Vietnam Dollar Bonds Best in Asia as Aberdeen, Union Buy
The notes handed investors a 10 percent return, HSBC Holdings Plc indexes show, as consumer-price increases slowed to a 12-month low and the trade deficit narrowed. India’s bonds advanced 7.1 percent and China’s 4.9 percent, the next best performances among the region’s 11 biggest economies excluding Japan. Aberdeen Asset Management Plc (ADN) and Union Investment Group, which oversee the equivalent of $526 billion in assets, say they boosted holdings of Vietnam’s global debt in the past year.
“The rally is justified as Vietnam has defied its skeptics and maintained relatively tight monetary policy,” said Edwin Gutierrez, a London-based portfolio manager who helps oversee about $8 billion of emerging-market debt at Aberdeen. “Many market participants expected them to slip up in favor of their erstwhile pro-economic growth bias.”
The government rolled out its so-called Resolution 11 strategy to tame prices, restrain credit growth and stabilize the currency in February 2011, limiting its ability to support the economy as Europe’s debt crisis curbed exports. The dong has strengthened 0.8 percent so far in 2012, after sliding 26 percent in the last four years. Inflation (VNCPIYOY) moderated to 14 percent in March from 23 percent in August and Gutierrez predicts the rate will fall below 10 percent this year.
Five-year credit-default swap contracts on Vietnam’s debt dropped 124 basis points this year to 285 as of April 3, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market. The contracts insure debt against non-payment, and traders use them to speculate on credit quality.
The contracts reached 272 on March 19, the lowest level since Standard & Poor’s and Moody’s Investors Service cut their Vietnam credit ratings in December 2010. Vietnam is rated BB- at S&P, three levels below investment grade, and assessed as B1 by Moody’s, the fourth-highest junk grade. The cost of insuring Vietnam’s debt using credit-default swaps is cheaper than that for Spain and Italy, both of which are rated investment grade.
Vietnam’s bonds are also in demand this year as higher- yielding securities will probably be least affected by rising Treasury yields as the U.S. economy improves, said Sergey Dergachev, a senior portfolio manager in Frankfurt at Union Investment.
“Vietnam is a good hedge for me against a possible rise in U.S. Treasury rates,” he said. “Vietnam historically, and also as a high-yield credit, is less susceptible to movements of U.S. Treasury yields than Philippine and Indonesian debt.”
Vietnam’s 6.75 percent dollar bonds due January 2020 yield 326 basis points, or 3.26 percentage points, more than similar- maturity U.S. Treasuries, while the yield premiums for the Philippines’ 6.5 percent debt due January 2020 and Indonesia’s 5.875 percent notes due March 2020 are at 146 basis points and 170 basis points, respectively, according to data compiled by Bloomberg.
The yield on 10-year Treasuries increased 38 basis points this year to 2.26 percent, after sliding 141 basis points in 2011.
Vietnam’s trade gap narrowed as slower lending growth curbed demand for imports. The trade deficit was $150 million in March, down from $279 million in February, preliminary figures from the statistics office showed on March 28.
Slower inflation limited domestic demand for foreign currency, easing pressure for the dong to devalue and giving the central bank room to bolster its foreign-exchange reserves. The State Bank of Vietnam purchased a “large amount” of foreign currency in 2012, boosting reserves by 20 percent from the end- 2011 level, Governor Nguyen Van Binh told reporters in Hanoi on March 6. The holdings increased 50 percent last year, Binh said, without giving the total.
The State Bank of Vietnam’s daily reference rate was 3 dong stronger than the offshore fixing set by the Association of Banks in Singapore today, compared with a gap of 396 dong at the end of last year. The currency dropped 0.4 percent to 20,908 per dollar at 2 p.m. today in Hanoi, according to data compiled by Bloomberg.
“Since they enacted Resolution 11, they have made very good progress in stabilizing the economy,” said Christian de Guzman, a Singapore-based assistant vice president at Moody’s. “More importantly, they have stemmed capital flight. Vietnam’s residents aren’t running to the dollar any more, or running to gold as fast as they did previously.”
Still, Moody’s is maintaining its negative outlook on Vietnam’s rating as the government still has to fix the nation’s weak banking system, De Guzman said.
The bad-debt ratio at Vietnam’s commercial banks was predicted by central bank Governor Binh in November to reach as high as 3.8 percent in December from 3.3 percent the previous month. The level may exceed official figures by as much as four times, Fitch Ratings said in a report on March 7, as it warned bank asset quality may deteriorate further and the government’s capacity to absorb bad debts is unclear.
“This remains the biggest risk to the credit and would be abetted if the banks were willing to accept foreign injections of capital,” said Aberdeen’s Gutierrez. “We do not under- estimate the challenges that remain in light of the future capitalization requirement of the financial system.”
Dung sought to cut the credit-growth target to below 20 percent for 2011 from 23 percent, and reduce it further to as low as 15 percent this year. Policy makers raised the benchmark refinancing rate to 15 percent from 9 percent at the beginning of 2011, before lowering it to 14 percent on March 12.
The cap on lending growth “has helped to lower inflation expectations, restored investor confidence and stabilized the value of the dong,” said Kim Eng Tan, senior director at S&P in Singapore. “If tight policy persists amid reasonable economic growth and credit metrics continue to improve, the outlook could stabilize.”
Vietnam’s economy expanded 4 percent in the first quarter from a year earlier, the slowest pace since 2009, the General Statistics Office reported on March 29. Gross domestic product may climb 6 percent this year and 6.6 percent in 2013, according to the median estimates of economists surveyed by Bloomberg.
“The policies are bearing fruit and this should be reassuring to foreign investors,” said Takahide Irimura, the head of emerging-market research in Tokyo at Kokusai Asset Management Co. “I would still like to see some discipline going forward so that they don’t try to stimulate the economy aggressively.”
Kokusai, which oversees $45 billion of assets globally, owned Vietnam’s dollar bonds maturing in 2016 and 2020 in its Asia Pacific Sovereign Open fund, according to data compiled by Bloomberg.
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