When mentioning Vietnam’s capital market, most investors think of the VN-Index and the privatisation of state-owned enterprises, forgetting a promising fixed-income market. Vietnam’s debt market is larger than the equity one, and debt financing remains a major source of funds in Vietnam. Unlike equity market, the fixed-income market offers sizeable investment opportunities, professional local participants and market resilience.
Government bonds (G-bonds) are worth around VND900trn ($40.3bn), and weekly transaction volume is $2bn. Local commercial banks are major participants in this market, as foreign investors do not hold many G-bonds. This mostly explains why the Fed’s recent interest rate hikes did not affect the market or G-bond price significantly. With a weak equity market and small flows of foreign indirect investment, Vietnam offers high yields, even for its G-bonds. A gradual decrease in bond yields has offered investors an exceptionally high holding period yield (HPY). HPY for 10-year G-bonds has averaged 18.2% per year in Vietnamese dong and 16.5% in dollars in the past five years. For five-year G-bonds, the most popular in the market, average HPYs were 15.4% and 13.6%, respectively.
For foreign investors, Vietnam’s public debt and foreign exchange risks are major concerns. Public debt totalled 50.5% of GDP as of the end of 2015, about average in the region. Some 81% of government debt is denominated in Vietnamese dong which makes it easier for the state to control the fiscal situation. For foreign exchange risks, the dong is among top performers of its tiers against the dollar. The current central exchange rate system allows the central bank to flexibly manage the USD/VND exchange rate, while Vietnam’s foreign currency reserves, at $40bn, are at an historical high.
As macroeconomic stability remains the government’s highest priority, and more importantly, Vietnam’s balance of payments is in good surplus, VND valuation is still expected to be relatively stable against the dollar. On the other side, with the current consistent monetary policies, we expect G-bond yields to decrease by a further 50-100 points per year in the next two to three years. In other words, this is still a good time for investors to join the market and earn exceptionally high HPY.
Corporate Bond Market
The corporate bond market is more fragmented and less liquid. Most of the issuances are carried via private placement, and there is no public/centralised market for corporate bonds. Local commercial banks are major players in this market. Without a national credit rating system, commercial banks, which are basically bond holders, service the bonds and manage collaterals for themselves. However, yields in this market are attractive, as investors are paid 9-11% or G-bond +2-3% (or equivalent) by the best companies of Vietnam. For dollar-denominated bonds, the floating rate is still as high as 5-7%. Generally, corporate bonds have short term of only two to five years and usually include put options.
As banks’ deposit interest rates have seen a sharp decrease in the past three years, high-net-worth individuals are paying more attention to the corporate bond market and creating more liquidity in the market. Only the biggest listed companies join this specific market. With a size of $8bn-10bn, Vietnam’s corporate market remains small but attractive, especially for active investors. The market size is expected to grow exponentially in the coming years, as big corporates start preferring bonds to bank loans. However, it will take time for it to be as matured as investors’ expectations.
Municipal bonds are not popular, but this is expected to change in the next few years. Municipal debts total around $2bn, mostly borrowed by big provinces. In the FY 2017 municipal debt is expected to increase by 20-30%. In the coming years big cities, especially Ho Chi Minh City, will issue more municipal bonds to finance infrastructure. These bonds generally offer yields around 1-2% higher than G-bonds. They are also seen as safer than corporate bonds as well as easier to invest in, especially for off-shore investors.