Vietnam’s Dollar Bonds Defy Moody’s Downgrade: Southeast Asia

A food vendor stands in a busy street in the days leading up to Tet Lunar New Year in Hanoi, Vietnam. Photographer: Justin Mott/Bloomberg

Vietnam’s dollar bonds are defying a credit downgrade by Moody’s Investors Service as efforts by the government to stabilize the economy since 2011 show progress.

The average yield on Vietnamese debt fell to a record low of 4.06 percent on Oct. 10, according to JPMorgan Chase & Co.’s EMBI Global index, even after Moody’s said Sept. 28 there was an “elevated risk” that the government may have to bear the cost of recapitalizing banks. Pictet Asset Management plans to add to its holdings of the nation’s securities and Aberdeen Asset Management Plc said it will maintain its investments.

“Compared to a year ago, the development in Vietnam has been quite good, especially on the macro side,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet, which oversees more than $23 billion in emerging-market debt, said in a phone interview on Oct. 8. “We still keep an eye on what’s happening on the banking side.”

Moody’s cut Vietnam’s government bond rating by one level to B2, five steps below investment grade. Standard & Poor’s in June raised the outlook to stable from negative on its BB-rating, the third-highest junk level, and on Sept. 26 said the risks facing Vietnam’s banking industry had eased. Fitch Ratings has maintained a B+ rating, the fourth-highest non-investment ranking, since July 2010.

Vietnam’s dollar notes handed investors a return of 26 percent in the past year, the second-best performance among 11 sovereign indexes compiled by HSBC Holdings Plc.

Rating Actions

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Vietnam’s government implemented a strategy in February 2011 to tame prices, restrain credit growth and stabilize the currency. The dong has appreciated 0.9 percent so far this year, after sliding 26 percent in the previous four years. Inflation moderated to a year-on-year rate of 6.48 percent in September from more than 23 percent in August 2011.

Foreign-exchange reserves have also increased, to a point where they would cover an estimated 2.4 months’ worth of imports, the Asian Development Bank said on Oct. 3. Vietnam recorded a current-account surplus of 0.2 percent of gross domestic product in 2011, from a deficit of 12 percent in 2008, according to the International Monetary Fund.

Indonesia, Philippines

The yield on Vietnam’s 6.75 percent dollar notes due January 2020 was at 4.566 percent today, while those of similar-maturity debt from the Philippines and Indonesia were at 2.18 percent and 2.71 percent, respectively, according to prices compiled by Bloomberg. Moody’s rates the Philippines at Ba2 and Indonesia at Baa3, three and five levels above Vietnam.

The downgrade by Moody’s was “an appropriate action to take in 2010 but not in 2012 after these guys have nearly doubled their foreign-exchange reserves from the lows and have undergone 1.5 years of necessary deleveraging,” said Edwin Gutierrez, a portfolio manager in London at Aberdeen who helps oversee $9 billion of emerging-market debt. “The bonds are relatively cheap to other expensive sovereigns in the region.”

Fund Injection

Five-year credit-default swap contracts on Vietnam’s debt dropped 30 basis points to 281 since the Moody’s downgrade, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities should the issuer fail to adhere to debt agreements. A basis point equals $1,000 annually in a contract protecting $10 million of debt.

Vietnam’s gross domestic product will expand 5.1 percent in 2012, the slowest pace of growth since 1999, and 5.9 percent next year, according to IMF estimates released Oct. 9. That compares with a projected growth for the whole of Asia of 5.4 percent this year and 5.8 percent in 2013.

The financial system needs an injection of 250 trillion dong ($12 billion) to 300 trillion dong, according to a Sept. 4 report published by the National Assembly’s Economic Committee and compiled by an advisory group.

The State Bank of Vietnam said on Oct. 7 it will crack down on violations stemming from small groups of shareholders who control Vietnam’s banks, calling them the “biggest obstacle” to reforming the financial system.

Credit Growth

“We were underweight Vietnam in our funds and we have not changed our stance,” Yerlan Syzdykov, who oversees the emerging-market debt fund at Pioneer Investments, which has 154 billion euros ($198 billion) of assets, said in an interview yesterday. “Pressures in the economy will continue to build and the sovereign will need to manage the economic slowdown amid efforts to contain credit growth and tame inflation.”

Fitch’s assessment of Vietnam probably won’t change for 12 to 24 months, after it affirmed the rating with a stable outlook in May, Art Woo, the Hong Kong-based director of Asian sovereign ratings at Fitch, said in an interview on Oct. 8.

“We recognize the banking sector is weak,” Woo said. “The level of non-performing loans will take time to fix and clean up. We also acknowledge the fact that the authorities in the last couple of years have made strides in correcting some of the macroeconomic imbalances.”

Stocks Rebound

Investor appetite for higher-yielding assets has improved, helping to boost Asian stocks and emerging-market bond returns. The MSCI Asia Pacific Index of stocks rebounded 11 percent from a six-month low reached in June, and the JPMorgan Emerging-Markets Bond Index reached a record high on Oct. 5.

The extra yield investors demand to hold Vietnam’s dollar-denominated securities rather than similar-maturity Treasuries narrowed 192 basis points this year to 318 points, according to JPMorgan data. The average yield premium for developing nations’ debt was 297 basis points, down 129 points this year.

“Market sentiment is leaning toward risk-on mood lately and Vietnam’s high yields attract inflows,” said Takahide Irimura, Tokyo-based head of emerging-market research at Kokusai Asset Management Co., which oversees about $43 billion, said in an interview on Oct. 9. The decision by Moody’s to cut Vietnam’s rating was “triggered by well-known weakness in the banking system,” he said.

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