Vietnam Bond Market
In recent years, the issue of efficiently mobilizing capital has become the concern of all companies. There are some ways of doing this: borrowing from the banks, issuing stocks or issuing bonds. However, when the interest rate of borrowing from banks is very high due to high inflation, together with the stock market is quite instable; calling for capital from bond market is much more preferred by investors. In the context of this report, some major points regarding the bond market in Vietnam are presented. Firstly, a common picture about the Vietnam bond market is drawn.
Next come the types of bonds and major participants in this market. Finally, several ways by which bonds are issued are described in details. I/ Overview of Vietnam bond market The Vietnam bond market was established in 2000, but it only developed sharply after 2002 when the government allowed issuing many types of bonds and especially after the appearance of the Ho Chi Minh stock exchange. Recently, the outstanding volume of bonds has increased rapidly, as shown in the graph below. Figure 1. Bonds outstanding volume and bond outstanding/ GDP. Source: Ministry of Finance of Vietnam)
Up to the year 2006, the proportion of outstanding bond volume over GDP reached the figure of 13%, in comparison with only 3% in 2001. Nevertheless, compared with the Vietnam stock market that accounts for more than 40% of the total GDP, that of bonds is very low. In particular, this rate of Vietnam is far below the level of other countries in Asia. In most Asia countries, the bond accounts for more than half of the total GDP whereas in Vietnam, it takes less than 15% of GDP. Figure 2. Outstanding bond volume/GDP in some Asia countries. Source: Ministry of Finance of Vietnam) All things considered, one of the main features easily to be realized in Vietnam now is that the bond market has not been attractive enough to most investors. Yet, according to many specialists, it is likely that this market will become an extremely attractive capital-mobilizing channel in the near future. II/ Types of bonds At the moment, there are three main types of bonds in Vietnam: government bonds, municipal bonds and corporate bonds. Here comes the pie chart showing the proportion of each types contributing to Vietnam bond market.
Figure 3: Proportion of different types of bonds (Source: Ministry of Finance of Vietnam) As can be seen, the government bonds, which are issued by both the State Treasury of Vietnam and the Vietnam Development Bank, dominate almost the market with 64% and 18% respectively. The municipal bonds currently issued by three local governments including Hanoi, Ho Chi Minh and Dong Nai, account for only 7% of the total. The rest 11% belongs to the corporate bonds which are issued by the companies. Nevertheless, there are many intensive conditions of the government for issuing corporate bonds.
Therefore, until now there are only 10 companies who meet enough conditions to issue corporate bonds, such as EVN, Vinashin, Song Da Corporation, etc. In comparison with other countries in the region, the structure of Vietnam bond market is quite different. Figure 4: Structure of bond market in some Asia countries (Source: Ministry of Finance of Vietnam) While in Korea, Singapore and especially Malaysia, the contribution of government and corporate bonds to the market is quite balance, that of Vietnam shows a significant difference. Government bonds dominate more than three forts of the market, and the rest 11% belongs to corporate bonds.
That large disparity warns that we are dealing with a strange situation in bond market and some actions need to be taken to balance the two types of bonds. III/ Major participants 1. Individual investors According to the SSC, until September 2008, the number of investors had increased by 47 per cent to 460,000 compared with last December. In fact, when in many other countries, institutional investors usually make up a large part of the securities market, the situation in Vietnam is on the contrary with individual holding 70% of the total accounts.
However, Vietnamese individual investors still prove to be unprofessional for some reasons: Main source of capital usually coming from banks, lack of reliable information about the market, limitation in accurate evaluation of the value of bonds and the bond issuing organizations. Therefore, they have tendency to invest following the majority: sell immediately when prices of securities decrease and buy right away when prices increase. This will lead to the high fluctuation of the market, so easily results in the losses suffering of many investors. 2. Fund managers
Fund management is the professional management of various securities (shares, bonds etc. ) to meet specified investment goals for the benefit of the investors. Fund management companies play an important part in the development of securities market. Since the establishment of VietFund Management, the first fund management company in Vietnam in 2003, until now, 38 fund managers have been granted operation licenses by SSC. Among them, FPT Fund Management Joint Stock Company has the highest chartered capital with 110 billion VND and Lotus IMC has lowest charter capital with 5 billion VND. . Brokers Broker has recently occupied the position of the hottest career for youngsters, although it is still new in Vietnam. The term “broker” is used to indicate a qualified and regulated professional who buys and sells all kinds of securities through market makers or Agency Only Firms on behalf of investors. Brokers play a leading role in developing securities market, and since the establishment of bond market in Vietnam, the number of brokers has increased rapidly, with hundreds of people working for nearly 100 brokerages (according to vietbao. net).
In 2008, due to the new regulation of The Ministry of Finance, brokerages are now the main target for the bond market. However, the lack of knowledge and experience has left Vietnamese brokers with some fatal weakness: limited in quantity, unable to perform all the service (in Vietnam, brokers only concentrate on execution, instead of advisory and discretionary dealing), lack of certificate and qualification, etc. IV/ The number of companies listed There exists an inequality in the number of securities in the Vietnam. Over 300 stocks and 600 bonds are now listed even though the stock market is more active than that of bond.
