Why government bonds fail
The bond market is still in its infancy with few successful issues despite the potential and the demand by large investors. At a workshop on the development of the bond market in Vietnam that was held recently in Hanoi, Nguyen Doan Hung, vice chairman of the State Securities Commission (SSC) said that bonds issued so far are chiefly government bonds. For businesses, although demand for medium and long-term capital is high, few have managed to issue corporate bonds and since 2002, no corporate bond has been issued to trade on the stock market transactions.
According to Hung, the offered bid interest rate for bonds on the primary market is defined in accordance with the rates set by the government or each city or each province and does not reflect what is happening on the market. Therefore, bond issues have been insipid affairs with most bids attended by just the state banks or insurers. “The weak operation capacity of the bond market means less investors that want to participate in the bond market which just weakens the operation of the bond market even further. This is an inevitable consequence of the vicious circle”, said Hung.
Many government bond issues have the same interest rate as the rate of common short-term bank loans at about 8.2% a year. Hung explained that collaboration in administering the policy on interest rates between the Ministry of Finance and the State Bank of Vietnam (SBV) remains “weak”.
To make the picture of the bond interest rate clearer, the new chairman of the board of Vietcombank, Nguyen Hoa Binh drew up a list to compare the common lending interest rate of banks with the government bond interest rate over 17 months from 2003 to 2004. The result shows that the lending interest rate of the bank that is lower than the rate of the government bond accounts for nine months and the remaining eight months for the bank rate is higher than the government bond interest rate.
The interest rate is only small part of the matters concerning bond trading that needs dealing with to develop the market. In addition, there are many other matters such as the often talked about building of credit rating companies and modern policies to establish a healthy bond market. However, most is talk and very little is done.
Category: Legal
