Channels opening up to mobilise long-term capital

In early November, the Ministry of Finance (MoF) revealed it was building a project to issue bonds to mobilise foreign currency from individuals.

“It is not too hard to do, because the interest rate on dollar deposits at banks are at zero per cent currently. We should issue more government bonds for the short term, and then involve capital to ensure economic development,” MoF Minister Ho Duc Phoc said.

The minister added that it is possible to increase the spending deficit in 2022-2023, but by 2024 if the economy develops well and the budget revenue increases, the deficit will drop and the average overspend for the whole term (2021-2025) will still reach the target set by the 13th Party Congress, at 3.7 per cent.

In the opinion of economist Le Dang Doanh, this solution is not too risky, because the US dollar and USD/VND exchange rate are relatively stable. While the USD deposit interest rates at banks are currently zero, the VND deposit interest rate is around 5-6 per cent.

“Therefore, idle USD holders will find it more profitable to buy foreign currency bonds issued by the government instead of wasting their money at zero interest rates,” said Doanh.

Three decades ago, in order to collect $3 billion to control inflation, the prime minister proposed to Politburo to mobilise money from people by improving the average interest rate from 3 to 12 per cent. This was extremely effective, Doanh said, and inflation went from three digits (774 per cent) in 1986 to two digits (14 per cent) by 1992.

“Similarly, issuing foreign currency bonds at this time is also a good solution to utilise the resources of the people when the economy has been hit strongly and there is little precedent,” said Doanh.

He added that it is highly possible to mobilise idle foreign currency in the country through bond issuance if other investment opportunities are not as attractive and safe as bonds. “The government should not worry that many people would simultaneously withdraw foreign currency at banks to buy bonds, causing the shortage of capital in banks, because most people usually divide their investment portfolios into various methods and not put all their eggs in one basket. If necessary, the State Bank of Vietnam (SBV) can perform a regulatory role to ensure that the financial system maintains enough foreign currency and cash to meet the essential demands,” Doanh urged.

Agreeing with the proposal of the MoF, a representative of the UN Development Programme told a forum on financing recovery and sustainable development last week that the domestic corporate bond market is also a potential channel to mobilise long-term capital.

This market started to develop strongly in 2005 and is now worth 10 per cent of GDP. To utilise it effectively, it is necessary to have a reliable credit rating agency as well as an accurate and timely report on bond transaction data to increase transparency and increase liquidity, the representative said.

Vu Tien Loc, a member of the National Assembly’s Economic Committee, noted on the sidelines of the National Assembly two weeks ago that the government should ask the banking system to keep statistics on the number of idle dollars and specifically assess the impact on macro stability in line with each mobilising rate, to build an appropriate strategy.

Can Van Luc, a member of the National Fiscal and Monetary Policy Advisory Council, said that issuing bonds to mobilise foreign currency will contribute to restructuring the government’s foreign currency loans with better terms and lower interest rates.

In addition to two loans of $750 million issued in 2005 and $1 billion issued in 2010 that have already matured, the country currently has two loans of $1 billion issued in 2014 and $1 billion issued in 2015, all at 4.8 per cent interest rate for 10 years.

Thus, within the next three years, $2 billion of the above bonds will mature, so it may be appropriate to prepare new foreign currency loans right now, especially when interest rates are low. Particularly, the US Federal Reserve may raise the US dollar base interest rate again from 2022, which will also affect US dollar interest rates globally, said Luc.

“If this issuance plan is successful, it will contribute to the government opening more channels to mobilise foreign currency capital in the future, mitigating dependence on foreign currency loans from abroad,” added Luc.

However, capital jostling may occur. The ratio of foreign currency deposits to total means of payments recently was at about 7.65 per cent, equalling $42 billion, while the ratio of foreign deposits was at 1.14 per cent, equivalent to $6.2 billion.

“If some of this capital flows to government bonds, the foreign currency capital of banks will be dropped remarkably. So, businesses that want to borrow in foreign currency will face the possibility of rising interest rates,” said Luc.

However, the economists were also concerned about the attraction of this government bond. “If the interest rate of foreign currency bonds is around 1 per cent only, it is not attractive for people, because banks are still paying some under-the-table interest rate for USD depositors,” said Nguyen Duc Do, an economist from the Academy of Finance. “If its term is shorter, around 3-5 years, some people will be interested in it.”

He said that the interest rate of the bond cannot be too high because an economic dollarisation could happen. Moreover, the MoF is mobilising government bonds at a record low-interest rate, so the government will not pay high-interest rates for the bond.

On the other hand, economist Le Xuan Nghia said that commercial banks could be buyers of this bond. “Commercial banks can buy foreign currency bonds and use them as liquidity reserve, hedging against exchange risk,” said Nghia.

Besides people and commercial banks, the SBV may be a buyer. “In a period of economic crisis, the currency’s rotation is decreasing sharply, and the central bank must be the key agency to buy bonds. Amid difficulties, the injection of money from the State Bank will not cause inflation. After the economy gradually recovers, inflation is likely to rise again, but the State Bank can sell public bonds to collect money,” he added.

However, various economists said that the plan to issue foreign currency bonds is targeting people rather than banks. So, issuing foreign currency bonds must be done cautiously, because of the included risks.