Vietnam Learns Becoming a Tiger Economy Comes With a CostBy and
Country to sell more bonds to fill gap in development funding
‘It’s like a kid growing up,’ and not needing handouts
Asia’s newest tiger economy is about to find out the cost of being a member of the club.
Vietnam has more than doubled its gross domestic product over the past eight years, becoming a high performer in the world’s fastest-growing region. One consequence is it’s now well-enough off to be disqualified from getting development funding from international institutions on a “concessional” basis at well below market rates.
The country graduated from most concessional financing from the World Bank at the end of June, and it’s currently rated a “blend” borrower from the Asian Development Bank -- one step up from solely getting the cheapest financing. As the discounted funding rolls off, Vietnam will need to turn more to the bond market -- boosting the supply of emerging-market securities that global investors have been happy to snap up in recent years.
“This is a clear sign of Vietnam’s remarkable development success -- it’s now a middle-income country,” Sebastian Eckardt, the World Bank’s lead economist in Hanoi, said in an interview. “Vietnam’s financing needs are growing rapidly, and official financing will not be enough to meet the development needs of the country -- so an increasing share of the financing will have to be mobilized from capital markets.”
For now, Vietnam plans to rely expanding local-currency debt, Truong Hung Long, head of debt management and the external finance department at the Ministry of Finance, said by phone from Hanoi. The domestic market can meet the need for funds “at the moment,” he said. In time, however, foreign investors anticipate further debt issuance offshore.
About 70 percent of Vietnam’s $13.2 billion worth of outstanding bonds are onshore, with the rest issued in dollar-denominated notes, according to data compiled by Bloomberg. Its most recent offshore issue was in November 2014, when it sold $1 billion of 4.8 percent 10-year securities.
“They will probably rely more heavily on the external bond market in the future than they have done in the past,” said Mark Baker, investment director for emerging-market fixed income at Standard Life Investments Ltd. Baker said last month that he had sold his holdings of the dollar debt due in 2024 as they were “performing so well,” but is hanging on to notes due in 2020 that have a higher coupon, at 6.75 percent.
The country’s debt is rated at junk by the three major agencies, putting it in the high-yield category compared with other Southeast Asian nations, such as Indonesia and the Philippines, which qualified for investment grade in recent years.
By 2020, Vietnam will have received some $45 billion worth of development assistance since 2005, according to Finance Ministry statistics. Among the key points in foreign official funding:
- Before 2010, the average repayment period for loans was from 30 to 40 years, with borrowing costs of between 0.7 percent and 0.8 percent per year and a grace period.
- The terms became stricter as the country grew more affluent, and from 2011 to 2015 the interest rate rose to 2 percent repayable over 10 to 20 years.
- The withdrawal of concessionary terms pushes up the interest rate on existing loans to 3.5 percent and cuts the repayment period by half.
Alongside greater tapping of the capital markets, Vietnam probably will also look at asset sales and tax reforms, according to Andy Ho, chief investment officer and managing director at VinaCapital Group, the nation’s largest fund manager. “Vietnam can borrow in the international markets, but if they borrow too much it becomes dangerous,” he said.
“It’s good news for Vietnam" to move off concessional financing, Ho said. It means "You’ve done well, you’ve been recognized, you don’t need any more handouts. It’s like a kid growing up.”
— With assistance by Selcuk Gokoluk