Viet Nam mulls swapping sovereign bonds with debts for the third time

Viet Nam mulls swapping sovereign bonds with debts for the third time

Viet Nam is considering issuing US$1 billion in sovereign bonds for the third time to swap with debts that are becoming due next year. But the proposal still needs to be evaluated based on potential cost, use of national resources for commercial purposes and debt payment capacity.

A consensus has so far been reached within the Government regarding the plan for a third sovereign bond-for-debt swap. This is the second time in two years that the Government has discussed the issuance of international bonds.

Viet Nam's GDP growth rate is expected to reach 5.54 per cent by end-September and reach 5.8 per cent by year-end.

At a government press conference last month, Nguyen Van Nen, head of the Government Office, said Viet Nam had about 1$ billion in outstanding sovereign bond debt that would need to be converted.

Viet Nam borrowed the money at high interest rates and could now borrow again at lower cost to reduce the amount of interest, Nen added.

Economists said swapping debts would make international investors think twice because a company or Government would often consider using this measure whenever faced with problems.

Economic expert Vu Dinh Anh told vneconomy that a sovereign bond-for-debt swap was likely to be the last resort, as a new $1-billion sale may pay for the maturing $750 million in bonds issued in 2005. That means the other $1 billion in bonds which will mature in 2020 may require another bond-for-debt swap if Viet Nam didn't have a sound strategy to pay for the debt.

In 2005, Viet Nam raised $750 million from its first dollar-denominated bond sale at a 7.125 per cent annual yield. The 10-year loan went to the formal debt-laden Vinashin, now known as Shipbuilding Industry Corporation (SBIC).

In 2010, the country borrowed $1 billion from its second sovereign bond sale at a 6.75 per cent annual yield, and this was lent to key State-owned economic enterprises.

Independent analyst Bui Kien Thanh said the use of the loans must be clearly projected and monitored strictly to avoid mismanagement of national resources.

But infonet.vn quoted VPBank Securities's report (VPBS) as saying that both LIBOR and margin interest rates for sovereign bonds have declined since the beginning of the year, and this was supposed to benefit Viet Nam's bond sales.

In principle, the government of a country with an unstable economy tends to denominate its bonds in the currency of a country with a stable economy. Because of default risk, sovereign bonds tend to be offered at a discount.

VPBS reported that the yield of 10-year Government bonds in US dollars fell to 4.5 per cent this September from 6.1 per cent at the beginning of 2010. The rate is lower than the 7.86-per cent annual yield of a 10-year Government bond in dong.

The United States Federal Reserve (Fed) and the European Central Bank (ECB) will likely keep rates on hold until 2015, but ultimately the Fed may have to raise the rate when it faces higher inflation pressure, which will distract investors from emerging markets like Viet Nam, VPBS said.

VPBS argued that if Viet Nam won't make the bond sale now, the opportunities would go by and the degree of success would be lower.

In response, Thanh said: "When talking about the possibilities of taking advantage of lower costs this time, we should remember that the interest rate is not the only issue that a sovereign bond issuance must take into account. It evidently includes other factors such as variety, costs of underwriting, issuance and consultancy."

Also, infonet.vn quoted Rong Viet Securities as saying that though Viet Nam's 10-year sovereign bond yield declined since the beginning of the year, it was still higher than that in 2005 and 2010.

Securities companies advised the Government to issue sovereign bonds for debt swaps, since it was hard to offer lower yields. They also urged the Government to be cautious about issuing the bonds because the international bond market may change quickly. 

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