BOND MARKET WEEKLY REVIEW October 5 10, 2015

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1 BOND MARKET WEEKLY REVIEW October 5 10, % Vietnam Government Bond Yields 7.5% 6.5% 5.5% Current T -7D 4.5% T -30D 3.5% 1Y 2Y 3Y 5Y 7Y 10Y 15Y Macro Indicators As at % change GDP (yoy) 3Q % CPI (ytd) 9/24/ % Credit (ytd) 9/21/ % M2 (ytd) 9/21/ % Mid-bank f/x rate (VND) 10/9/ ,200 Vietnam Sovereign Credit Rating Agency Rating Outlook Date S&P BB- Stable 6/28/13 Moody s B1 Stable 7/29/14 Fitch BB- Stable 11/03/14 Vietnam 5Y Credit Default Swap Source: Bloomberg, CMA New York During the reviewed week, the amount of bonds issued in the primary market improved significantly. Foreign investors came back to the market with a high volume of net buying worth more than VND2,000 billion (USD90.1 million). This increasing demand for bonds caused bond yields to decline quite significantly for short-term tenors, whereas long-term bond yields appeared to stay unchanged compared to last reviewed week. Interbank market rates fell significantly because of abundant liquidity in the banking system, supported by a large amount of bonds and bills coming due, and a reduction in demand for holding USD as a result of Circular 15. The government recently approved resumption of bond issuance of under-five-year maturities from November, which will increase the supply of bonds in the last two months of the year and hurt credit growth. Outlook: The issuance of under-five-year bonds will resume in the last two months of the year as approved by the Congress on October 12. Next week, yields of under-five-year bonds may rise. The supply of over-five-year bonds above will be lower than previously expected, which will release pressure longer term bond yields. Bond issuance: From October 5 to 9, VND2,063 billion (USD92.9 million) of bonds were successfully mobilized, a winning ratio of 34 percent. Transaction volume: Total traded volume reached VND11,850 billion (USD534 million), down percent compared to last reviewed week. Foreign buying: Foreign investors continued to net buy strongly for the sixth consecutive week. The net buying amount increased substantially, to 1.5 times last week s net purchasing volume, reaching VND2,276 billion (USD102 million). OMO: The Central Bank net injected VND241 billion (USD10.8 million) via the open market. Interbank market: Interbank market rates this reviewed week continued to decline strongly. F/X: Exchange rates at commercial banks and in the OTC market both dropped sharply during the reviewed week. Gold: International gold prices increased to a seven-week high, while local gold prices rose slightly. CDS: CDS spreads of Vietnam and other regional peers narrowed to the lowest levels in three weeks amid commodity price increases and lower risk of a Fed rate increase. Please see the important disclosure at the end of this report. Page 1

