Capital mobilisation channel of bonds encouraged

The government plans to raise a huge volume of capital through the bond market and guarantee businesses' capital mobilisation via issuing corporate bonds in 2009.

The bond market is one of the highly potential capital mobilisation channels for both private and state enterprises. In 2007, the market's capital scope accounted for 13.72% of GDP, in which corporate bonds occupied 15%.

Vietnam's bond trade some times reached a high growth rate of 98.11%, much higher than the average figure of Eastern Asia's newly emerging countries. The bond trade in the first nine months of 2008 achieved 1.370 billion bonds, up 21% year-on-year.

Therefore the Vietnamese bond market contains many disadvantages.
Vietnam has now nearly 400 kinds of bonds with different terms, periods of grace, and coupon rates. Each kind of bond was offered with a small volume so it could not meet demand of investors, leading to the low transparency of many Vietnamese bonds.
To upgrade the transparency of bonds, the government will both enhance the bond issue in line with big lots (larger volume), restructure bonds through reducing the number of bond lots and increasing the size of each lot based on particular regulations on bond buyback (direct purchase or tender), and bond conversion.

According to the government's Decree No 141/2003/ND-CP, the coupon rate of Treasury bonds, work bonds, investment bonds, foreign currency bonds, G-bonds, bonds of local governance will be defined by the Ministry of Finance based on the real situation of financial market at the issue time. In tenders, coupon rate will be shaped from tender results. Otherwise, the coupon rate of bonds does not totally depend on the market. For example, from March to October 2008, nearly 30 G-bond issues failed. This is also the reason why G-bonds have not become a sustainable capital supply, so the market lacks a standard coupon rate to define the significance of other financial tools.

Concerning the corporate bond issue, Vu Nhu Thang from finance ministry's Legislation Department said that there is a need to distinguish the issue methods of separate issues and public issues. The method of separate issues includes issue underwriting, issue agent and tender with the term that issue institutions and agents must satisfy finance ministry's criteria. But till date, there have not been guidance regulations on the criteria, which are hampering corporate bond issues of SMEs in Vietnam.

Compared with the separate bond issues, the legislation frame for public bond issue is more complete and clear pursuant to Law on Securities. Yet factually, domestic businesses do not pay much attention to the method of capital mobilisation.

According to the State Securities Commission, there are 2-3 applications a year asking SSC's permission to issue public bonds because the cost for bond issue remains higher than that for share issue and transparency of bonds is limited.

In line with the government's orientation of giving high priority for bond market as a key capital mobilisation channel in 2009, analysts said, the government should consider some demand stimulus solutions. First, the bond market is fairly sensitive on tax preferences because direct taxes will affect strongly the investment decisions of individuals and institutions.

On the other hand, the tax policies will cause an impact on enterprises' decision in choosing capital mobilisation methods, which will influence the bond supply.

Under the Law on Personal Income Tax (PIT), earnings from G-bonds will be not taxed but the earnings from other bond transfers will be levied with 20% of the difference between selling and buying prices or 0.1% of total selling value.

Because savings are not subject to PIT, investors will prefer sending money to banks instead of buying corporate bonds.

The government is making efforts to hike the bond purchase demand of institutions. Typically, Vietnam Social Insurance is allowed to purchase bonds, T-bills, state bonds and bonds of state commercial banks. According to Decree No 199/2004/ND-CP, state enterprises are allowed to buy bonds and contribute capital to set up other companies, which results in the booming of subsidiary companies and the less effective financial investment. (DTCK)