When will it be time to test the sovereign bond?

Thursday, May 8, 2008
The Viet Nam government decision to once again postpone its US$1bil sovereign bond issue has sparked questions about how to pick the time to enter the market.
Prime Minister Nguyen Tan Dung told the National Assembly meeting on Tuesday: "The sovereign bond issuance will be done at a suitable time."
The Finance Ministry's external financing department director Nguyen Thanh Do told Viet Nam News yesterday: "The words 'suitable time' might apply when the global credit crisis eases; the domestic financial market is rejuvenated and inflationary pressure retreats.
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"These are three major reasons for the waiting. I don't think the Government will issue bonds until they change for the better."

With the fighting of inflation the priority, raising more dollars and then pumping more money into projects would mean more money in circulation and more inflation, he said.

The statement announcing the delay earlier last month said: "In the short term and current circumstance, the issue of sovereign bonds abroad will not proceed so as to focus the forex sources already available in the country."

Proceeds from any final sale of bonds will be used to finance the building of an oil refinery, two hydropower plants and buy ships.

The money will be lent to the Viet Nam Oil&Gas Group, or PetroVietnam, the Viet Nam Shipping Lines Corporation (Vinalines); Song Da Corporation and the Viet Nam Machinery Installation Corporation (Lilama).

But external financing department director Nguyen Thanh Do believes the postponement is not likely to adversely affect any of these projects because the corporations have raised investment capital from other sources and work is underway.

The cost of waiting

Waiting longer could well cost Vietnam more because the global credit crisis is expected to get worse before it gets better and the Government may have offer more if it is to persuade investors to risk their capital.

It will have to pay much more to sell its bonds than it would have at the end of 2007.

And, most importantly, the country will now face much higher borrowing costs.

Nevertheless, the decision has its supporters.

Many want to buy Viet Nam bonds but the Government determine the appropriate time," the managing director of a HCM City-based foreign investment fund, who declined to be identified, told Viet Nam News by telephone yesterday.

"Meantime, I think it's sensible."

Bankers and fund managers say they do not expect the bonds to go to market before June 30 given the global credit-market turmoil and Vietnam's preoccupation with containing consumer prices.

These rose 21.42% year on year in April, their highest for 17 years.

Others think the sale may be shelved until next year.

External financing department director Nguyen Thanh Do believes that if the market turmoil continues into 2009 or even the year after the issue can be delayed until it ends.

"Timing will also be fixed by how well the country's battle with skyrocketing prices goes," he says.

"It's difficult to forecast exactly when the bonds can be offered given the chaos in world markets."

Another factor is likely to be the availability of foreign currency.

The burgeoning trade deficit could make money more difficult to raise while Official Development Assistance and remittances are tipped to decline.

So will foreign currency be scare if the Government does not issue sovereign bonds?

External financing department director Nguyen Thanh Do concurred.

"If we really needed dollars, we could raise commercial loans in the international market or issue bonds," he said.

Viet Nam's bond sale of October 2005 attracted strong international demand and raised $750mil.

Orders totalled $4.5bil, six times higher than the eventual sales total, as investors sought entry to an economy growing at about 7 to 8%. (Viet Nam News)