2 MACROECONOMICS The Ministry of Finance may borrow additional USD1 billion from Vietcombank According to The Saigon Times, the Ministry of Finance is going to issue additional USD1 billion of USD-denominated bonds to Vietcombank. The bond yield may be about three to four percent per annum. In early May this year, Vietcombank completed the purchase of USD1 billion worth of government bonds from the Ministry of Finance. The bonds have maturities of five and 10 years with bond yields of 4.8 percent, which is the same rate as the USD1 billion sovereign bonds that the Government issued at the end of last year. This rate is very attractive as it is much higher compared to the USD deposit rate quoted in local banks. This issuance, if completed, will be the second time the government has placed a private issuance of such a large amount of USD-denominated bonds to a bank in years. Previously, the government raised the smaller amount of USD150 million from selling USD-denominated bonds in an auction in There are few reasons for the USD-dominated bond issuance: - The MOF has encountered difficulties in borrowing via VND-denominated bond issuance because only bonds over five-year tenors have been allowed (which will change soon, as we discuss). To finance its expenditures, MOF borrowed VND30 trillion (USD1.36 billion) from the central bank in September. - The MOF needs foreign currency for some of its expenditures and borrowing domestically is preferred to borrowing abroad because of lower borrowing costs. - Vietcombank has more adequate foreign currency than other local banks. From September 28, the ceiling of interest rates on USD deposits was reduced to zero percent for institutions and 0.25 percent for individuals. In the meantime, the rates are not capped for lending of credit institutions. Therefore, Vietcombank may gain big profits from such bond deals. The government will resume issuing bonds under-five-year-term from November On October 12, the National Assembly approved a proposal to allow the government to issue bonds for all tenors starting this November. This proposal will reverse the provisions of Resolution 78, enacted by the Congress last year, stipulating that the government could only issue overfive-year-term bonds. We expect that this move should make a strong impact to improve the effectiveness of the government s funding plans for the rest of the year. During the first nine months of 2015, the Government implemented this provision of Resolution 78 with positive results as the average maturity of the outstanding G-bonds rose to more than four years compared to the three-year average of Through September 29, the State Treasury issued VND127,158.7 billion (USD5.68 billion), including USD1 billion of USD-denominated bonds issued to Vietcombank in May, fulfilling 50.8 percent of the annual plan in 2015, by 60.5 percent over the same period in However, the government has recently experienced some difficulties to Page 2

3 meet its funding objectives. The overall winning rate for the third quarter stood at 31.7 percent, slightly below the level of 32 percent in the second quarter, the lowest during the last two years. Winning bond yields did manage to remain quite constant in the third quarter, after rising quite significantly in the second quarter though. VPBS thinks that in order to complete the annual plan, in the last two months of the year, the State Treasury will have to issue a large volume of bonds. Even if an additional USD1 billion of USD-denominated bonds will be issued to Vietcombank, the volume of government bond issuance in dong will still be huge. As a result, pressure on the yields of G-bonds to rise is quite obvious. In the plan proposed to the Congress, about 60 to 70 percent of G-bonds issued in the last two months will have tenors of five-years or longer, depending on market conditions. During the past few months, as banks have moved away from investing in government bonds, credit growth has soared. Through September 21, 2015 total credit growth has reached percent year-to-date. This is nearly double last years level and has caused the State Bank of Vietnam to revise upward its credit growth target. Even if banks should now move back toward government bonds, the government s initial target for credit growth should easily be met. The government submitted a proposal to the National Assembly to issue international bonds According to the proposal, about USD3 billion of international bonds will be issued to restructure G-bonds in local currency during 2015 and 2016 and to finance the state budget deficit from 2017 onwards, when Vietnam is no longer eligible to borrow ODA from the World Bank. The external debt of the government will not exceed the threshold of 50 percent of total debt. The bonds will have tenors from ten to 30 years. Some of the benefits are visible as follows: - During 2015 to 2016, international bonds with long tenors will help to prolong the average maturity of public debt, reducing annual payment liabilities and bring the ratio of payment liablities to budget revenue to a safe level of under 25 percent. - From 2017 onwards, these bonds will fill the place of ODA borrowings from IDA (the World Bank) in the Balance of Payment and budget financing for Vietnam financial stituation to stay in balance. Without new external debt, Vietnam s reserves and budget may be negatively affected. - Because the government does not want to raise bond yields, it has been unsuccessful in attracting sufficient demand to reach this year s issuance target. International bonds may be a good alternative given the super-low interest rates prevailing in global market right now. Still we are concerned about negative impacts of the plan, if realized. - For the government, the benefit of lower yields of international bonds may not be enough to compensate for the devaluation of VND in the long period of 10 to 30 years to come. - A balance of payments relying more and more heavily on the capital Page 3