Another noticeable feature is that bond market has only 10 corporate listings, compared to over 600 government listings, in which most issuers are state-owned corporations. V/ Issuance of bonds Basically, there are two ways of issuing bonds: private placement and public offering 1. Private placement This is the direct sale of securities to a limited number of investors, often the institutions such as mutual funds or insurance companies. Compared to public bonds, those bonds are more likely to have call provision. The issuers usually take their bonds back before the maturity date.
Certainly, the bonds that are more callable are riskier because the investors whose bonds have been called have to face with reinvestment risk. However, investors can get higher rate of return as compensation for the risk they bear. Definitely, such bonds are more in favor of the risk-lovers. 2. Public offering Public offering means the issuance in which securities can be exchanged widely among the public. The separation of private placement and public offering aims at ensuring that the companies using public offering must have high-quality, good operations in order to protect the public from the default risk.
Public offering can take the forms of underwriting or auction. 2. 1. Underwriting When a company wants to go public, the first thing it does is to hire an intermediary known as underwriter. In most situations, the underwriters are the investment banks that act as the middleman between the public and the corporation. If the investment bank and company reach an agreement to do underwriting then investment bank will buy the new securities for an agreed price, and resell them to the public at a markup, bearing all of the expenses associated with the sale.
The company gets the guaranteed funds even if the investment bank does not sell all of the securities. Thus, the investment bank takes a significant risk in a firm commitment. 2. 2. Auction Auctions are designed to minimize the cost of financing the corporate debt by promoting broad, competitive bidding and liquid secondary market trading. A review of the auction process – from the announcement of a new issue to the delivery of securities – reveals how these objectives have been met. However, in the recent times, many of Vietnamese government bond auctions have not been successful.
The major cause is supposed that the government can not match the coupon rate of private investors. Creditors usually applied a high level of coupon that the government can not offer. Both customers and suppliers cannot meet at the common point to bring bonds to market. Conclusion There have been much more debate among the issues of Vietnam bond market and some discussion points should be noticed. Regarding the domination of government compared to corporate bonds, two main causes have been drawn. Firstly, there are many intensive conditions for companies to issue corporate bonds.
Beside the requirement of owning at least 10 billion chartered capital and making a profit of the previous year, the companies need to have no bad debts over 1 year and prepare the audited financial statements of the last year to ensure transparency for investors. Secondly, default risk is higher with corporate bonds than government bonds that also means a higher interest rate of corporate bonds. Therefore, very few companies can afford this type of cost and few companies issue corporate bonds as a result.
Concerning the difference between Treasury Bills and Treasury Bonds, even they are both issued by the Government and bearing no default risk, their maturity dates are far different. Treasury Bills have the short terms of 3 months or 6 months whereas Treasury Bonds have long terms of 5 years, 10 years or more. The issue of high inflation has a significant influence on Vietnam bond market, one of which is the decrease in value of bonds. Apparently, the price of bond is equal to the coupon divided by the bond yield. Coupon is fixed, so when inflation rate is high, leading to high bond yield, the bond price falls accordingly.
Noticeably, although bonds have lower default risk premium than stocks, their liquidity risk premium is considerably higher than that of stock. The low liquidity of bonds compared to stocks can be explained by two reasons. Firstly, the stock market is much more active than bond which pushes up the transactions of stocks among investors and increases liquidity of stocks. More importantly, the value of bonds in each transaction is quite large (about 500 million VND for each), few companies can afford them and therefore, makes it harder to exchange bonds in the market.
After purchasing those bonds, investors tend to hold them until the maturity dates, which significantly reduces the liquidity of bonds. Moreover, it has been asked the reasons why the rate of individual investors in Vietnam is much higher than other countries (70% and 30% respectively). It is supposed that buying bonds is almost compulsory with individual employees in the workplace. Moreover, investment funds have not yet implemented their roles effectively in Vietnam, so small source of capital can not be gathered to make up the market for institutional investors.
It is also important to differentiate between the brokers and market makers or dealers. The dealers act as both buyer and seller of bonds. They purchase bonds from investors and then resell them at a higher price to others. Meanwhile, the brokers do not actually make any purchasing, and only act as intermediaries between investors and dealers. Finally, the question about the difference in interest rate of bonds issued under private placement and public offering was raised.
As mentioned in the report, the holders of private placement bonds often bear reinvestment risk, which in turn leads to higher return or higher interest rate. That is the reason why the interest rate of bonds issued by private placement is usually higher than that of public offering. All in all, there still exists a lot of concerning around the topic of the Vietnam bond market. General speaking, this market has not developed accordingly to its potential. However, with the efforts of Vietnam Government to enhance the bond market’ operations, a bright perspective has been open to this field.