Vietcombank, one of the largest Vietnamese commercial banks, has wrapped up a deal to buy $1 billion worth of government bonds in dollars after one year of hectic preparations.

 

Thoi Bao Kinh Te Sai Gon quoted its sources as saying that Vietcombank has successfully bought $1 billion worth of 5-10-year term government bonds from the Ministry of Finance at interest rates hovering around 4.8 percent.

At least 4.8 percent is nearly the same with the interest rate of international bonds the government of Vietnam issued in late 2014. 

Analysts say the interest rate is “admirable” for commercial banks because it is relatively higher than the average dollar deposit interest rate offered by Vietnamese banks at this moment.

They noted that if the government had issued the bonds through bidding, it would have been able to mobilize capital at lower interest rates.

This is the first time the government issued bonds in foreign currency in bulk specifically to one bank.

Why the US dollar, and not dong bonds, and why Vietcombank? First, the government also needs foreign currencies for its spending, and therefore, it is reasonable to issue bonds in dollars.

Second, Vietcombank is believed to be the commercial bank richest in foreign currency reserves among domestic banks. 

Meanwhile, economists said that it would be better to borrow from domestic sources than overseas.

Seeking capital from domestic sources would also help avoid possible shocks caused by exchange rate fluctuations. If the government borrows money from overseas, i.e., creates a cross-border cash flow, this would cause the dong to appreciate.

Under current regulations, once MOF issues dong bonds, it will have to do this through bidding. However, no one can say for sure the bidding would succeed. Dong bonds have not sold in the latest bidding sessions. 

The State Treasury could issue only VND8.5 trillion worth of government bonds after all the 11 bidding sessions in April.

Third, if the State Bank, not the Ministry of Finance, sold issues for $1 billion from Vietcombank, the money supply would be in trouble because of a large amount of dong to be put into circulation.

In general, the central bank only buys dollars when the commercial banks’ exchange balance increases.

Economists commented that this is a wise decision which allows borrowing of money for the government’s spending and brings benefit to Vietcombank, though the bank will have to make big efforts to regulate its foreign capital.   

Vietcombank said it took it one year to prepare for the deal. This is the biggest ever transaction, and an unprecedented deal, in the banking sector.

In 2009, the Hanoi Stock Exchange raised $150 million worth of government bonds in dollars through bidding.

TBKTSG