4 and financial account and external debt may not be a sustainable situation because this source of foreign currency will have to be repaid in the future. - Public debt has risen to over 59.6 percent of GDP. Additional borrowings may bring about more risk to the budget operations. BOND MARKET Primary market From October 5 to 9, VND2,063 billion (USD92.9 million) of bonds were successfully mobilized, a winning ratio of 34 percent. In the primary market during the week of October 5 to 9, there were VND2,063 billion (USD92.9 million) of bonds successfully mobilized from a total of VND6,000 billion (USD270 million) of bonds offered. Accordingly, the winning rate was improved quite significantly from 4.83 percent last week to 34 percent this reviewed week. The State Treasury (ST) offered VND3,000 billion (USD135 million) of fiveand ten-year bonds. Of these, VND2,000 billion (USD90.1 million) of fiveyear bonds were successfully issued at a yield of 6.65 percent per annum, up five basis points (bps) compared to last reviewed week, and VND12.8 billion (USD576,576) of ten-year bonds were issued at a cost of 6.9 percent per annum, unchanged from the last issuance. The Vietnam Development Bank (VDB) offered VND2,000 billion (USD135 million) of bonds across all tenors. However, it mobilized only VND50 billion (USD2.25 million) of fifteen-year bonds at a yield of 7.9 percent per annum, remaining stable compared to the last issuance. The Vietnam Bank for Social Policies (VBSP) also offered VND1,000 billion (USD45 million) of bonds, but did not successfully mobilized any. As of October 9, VND116,736 billion (USD5.26 billion) of government bonds and government-guaranteed bonds have been issued. These comprise VND98,773 billion (USD4.45 billion) of ST bonds, VND8,459 billion (USD381 million) of VBSP bonds, and VND9,504 billion (USD428 million) of VDB bonds. The treasury bill market recorded no auctions this week. Next week, VND7,500 billion (USD338 million) of bonds will be offered in the primary market. The ST will continue to offer VND3,000 billion (USD135 million) of five- and fifteen-year bonds. The VBSP will offer VND1,000 billion (USD45.1 million) of three-, five-, and fifteen-year bonds, while the VDB will offer VND3,500 billion (USD157 million) of three-, five-, ten-, and fifteenyear bonds. Issuer Number of Trading Sessions Total Winning Amount (VND bn) State Treasury 1 2,013 Vietnam Development Bank 1 50 Vietnam Bank for Social Policies 1 0 ST-Bills - - Source: HNX, VPBS collected Page 4

5 Traded value (bn Secondary market Total traded volume reached VND11,850 billion (USD534 million), down percent compared to last reviewed week. Trading volume of the secondary market this week stood at VND11,850 billion (USD534 million), equivalent to a daily average of VND2,370 billion (USD107 million), down percent compared to last reviewed week. Significantly, foreign investors returned to the market, net buying strongly for the sixth consecutive week by a large amount. Outright and Repo Transactions in the Secondary Market 24,500 Outright (Bonds + Bills) Repos (Bonds + Bills) 21,000 17,500 14,000 10,500 7,000 3,500 4,486 6,482 4,427 16,313 5,325 13,486 2,513 9,239 7,210 11,022 5,034 6,521 8,647 8,177 6,486 12,494 2,905 8,946 0 Source: HNX, VPBS collected Outright transactions dominated the secondary market with 75 percent of total transactions, or VND8,946 billion (USD403 million). Repurchase transactions contributed only 25 percent of total trading volume, or VND2,905 billion (USD131 million). Outright Transactions by Maturity Less than 1 year From 1 to less than 3 year From 3 to less than 5 year From 5 to less than 7 year 5/10-9/10/ /9-2/10/ /9/ /9/ /9/ /8-4/9/ /08/2015 Over 7 year 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Source: HNX, VPBS collected Outright transactions this week continued to focus on short-term bonds with one-to-three-year terms, accounting for 50 percent of total outright transactions. Three-to-five-year bonds contributed 14 percent of total transactions, while five-year bonds accounted for 29 percent. Less-thanone-year bonds only contributed seven percent of total transactions. Foreign investors continued to net buy strongly for the sixth consecutive week. The net buying amount increased substantially, 1.5 times last week s net purchasing volume, reaching VND2,276 billion (USD102 million). Page 5

