Vice minister of Finance (MoF) Tran Van Hieu said that the economic slowdown and global financial crisis were hurting government bond auctions. “We will have other plans for bond issuances following these failures and the plans will be appropriate for the current situation,” said Hieu.

Although Hieu did not reveal what changes would be made, he said they would “not create pressure on interest rates in financial markets and would avoid impact on the banking sector.”

Government bonds are an important capital source for Vietnam’s economy this year. The government is planning to mobilise about VND55 trillion ($3 billion) from bond issuances to boost demand for investments in the country. Capital mobilised from government bonds is expected to eliminate the budget deficit, which is estimated at about 8 percent of the gross domestic product this year.

Hieu said the government’s capital demands were large compared with previous years. He said the MoF would try its best to ensure the government’s target for mobilised funds and said the upcoming changes in bond issuance would ensure the success of government bond auctions.

Between January 1, 2009 and June 4, 2009, nine government bond auctions were organised with volumes totalling VND2.5 trillion ($140.4). However, the total winning volume was only VND100 billion ($5.6 million) in the February 12 auction. Trinh Mai Van, an economist at Hanoi-based National Economic University, said the main reason for the auctions’ failure was that bidders and the MoF did not find a common bond yield.

In fact, the ceiling yield fixed by the MoF was lower than the bidders’ lowest registered yield at most government bond auctions between January and May. For example, the ceiling yield was 8.80 percent, per year while bidders registered the lowest yield at 9.20 percent, per year. But, Van said government bonds were still attractive and safe for investors.

“Investors are expecting a higher yield, so raising the ceiling yield is the most effective measure for the success of government bond auctions,” said Van.

However, the Saigon-Hanoi Securities Company said in its latest report that the government had not agreed whether to raise the bond yields or not.

“If the government does not raise the yield, it cannot issue more government bonds. But the increase of the bond yield could negatively impact on banking interest rates and the effectiveness of interest rate subsidy policies,” said the report.

HSBC last month predicted in its report that the two and five-year government bond yields would rise to 9.50 and 9.75 percent respectively by this year’s third quarter. But the MoF’s low ceiling yields are not the only factor in the failure of bond auctions. Van said slow disbursement of government bond-funded projects was also impacting investment decisions.

Furthermore, investors were facing financial difficulties due to the economic downturn and global financial crisis, Van said. Hieu said the failure of bond auctions would not impact the government’s plan to fix the budget deficit. He added that the pressure for government bond issuance had fallen as global prices of crude oil were rising.

“If the global crude oil price stays between $65 to $70, the budget deficit would be around 6 percent instead of the forecast 8 percent,” said Hieu.

Source: Vietnam Investment Review