Local currency (LCY) government bond yields in Vietnam climbed for all tenors between March 1 and May 8, according to the Asian Development Bank (ADB)’s latest issue of the Asia Bond Monitor.

Bond yields rose faster at the short-end than the long-end, resulting in a flattening of the yield curve. Yields gained an average of 30 basis points (bps) for the one-year through three-year maturities, but only rose an average of six bps for the ten-year through 15-year tenors.

As a result, the spread between the two-year and ten-year yields narrowed to 125 bps on May 8 from 150 bps on March 1. 

The overall upward trend in bond yields was influenced by the uptick in deposit rates. Some banks raised deposit interest rates at the beginning of the year, to enable them to attract funds for mobilization.

A regulation from the State Bank of Vietnam (SBV), which came into effect this year, reduced the ratio of short-term capital that can be used for long-term lending to 40 per cent from the previous 45 per cent. Borrowing costs edged higher as a result. The uptick in bond yields at the short-end of the curve can also be attributed to rising inflationary expectations. 

Upwards adjustments in the prices of electricity and gasoline in March and April were expected to have a domino effect on the cost of goods and services. While inflation in the first four months of 2019 was the lowest for this period in three years, core inflation crept up to 1.8 per cent year-on-year in January-April, hitting the upper-end of the target range of 1.6-1.8 per cent set by the National Assembly for full-year 2019. 

On the external front, uncertainties in global financial markets, particularly those arising from the unresolved trade issues between the US and China, also impacted on bond yields, as the two are among Vietnam’s largest trading partners. 

The SBV has kept its refinancing rate steady since July 2017, at 6.25 per cent, and continues to utilize other monetary tools in guiding interest rates. It has engaged in open market operations and intervened in the foreign exchange market to stabilize the VND-USD exchange rate. 

Between March 1 and May 8, the Vietnam dong weakened 0.7 per cent versus the US dollar. Real gross domestic product (GDP) growth eased to 6.8 per cent year-on-year in Q1 2019 from 7.5 per cent year-on-year in Q1 2018, as growth moderated in all major industry types.

The largest contributor to overall GDP growth was the industry and construction sector, which grew 8.6 per cent year-on-year in the first quarter. The services sector expanded 6.5 per cent year-on-year and the agriculture sector grew 2.7 per cent year-on-year.

Size and composition

Vietnam’s LCY bond market reached a size of VND1,193 trillion ($51 billion) at the end of March. Growth rose a marginal 0.7 per cent quarter-on-quarter in Q1 2019; a reversal from the 5.0 per cent quarter-on-quarter contraction in Q4 2018. On a year-on-year basis, however, a 0.2 per cent contraction was recorded. 

Total LCY government bonds outstanding stood at VND1,092 trillion ($47.27 billion) at the end of March, with growth rebounding to 0.9 per cent quarter-on-quarter in Q1 2019 after contracting 6.1 per cent in the preceding quarter. On a year-on-year basis, the government bond market contracted 2.4 per cent after expanding 7.9 per cent in Q4 2018.

The stock of Treasury instruments was the sole driver of growth, as the stocks of central bank bills and government-guaranteed and municipal bonds contracted during the review period. At the end of March, the outstanding amount of Treasury bonds reached VND919.2 trillion ($39.8 billion), accounting for an 84.2 per cent share of government bond stock. 

Growth of Treasury instruments rebounded to 2.3 per cent quarter-on-quarter and 9.0 per cent year-on-year. In Q1 2019, newly-issued Treasury instruments totaled VND78 trillion ($3.3 billion) on issuance growth of 123.4 per cent quarter-on-quarter and 20.5 per cent year-on-year.

The outstanding stock of central bank bills stood at VND4.9 trillion ($209 million), as the SBV resumed issuance in March after a five-month break.

The stock of government-guaranteed and municipal bonds stood at VND168.2 trillion ($7.2 billion), down 8.5 per cent quarter-on-quarter and 9.0 year-on-year.

At the end of March, the outstanding stock of LCY corporate bonds reached VND100.7 trillion ($4.3 billion), with growth declining 1.3 per cent quarter-on-quarter but rising 31.9 per cent year-on-year.

Data culled from Bloomberg shows that the LCY corporate bond market comprised issuances from 46 institutions.

A majority of corporate bonds are issued via private placement for which information is not publicly disclosed.

The 30 largest corporate bond issuers in Vietnam accounted for an aggregate bond total amounting to VND96.2 trillion ($4.1 billion). This was equivalent to 95.5 per cent of the corporate bond total at the end of the review period. The composition of the top five issuers was unchanged from the list at the end of December.

Taking top spot was Vinhomes, with outstanding bonds amounting to VND12.5 trillion ($536 million), followed by Masan Consumer Holdings with VND11.1 trillion ($476 million). Together, these two firms accounted for 23.4 per cent of the total corporate bond stock at the end of March.

In third was Vingroup, with outstanding bonds valued at VND9.6 trillion ($411.9 million), followed by the Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) and the Asia Commercial Joint Stock Bank (ACB).

Two firms tapped the debt market for funding in Q1 2019: Refrigeration Electrical Engineering and Ho Chi Minh City Infrastructure. 

Ratings Updates

In April, S&P Global Ratings raised Vietnam’s long-term sovereign credit rating to BB from BB-. The rating was given a stable outlook, with Vietnam’s strong economic growth and improved government institutional environment cited as reasons for the upgrade. 

In May, Fitch Ratings affirmed Vietnam’s long-term foreign currency issuer default rating and long-term LCY issuer default rating at BB and revised the outlook for both ratings to positive from stable. In making its decision, it cited Vietnam’s improving economic management, falling government debt levels, strong economic growth performance, and stable inflation. 

VN Economic Times