6 Vietnam Government Bond Yields 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% Current T -7D T -30D 1Y 2Y 3Y 5Y 7Y 10Y 15Y Source: Bloomberg consensus Yields of long-term and shortterm bonds this week changed divergently. Yields of long-term and short-term bonds this week changed divergently. Yields decreased for less-than-five-year bonds and increased for over-fiveyear bonds. One-year bond yields fell the most as foreign investors net purchased a large amount (VND1,086 billion or USD81.4 million). A rise in demand therefore caused bond yields to drop. 1Y 2Y 3Y 5Y 7Y 10Y 15Y Current 4.94% 5.47% 6.07% 6.71% 6.96% 7.21% 7.83% T -7D 5.13% 5.49% 6.11% 6.71% 6.92% 7.14% 7.83% Up/Down T -30D 5.17% 5.50% 5.96% 6.75% 6.99% 7.19% 7.82% Source: Bloomberg OPEN MARKET OPERATIONS The Central Bank net injected VND241 billion (USD10.8 million) via the open market. During the reviewed week from October 5 to 9, VND650 billion (USD29.3 million) of reverse repos came due, and no reverse repo bills were traded in the OMO. The State Bank of Vietnam (SBV) during the reviewed week did not withdraw money via the OMO as it did two weeks ago, and did not offer any T-bills. The main reason for the SBV not withdrawing money via the OMO was the sharp fall in the VND/USD exchange rate, which reduced pressure to withdraw VND. Two weeks ago, the SBV withdrew strongly by VND42,989 billion (USD1.94 billion), therefore it was not necessary to withdraw money this reviewed week. During the reviewed week, VND891 billion (USD40.1 million) of bills came due. Thus the SBV net injected VND241 billion (USD10.8 million) via the open market. INTERBANK INTEREST RATES Previous Current Date applied Base rate 8.00% 9.00% 11/5/2010 Ceiling deposit rate 6.00% 5.50% 10/29/2014 OMO rate 5.50% 5.00% 4/10/2014 Discount rate 5.00% 4.50% 3/18/2014 Refinancing rate 7.00% 6.50% 3/18/2014 Source: Bloomberg, VPBS collected Page 6

7 01/14 02/14 03/14 04/14 05/14 06/14 07/14 08/14 09/14 10/14 11/14 12/14 01/15 02/15 03/15 04/15 05/15 06/15 07/15 08/15 09/15 Interbank Offered Rates % ON 1W 2W 1M 0 11/14 12/14 01/15 02/15 03/15 04/15 05/15 06/15 07/15 08/15 09/15 Source: Bloomberg, VPBS collected Interbank market rates this reviewed week continued to decline significantly. Interbank market rates this reviewed week continued to decline because of abundant liquidity and a significant fall in exchange rates. The amount of bonds and bills coming due this reviewed week reached VND8,000 billion (USD360 million), resulting in liquidity at banks remaining abundant. The USD/VND exchange rate also declined significantly during the reviewed week, reducing pressure on VND and demand for short-term loans used for speculating in USD. Demand for capital borrowing was therefore minimal. According to Bloomberg, interbank rates were quoted as: overnight (2.9 percent, -50 points), one week (3 percent, -40 points), two week (3.4 percent, -40 points) and one month (3.7 percent, -50 points). FOREIGN EXCHANGE MARKET Foreign exchange rate 23,500 23,300 23,100 22,900 22,700 22,500 22,300 22,100 21,900 21,700 21,500 21,300 21,100 20,900 20,700 20,500 Ask Price - the OTC market Weighted Interbank Ceiling/floor price Ask Price - VCB Source: Bloomberg, VPBS collected Exchange rates at commercial banks and in the OTC market both dropped sharply in the reviewed week. During the week from October 5 to October 9, exchange rates at commercial banks and in the OTC market both dropped sharply by around VND250 per USD to the lowest levels since August 19. At the end of the week, exchange rates at Vietcombank were quoted at 22,200 22,280 VND/USD, versus 22,440 22,500 VND/USD one week ago. In the OTC market, the VND/USD rates closed the week at VND22,240 and VND22,290 for bid and ask prices, respectively. Page 7

