Vietnamese bonds will probably weaken further, HSBC predicts

The government has also struggled to sell new debt, with a VND1.5 trillion (US$84 million) offering Thursday failing to attract buyers.

Monetary authorities have “begun to raise primary issuance yields higher to attract buyers after repeated auction failures have put the government further behind in its bond issuance schedule,” Pieter van der Schaft, a Hong Kong-based strategist at HSBC, wrote in a research note.

Interest rates are also likely to rise because of strong loan growth resulting from the subsidy program, which has “pressured profitability and pushed up bank funding costs,” according to van der Schaft.

Vietnam’s government has been providing subsidies on loans in a bid to ensure access to credit as economic growth slows amid the global recession. An elimination of the subsidy program, which has been called for by the International Monetary Fund, would make it more difficult for Vietnam to reach a revised 5 percent economic growth target.

Stimulus package

Vietnam’s government has valued its stimulus package at more than $8 billion. The central bank has set a 30 percent maximum target for loan growth this year, up from an earlier projection of 21 percent to 23 percent, HSBC said. Outstanding bank loans rose 17 percent in the first half, van der Schaft said in the note.

A “significant proportion” of loans disbursed so far under the subsidized lending program have been used to refinance existing corporate liabilities or for state-owned banks to provide credit to state-owned companies, van der Schaft wrote. Some lending has also gone to consumers, he said in the note.

In addition to contributing to a stock-market rally, an attempt to expand consumer loan books has underpinned a higher interest-rate environment by also pushing up deposit rates, according to HSBC.

“Banks are funding themselves with term deposits at levels higher than where bond yields are, so that should put upward pressure on yields,” van der Schaft said in a telephone interview Friday. “And the government’s financing requirements should also tend to push yields up.”

Vietnamese bond yields are also likely to be pushed higher by Fitch Ratings’ downgrade last week of Vietnam’s local-currency debt rating, Indochina Capital

Vietnam Holdings Ltd. said this week. Foreign investors cut their buying of Vietnamese debt in response to the downgrade, Indochina said.

Still, Standard Chartered Plc said this week that it sees “signs of a resumption of activity in the primary government bond market in Vietnam.”

“It seems the expectation gap between where the government would like to sell bonds and underlying demand is narrowing,” Standard Chartered said in a July 7 note.

Source: Bloomberg

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