Sunday, July 5 2020


Foreign currency bond initiative under fire

Update: July, 04/2016 - 09:00

by Thiên Lý

HCM CITY — Prime Minister Nguyễn Xuân Phúc recently approved a plan under which the Government will borrow VNĐ452 trillion (US$20.1 billion) this year to offset its fiscal deficit and pay existing debts.

The Government will use VNĐ254 trillion, or 56 per cent of the money, to bridge the deficit, projected at 4.95 per cent of gross domestic product this year, and VNĐ60 trillion, or 13.2 per cent for public spending.

About 21 per cent, or VNĐ43 trillion, will be for refinancing debts and the rest will be on-lent to local governments. Việt Nam’s debt servicing costs are estimated at VNĐ272.3 trillion this year.

Regarding the sources, the Government plans to raise VNĐ366 trillion, or 78 per cent of the borrowing target, through bond sales as well as loans from the social insurance fund and the State Capital Investment Corporation (SCIC), which itself is trying to collect money from its investment in State-owned companies.

Official development assistance (ODA) loans from foreign sponsors are expected to amount to VNĐ99 trillion.

Significantly, the Government plans to issue VNĐ17 trillion worth of bonds in foreign currencies at home and abroad.

When the Government announced the plan to issue bonds in foreign currencies at home, opinions were divided.

Some analysts hailed the idea saying it would not only help the Government raise low-cost funds but also help it in the ongoing war against dollarisation.

They pointed out that a large amount of foreign currencies from remittances and savings are in circulation on the domestic market, and the Government could mop them up if it issued bonds for three, five or 10 years at coupon rates of 0.5-1.5 per cent.

The current zero interest policy on dollar deposits will be an important factor in this. 

Many others however disagreed with this plan, saying it goes completely against the anti-dollarisation goal, to achieve which the Government and central bank have had to take many measures. 

In any case, by drawing dollars from abroad to enjoy the attractive interest rates, it might fail to mop up dollars from the domestic market and in fact could increase the supply of dollars in the economy, they said.

Other critics also expressed doubts whether people are ready to invest their dollars into bonds when the local and global economies are yet to become completely stable.

With a bond issuance in foreign currencies unlikely to succeed, the Government should instead issue đồng-denominated bonds and buy the greenback if it needs foreign currency, they said.

Draft decree makes debt trading harder

The banking sector’s bad debts ratio has been brought under 3 per cent thanks to the Việt Nam Asset Management Company (VAMC) that has been proactive in buying large amounts of non-performing loans (NPLs) from banks.

Between May 2013 and late last year the VAMC bought bad debts totally worth VNĐ230 trillion. However, only 10-15 per cent of the debts have been realised so far.

Thus, though the bad debts ratio has been pushed to below 3 per cent, it remains a pressing issue for the economy.

Resolving the problem is a vital albeit difficult task especially since the country does not have a secondary debt trading market.  

Analysts say NPLs be resolved thoroughly only with a debt market.

The lack of a debt market does create a bottleneck in the process of handling toxic debts. The VAMC was set up under the central bank’s umbrella in 2013 with a charter capital of VNĐ500 billion to handle bad debts.

Meanwhile, a draft decree spelling out conditions that entities should fulfil to trade in debts has been put up for public scrutiny and suggestions.

One of the conditions is that they must have a minimum legal capital of VNĐ100 billion to buy and sell debts and VNĐ1 trillion for setting up a debt trading floor.

Analysts point out however that not many people want to buy debts, especially bad debts, since collecting them is a very difficult task and the risks are great.

In the event, the Government’s decision to place debt trading in a list of conditional businesses is an unwise and infeasible decision, they say.

The 2014 Investment Law that replaced the 2005 Investment Law has many important changes, especially with respect to sectors in which investment is prohibited or allowed with conditions. 

Accordingly, conditions apply to some sectors that have implications for national defence and security, social safety, public health and others.

Debt trading can hardly be considered sensitive since only the ownership of a debt changes and not obligations related to the debt.

Experts from the Việt Nam Chamber of Commerce and Industry (VCCI) also say that existing legal provisions are enough to regulate debt trading since debts are only a commodity.

The Government also has the legal wherewithal to regulate the process of handling bad debts, they say.

With debt trading needed to be encouraged to help both banks and businesses resolve their funding problems, it should not be stymied by imposing conditions, they warn.

Independent analysts agree with the VCCI experts, saying the decree stipulating conditions for debt trading should be delayed.

The VAMC said Việt Nam needed a legal framework for regulating bad debts since many foreign investors and funds were now looking to take part in the country’s debt restructuring and handling process.

The draft will help develop a legal framework for debt trading and setting up trading floors for debt trading, consultancy and brokerage. 

Brexit makes gold volatile

On July 28 SJC’s gold selling price opened at VNĐ35.2 million per tael (of 37.5 grammes) and moved up to VNĐ35.25 million.

But by 10am it dropped to VNĐ35.22 million, a decrease of 250,000 per tael from the same time the previous day.

The previous noon it had traded at around VNĐ35.38 million, up VNĐ1.3 million from morning. 

The wild fluctuations were attributed to global volatility caused by Britain voting to leave the EU.

The precious metal surprised investors with a sharp rally on June 24, hitting a high of US$1,358.5/ounce for a 6.5 per cent rise from the previous session.

But on June 27 it had fallen to $1.327.89.

Thus, yet again it became clear that physical gold is a haven for investors whenever there is economic or political turmoil anywhere in the world.

Many analysts expect gold prices to continue to rise since the economic, political and social situation in Europe is unclear and major stock markets have taken a hit.

But in Việt Nam the gold market was rather quiet, with most transactions taking place between enterprises and individuals mostly keeping on the sidelines.

This is what analysts counsel too, saying with the volatility investors should be careful for the moment. — VNS

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