8 VND million/tael We believe the significant declines in the exchange rates were for the following reasons: 1) The USD deposit interest rate adjustment by the SBV. Interest rates for USD deposits by institutions were reduced to zero, and the maximum interest rate for USD deposits by individuals was reduced to 0.25 percent. 2) On October 2, 2015, the SBV released Circular 15, whereby, starting October 5, enterprises cannot buy foreign currencies for immediate delivery more than two days before the actual payment date (Circular 15/2015/TT-NHNN, guiding transactions of foreign currencies in foreign exchange markets). The above policies are expected to prevent the hoarding of foreign currency. 3) Rumors about Vinacomin s USD300 million reserves being sold for VND between now and the end of this year, which would help to increase USD supply in the foreign exchange market. We have had confirmed that Vinacomin has recently sold around USD40 million, and the organization will receive around USD150 million from its lender by the year-end. Part of this amount will be used to pay for imports; the remainder will be sold for VND. 4) USD index had declined 1.35 percent during the week as the U.S. job report showed that non-farm payroll employment rose by only 142,000 in September, far below the expectation of 203,000 new jobs, and the U.S. Service PMI for September came in at 56.9, down from 59.0 recorded in the previous month. GOLD MARKET Gold prices VN-gold International-gold Source: Bloomberg, VPBS collected International gold prices increased to a seven-week high, while local gold prices rose slightly. After advancing 2.3 percent on October 2, international gold prices continued to extend their gains by 1.57 percent to reach USD1, per ounce as of the end of this reviewed week, the highest level for seven weeks. These strong gains were the result of the lowered expectations for a Fed interest rate rise this year, due to the recent weaker-than-expected U.S. Page 8

9 09/13 10/13 11/13 12/13 01/14 02/14 03/14 04/14 05/14 06/14 07/14 08/14 09/14 10/14 11/14 12/14 01/15 02/15 03/15 04/15 05/15 06/15 07/15 08/15 09/15 economic data. The market saw a 39 percent chance for a rate hike this December, and a 63 percent chance for the first quarter next year. Compared to the previous week, local gold rose slightly by VND130,000 per tael to close the week at VND33.96 million per tael. The gold price gap between the international and local markets was stable at around VND3.0 million per tael. REGIONAL SOVEREIGN CREDIT Sovereign Credit Default Swap (CDS) Credit Default Swaps 350 Vietnam Thailand Indonesia Philippines US Source: Bloomberg, CMA New York CDS spreads of Vietnam and other regional peers narrowed to the lowest levels in three weeks. CDS spreads of Vietnam and other regional peers, such as, Thailand, Indonesia and Philippines narrowed significantly by 17 to 38 basis points to the lowest levels in three weeks, closing the week at , , and basis points, respectively. The U.S. CDS spreads also tightened to the recorded low level at basis points. The significant declines of the CDS spreads worldwide were attributed to an outstanding week of global stock markets, commodities and emerging market currencies in years. The MSCI global benchmark had its best weekly rally since The S&P s 500 Index rose to the highest level since August 20. In addition, Bloomberg s Commodity Index increased 3.6 percent in the reviewed week, the best gain since Global crude oil closed the week at nearly USD50 per barrel. Furthermore, a basket of emerging currencies advanced as the market saw a lower chance for a Fed rate hike this year. Page 9

