Bond issuance needs reform for more effective and professional operations, according to Truong Hung Long, Deputy Head of the Banking Finance Department under the Ministry of Finance.

With bond issuance becoming a more common means of accumulating funds for developments, localities and enterprises are issuing bonds, in addition to the government.

According to Mr Long, the bond market began taking shape in 2000 when the government issued Decree 141 on bond issuance. The market has developed strongly since 2002 after the government allowed issuance of a variety of bonds, and approved the establishment of the HCM City Securities Trading Centre.

The current types of bonds available on the market, include government bond issued by the Government, urban bonds issued by local governments like HCM City, Hanoi and corporate bonds issued by state-owned corporations like the Vietnam Shipbuilding Industry Corporation (Vinashin), the Electricity of Vietnam (EVN), the Vietnam Oil and Gas Corporation (PetroVietnam), and the Song Da Corporation.

The bond market in Vietnam is still small, accounting for around 8-9% of the gross domestic product (GDP). In the international arena, the US, Japan and the European Union (EU) account for 80%, while Asia accounts for 3%. The bond market in Singapore, Malaysia and Thailand develops more strongly than Vietnam, accounting for 30-40% of GDP.

“Research shows that to develop economics, the capital market must first be allowed to develop. To gain a growth rate of 1%, we need 0.527% of capital. Capital is very important to the economy and the issuance of bonds to raise funds is considered a useful financial tool to the national economy, even though the issuance of bonds is still small at present,” said Mr Long.

So far, the total value of issued bonds is around VND70-80tril (US$4.375bil), including 80% of government bonds. Capital raised from bonds is primarily used to develop infrastructure facilities such as transport, irrigation works, shipbuilding, and the oil and gas industries.

“The growth of the economy partly reflects the effectiveness of the issuance and the use of that source of capital. But bond issuance has another meaning, reducing risks from the banking sector,” said Mr Long.

According to Mr Long, most bank loans are short term, and 80% of these are less than one year and cannot be used for long-term investment profiles. However, such loans now account for 40% of the market, and thus pose risks for banks and the national financial market.

It is easy to define when, where, how much and in which currency unit that bond is issued but it is not simple for banks to define their loans, according to Mr Long.

Vietnam aims to obtain GDP growth rate of 8% from now to 2010 and to realize this goal, the country needs to further invest in infrastructure. Around $150bil is the figure the country needs. Of this figure, the capital and monetary market will contribute 40-50%. This is the primary objective, and developing the capital and monetary markets is the key goal of the financial sector till 2010, Mr Long said.

To facilitate bond issuance as a national capital raising channel, Vietnam will take the following measures:

Firstly, establishing market founders and agents who are all professional bond distributors, coupled with a shift in transaction method. Accordingly, bonds will be traded in the by negotiation, as in over the counter (OTC) transactions, instead of at securities trading centres. Bonds will be issued through securities trading companies to reduce formalities and save time.

Secondly, ending intervention and management by the Ministry of Finance over bond interest rates. The ceiling interest rate for bonds will be abolished, thus interest rates will float in accordance with the market. Policy will also allow diversification in the forms of bond issuance towards more flexible pricing.

Restructuring of bond issuance is the third measure. Accordingly, bonds will be issued in batches and be listed together. This measure aims to create liquidity for bonds.

Along with that, combining the monetary and capital market to strengthen liquidity is also another financial reform solution.

In addition, the establishment of domestic and foreign credit ratings organisations to help accurate evaluation of the value of bonds and the bond issuing organizations will be encouraged.

Source: VNECONOMY