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A view of Nha Trang Panorama project of the Nha Trang Bay Investment and Construction Joint Stock Company. — Photo vinhnhatrang.com.vn

The Viet Nam Prosperity Bank (VPBank) bought VND925 billion ($40.22 million) worth of bonds issued by the Hoang Truong Tourism Real Estate Investment Company.

VPBank is among the lenders to have invested a lot in corporate bonds recently. As of March this year it had invested nearly VND15 trillion in bonds, an increase of 69 percent from the end of last year.

Market observers attributed banks’ interest in corporate bonds to their high returns.

They said these bonds usually offer higher interest rates than government bonds or bank deposits with comparable maturities.

Most corporate bonds offer a record 14.45 per cent coupon rate, far higher than the 4-5.5 per cent interest for short-term bank deposits and 8-8.9 per cent for long-term deposits.

According to the Ministry of Finance, companies mobilised VND224 trillion by issuing bonds last year, up 94.5 per cent from the previous year. Liabilities in the market for corporate bonds amounted to VND474.5 trillion at the end of 2018, equivalent to 8.6 per cent of GDP and up 53 per cent from the previous year.

The explosion in corporate bond issuance reflects the appetite for this product.

Bonds are issued by the central and local governments and by corporations.

Corporate bonds are always associated with a higher degree of risk, typically based on the creditworthiness of the companies that offer them.

When you buy a bond, you are lending money to the bond issuer in exchange for a promise to repay the loan amount plus interest at a future date. Bond maturities typically range from 30 days to 30 years.

According to Investopedia, the most well-known risk in the bond market is interest rate risk – the risk that bond prices will fall as interest rates rise. By buying a bond, the bondholder has committed to receiving a fixed rate of return for a set period. Should the market interest rate rise after the bond's purchase, its price will fall accordingly. The bond will then be trading at a discount to reflect the lower return that an investor will make on the bond.

Another risk is that a bond will be called by its issuer. Callable bonds have call provisions, which allow the bond issuer to purchase the bond back from the bondholders and retire the issue. This is usually done when interest rates have fallen substantially since the issue date. Call provisions allow the issuer to retire the old, high-rate bonds and sell low-rate bonds in a bid to lower debt costs.

Bond holders also face the risk of inflation, which deteriorates the returns. This in fact has the greatest effect on fixed bonds, which have a set interest rate from inception.

Experts said because bonds, especially those issued by companies, are considered quite risky the Government could find it necessary to tighten their purchase by banks to mitigate the risk for the sector.

Some 75 per cent of corporate bonds are bought by banks.

The State Bank of Viet Nam (SBV) has drafted a circular in place of Circular 36/2014/TT-NHNN reducing the prudential rate for credit institutions and foreign banks.

The draft includes new regulations that aim to restrict lending to high-risk areas including investment in and trading of corporate bonds. These are expected to prevent banks from directly or indirectly buying bonds to restructure existing loans.

In particular, the central bank prohibits them from providing credit for investing in corporate bonds in certain cases.

They include those subject to the Law on Credit Institution’s Article 126, Clause 1, and those that want to use bank loans to buy corporate bonds not yet listed on the stock market or bonds of public companies that are yet to be registered for trading in the market.

The draft also regulates that domestic credit institutions and foreign banks are not allowed to provide credit to customers seeking to buy corporate bonds issued by their own subsidiaries.
Experts said this is not the first time the central bank is seeking to tighten regulations on corporate bond buying by credit institutions and foreign banks.

In June last year the SBV issued Circular No.15/2018/TT-NHNN for the same purpose.

Under this new circular which revises Circular No. 22/2016/TT-NHNN, the central bank also stipulates that for corporate bond purchase, credit institutions including foreign banks must have an internal credit rating system besides a system to rate the bond issuers.

They are also required to issue internal regulations for the purchase of corporate bonds in accordance with current legal regulations. Accordingly, internal supervision regulations on corporate bond purchase, especially bonds issued for the purpose of implementing programmes and projects in areas of potential risk as identified by credit institutions, must be issued to detect risks and violations.

Credit institutions must also issue internal regulations on specifying the areas of potential risks as well as their credit and investment policies on the areas.

In a recent report, the Ministry of Finance also says that it is seeking ways to reduce the corporate bond market’s reliance on banks.

It has drafted measures to develop the corporate bond market, one of which is to strengthen the legal framework for issuance.

Developing credit rating agencies and encouraging companies to use credit rating services will also be given priority to improve buyers’trust in corporate bonds, thus making them attractive.
Development of an investor base in the Vietnamese corporate market would be implemented in ways that will enable professional institutional and individual investors to diversify their investment.

Smooth sailing forecast for forex market in 3rd quarter

Experts think there will be many favourable factors to help keep the foreign exchange market stable in the third quarter of the year.

They expect the exchange to remain steady at VND23,300-23,600 to the dollar.

They point to the State Bank of Viet Nam (SBV)’s efforts to intervene in the foreign exchange market whenever it thinks necessary, much of it involving buying the greenback.

They point out other reasons including the improvement in the trade balance and demand for foreign exchange being steady and predictable.

The trade balance is predicted to improve to a surplus estimated at US$1.5 billion thanks to a surge in foreign companies’ exports.

The economy is also in good shape, with growth being steady, inflation low and foreign capital inflows consistent, which would help the foreign exchange market cope with any possible volatility.
Disbursement of foreign direct investment (FDI) is quite high, at an estimated $5.5-6 billion by the end of this quarter.

Portfolio investment is expected to increase sharply thanks to the issue of international bonds by banks.

VPBank, for instance, has successfully raised $300 million through three-year bonds, with BNP Paribas, JP Morgan and Standard Chartered acting as consultants.

TPBank plans to issue tier 2 international bonds worth $200 million this year.

There could be another $200 million in the pipeline.

Several external factors are also likely to keep forex rates steady in the third quarter.

Pressure from the global market on the VND/US$ exchange rate will likely ease after US President Donald Trump and Chinese President Xi Jinping met on the sidelines of the G20 Summit in Japan in late June, which opened the way for the resumption of trade negotiations and reduced the risk of escalation of the trade war between the world’s two biggest economies.

Trump claims the US is in a disadvantageous position in the trade war when the central banks of other countries have continued to ease monetary policy, reduce interest rates and devalue their currencies.

So the US central bank could be put under pressure for its monetary policy and the dollar is unlikely to strengthen. The bank is ready for a rate cut of at least 0.25 percentage points.

Meanwhile, the Vietnamese Government has implemented measures to mitigate the negative impacts of the China-US trade war. It has established a committee to monitor the developments and make policy recommendations and made preparations to ensure steady economic growth.

They include controlling inflation and ensuring flexibility of the exchange rate.

The Government also plans to enhance the competitiveness of the country’s businesses and the investment environment.

VNS