10 Regional Foreign Currency Credit Ratings S&P Moody s Fitch Singapore AAA AAA AAA China AA- AA3 A+ Japan AA- AA3 A South Korea AA- AA3 AA- Malaysia A- A3 A- Thailand BBB+ BAA1 BBB+ Philippines BBB BAA2 BBB- Indonesia BB+ BAA3 BBB- Vietnam BB- B1 BB- CPI (September 2015) (yoy) 5-yr Local Currency GB Yield (as of October 9, 2015) Singapore -0.80%* China 1.60% Japan -0.20% South Korea 0.60% Malaysia 3.10%* Thailand -1.07% Philippines 0.40% Indonesia 6.83% Vietnam 0.74% *Data on August 31, 2015 Sources: Bloomberg, VPBS Page 10

11 Appendix 1: Weekly bond and bill winning amount in primary markets Unit: VND bn Week ST VDB VBSP ST-Bill Total June , ,300 8,140 June 29 July 3 3, ,760 9,370 July , ,000 9,400 July , ,000 6,492 July , ,162 July , ,983 Aug 3 7 2, ,520 Aug ,565 Aug ,011 Aug Aug 31 Sep Sep Sep Sep Sep 28 Oct Oct ,063 Source: HNX, VPBS collected Appendix 2: Weekly bond trading in secondary markets Bonds ST-Bills Unit: VND bn Week Outright Repo Outright Repo Total June ,260 3, ,002 June 29 July 3 11,803 4, ,111 July ,761 6, ,412 July ,347 6, ,446 July ,285 3, ,779 July ,782 5, ,405 Aug ,457 6, ,240 Aug ,482 4, ,968 Aug ,166 4, ,740 Aug ,486 5, ,810 Aug 31 Sep 04 9,239 2, ,752 Sep ,932 7, ,232 Sep ,297 5,034 1,224-11,555 Sep ,177 8, ,823 Sep 28 Oct 2 12,494 6, ,980 Oct 5 9 8,945 2, ,850 Source: HNX, VPBS collected Page 11

12 Appendix 3: Open Market Operations Unit: VND bn Reverse repo Outright (SBV Bills) Week Due Offer Balance Outstanding Due Offer Balance Outstanding June ,975 39,333 14, ,173 June 29 July ,684 14,299 19, ,558 July ,054 40,767 10, ,271 July ,468 25,000 4, ,803 July ,552 62,373 18, ,624 July ,818 32,179 (1,639) 248,985 Aug ,275 25, ,710 Aug ,206 (6,206) 6,206 10,603 0 (10,603) 239,107 Aug ,206 21,119 (14,913) 21,119 17,068 10,758 (6,310) 232,797 Aug ,119 7,433 13,686 7,433 26,527 28,330 1, ,600 Aug 31 Sep 04 7,433 3,595 3,838 3,595 20,195 1,828 (18,367) 207,361 Sep ,595 1,662 1,933 1,662 6,000 21,194 15, ,555 Sep ,662 2,670 (1,008) 2,670 3,123 - (3,123) 219,432 Sep ,670 2, ,465 3,716 18,142 14, ,858 Sep 28 Oct 2 2, , ,925 34,468 26, ,401 Oct (891) 259,510 Source: HNX, VPBS collected Page 12

13 CONTACT INFORMATION For further information regarding this report, please contact the following members of the VPBS research department: Barry David Weisblatt Head of Research Nguyen Thi Thuy Linh Director Macro and Financials Hoang Thuy Luong Research Analyst Nguyen Thi Ngoc Anh Research Assistant For any questions regarding your account, please contact the following: Marc Djandji, CFA Head of Institutional Sales & Brokerage & Foreign Individuals Ext: 158 Vo Van Phuong Vice President of Retail Sales & Brokerage Ext: 130 Ly Dac Dung Director of Retail Sales & Brokerage Ext: 1700 Domalux Vice President of Retail Sales & Brokerage Ext: 128 Tran Cao Dung Director, Head of Wealth Advisory PRESTIGE VP Private Banking Tran Duc Vinh Vice President of Retail Sales & Brokerage Ext: 369 Nguyen Danh Vinh Associate Vice President of Retail Sales & Brokerage Ext: Page 13

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