Dec 13, 2012

Vietnam - “Bountiful bond crop” raises worries

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VietNamNet Bridge – While other investment channels have been shrinking in the economic downturn, government bonds have been yielding big fruits. What’s behind this?

Only banks buy government bonds

Commercial banks remain the biggest government bond buyers. A report of the Hanoi Stock Exchange (HNX) showed that 132,274 billion dong worth of bonds had been sold by November 21, 2012, higher than the targeted 120 trillion dong level. 89 percent of buyers were commercial banks, while the others were securities companies and some other financial institutions.

This is not new news. Banks have always been the key members in the bond market. However, it is really a surprise that government bonds, the most attractive investment channel for now, can only attract bankers.

Analysts have every reason to believe that government bonds are now the safest and the most attractive way of investment. This is a kind of assets guaranteed by the government, while it can provide very attractive yields, if compared with the expected inflation rate.

Dr Le Hong Giang, the owner of kinhtetaichinh blog, a well-known finance expert, wrote that government bonds are always a very important instrument used by the central bank in regulating the national monetary policies. Most of the central banks in the world intervene in the interest rates in the finance market through the instrument - government bonds.

Besides, government bonds can also be used as collateral in the transactions among private financial institutions. Therefore, this kind of bonds helps stimulate the capital rotation.

However, it is quite right to think that commercial banks buy government bonds to fulfill some unwritten duty?

The duty is that they need to join the market to support the state in regulating the monetary policies, for which they would receive some certain advantages when making transactions in the OMO (open market operation) and the interbank market.

For example, they can use government bonds as collateral for the financial activities in repo transactions, interest rate swap contracts, and most importantly, as the instrument to carry out the OMO transactions with the State Bank.

What will happen if all money goes to government bonds

Governor of the State Bank of Vietnam Nguyen Van Binh, when answering the questions before the National Assembly, admitted that the banks’ liquidity is still unstable.

If so, analysts have warned that there would be no money to be pumped to the private run business sector, if the money all has gone to the government bonds. Meanwhile, the central bank has been making every effort to slash the interest rates to make it easier for enterprises to access bank loans.

According to Dr Nguyen Le Ngoc Hoan, a lecturer of the HCM City University, in theory, when the government issues bonds in large quantities, the volume of cash in circulation would decrease. Once the money supply decreases, the capital price would increase.

In other words, when the central bank takes back money from the market, while keeping the tight monetary policies, this would happen that government bonds would compete with private credit in terms of interest rates.

This might be a factor that makes the credit still inaccessible to businesses, even though the central bank has slashed the ceiling deposit interest rates and set the ceiling lending interest rates in some certain areas.

The issuance of government bonds in large quantities, according to experts, would bring immediate benefits to the state budget, but it may leave long term consequences.

Moody’s has reduced the credit rating for Vietnam’s government bond in foreign currencies and local currency from B1 to B2.


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