Although no official number of being-circulated government bonds was released, this figure is estimated at some US$15 billion of which foreign investors hold about US$3 billion.
The number of bonds that foreign investors hold is mainly bought from mid-2007 to the first quarter.
According to the bond trading forum that gathers domestic and foreign investors, prices of government bonds in the market is having a fast downward tendency. That means that interest rates of government bonds are highly increasing.
“Three months ago, holders of two-year government bonds were entitled to an interest rate of 7.4% however government bond buyers in the secondary market are entitled to an interest rate of 20%. That means prices of government bonds have reduced by up to 30%, said Do Ngoc Quynh, representative from the forum.
Analyst said that in case government bonds depreciate so much, the government will find hard to raise capital in the upcoming time and issuing bonds of businesses will also adversely be impacted.
If the government must borrow capital at an interest rate of up to 20%, businesses will surely have to borrow capital at an interest rate of over 20%. At that time, businesses will be unlikely to consider issuing corporate bonds, an analyst emphasized.
Thus, only if the government sets an interest rate of 20% or higher for government bonds, will the government be able to raise capital. The government has to unintentionally raise capital at an interest rate higher than commercial banks, which offer an interest rate of only 17-19% while government bonds carry low risks.
Analysts worried that current moves of government bonds will impact the government’s raising capital in the upcoming time in order to actualise capital for infrastructure projects as well as projects using capital from government bonds.
Many people questioned why the interest rate of government bonds are highly boosted and whether this reflects exactly the reality of the macro-economy or whether there is any abnormal thing for the economy.
Responding the above questions, analysts put forward the inflation that increased by over 20% year-on-year and up by over 15% compared to early this year. In order to ensure positive interest rates amidst the highly rising inflation, it is clear that the interest rate of government should rise.
Nevertheless, according to experts, regarding market participants, the pressure on pushing the interest rate of government bonds comes from foreign investors. This is resulted from their bond buying customs, namely, they apply the market-to-market accounting method where foreign investors reappraise the status and the value of daily trading status of government bonds based on the market price.
Thus, when reappraising the status and the value of daily trading status of government bonds, foreign investors recognise losses from government bonds. If such losses reach the stop loss point, foreign investors have no way but to sell government bonds in a bid to escape from the market.
In fact, only a few of domestic investors suffer from the pressure on liquidity but not the pressure on stop loss point that forces them to sell government bonds. Although some banks with good liquidity and some investment funds are considering acquiring government bonds because the interest rate of 20% is attractive to them, the demand fails to conform to the supply of foreign investors, said Quynh.
This leads to disadvantages for the market because foreign investors often offer selling prices of government bonds and reflect prices of government bonds inexactly in Vietnam’s market.
At the forum, the participants said that if the government does not want to close the channel of raising capital via government bonds, the government should take intervene actions by reconsidering acquisition of government bonds of foreign investors in the market in order to help them escape from the pressure on cutting losses. However this is only a temporary situation, partially preventing the interest rate of government bonds from highly growing.
Nevertheless, the participants noted that the government’s intervene will result in another issue, namely conversion of currencies of government bond sales from dong to US dollars. Thus, it is required to have consensus cooperation between the State Bank of Vietnam and the finance ministry.
While waiting for solutions of the government, experts said that the government bond market is a basis for identifying the corporate bond market. If the government cannot raise capital in the market, businesses have no way to raise capital for production and business because loans from banks and share issuance are being restricted. Therefore, businesses will face up more and more difficulties.