts was little changed at 22,676 as of 1:42 p.m. in Singapore, while the spot rate rose 0.2 percent to 20,580, data compiled by Bloomberg show. Forward contracts are agreements to buy an asset at a set price and date. Non-deliverable forwards are settled in dollars.
“There’s a bit more policy aggression against inflation,” said Rajeev de Mello, who helps oversee $454 billion as the Singapore-based head of Asian investment at Western Asset Management, the Pasadena, California-based fixed-income unit of Legg Mason Inc. “That’s something which is positive for the full macro-economic situation in Vietnam. We’ve seen some stability in the currency.”
Default risk
The cost of insuring the nation’s debt against non-payment is falling, as five-year credit-default swaps fell 113 basis points from this year’s high of 409 basis points on Jan. 28 to 296 as of May 5, according to data compiled by CMA, owned by CME Group Inc. The 28 percent drop is faster than the 9 percent and 16 percent declines over the same period in swaps for the Philippines and Indonesia, which trade at 134 and 137 respectively.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
Benign environment
April’s trade deficit in Vietnam was $1.4 billion compared with a revised $1.41 billion in March, based on preliminary figures released by the General Statistics Office in Hanoi on April 27. Foreign-currency reserves declined 46 percent to $12.4 billion at the end of last year from 2008, World Bank data show.
“Over the past couple of years, Vietnam has depleted its reserves very quickly,” Pictet’s Ting said. “I don’t see that problem going away very quickly. The important part is they are doing the right thing on the inflation front.”
Vietnam is forecasting slower economic growth and expects inflation to exceed its previously announced targets.
Gross domestic product may expand 6.5 percent this year, from a December estimate of 7 to 7.5 percent, Minister of Planning and Investment Vo Hong Phuc told journalists on May 3. The economy grew 6.8 percent in 2010, the fastest in three years. Inflation may be 11.75 percent by year-end, compared with the December estimate of 7 percent and similar to last year, Phuc said.
“The outlook for 2011 depends critically on whether the new policy package will succeed in restoring policy credibility, as well as domestic and foreign investor confidence,” the International Monetary Fund said in an April 28 report.
Vietnam’s bonds are being favored by investors willing to take more risk as near-zero interest rates in the U.S. and Japan fuel appetite for emerging-market assets, said Arjuna Mahendran, the Singapore-based head of investment strategy for Asia at HSBC Private Bank, part of Europe’s largest bank by market value.
“The appetite is there because people are now going on the assumption that inflation will start receding in the second half,” Mahendran said. “The rate hikes in Asia will take a pause and that’s a very fairly benign environment for high yields. Clearly, Vietnam is a more risky proposition than Indonesia, Philippines and other high-grade issuers in Asia. I think these bonds will continue to do well.”
Bloomberg
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