Around the markets : Bond funds finding Vietnam attractive
SINGAPORE - Vietnam, Asia's second-best performing debt market this year, is attracting global bond funds anticipating faster economic growth and higher credit ratings.
Fortis Investments, a unit of Belgium's biggest financial-services company, is adding to its holdings of bonds denominated in the local currency, the dong. Oppenheim KAG, part of Europe's largest privately owned bank, plans to buy debt when Vietnam sells dollar bonds for a second time.
Investors are encouraged by the government's forecast of a sixth consecutive year of economic growth in excess of 7 percent and its acceptance this year into the World Trade Organization. The nation is attracting so much money it needs to curb "excessive exuberance" in its bond and stock markets, analysts at Credit Suisse Group said in a report last week.
"We expect a rating upgrade in the second half of this year," said Carmen Daub, who helps oversee the equivalent of $4.63 billion of debt at Oppenheim in Cologne, Germany. "Vietnam will profit from China and growth in the region."
The extra yield investors demand to own Vietnam's 6.875 percent dollar bonds due in 2016 compared with similar-maturity Treasuries has narrowed to 1.32 percentage points from 2.56 when the government sold them in October 2005, according to data compiled by Bloomberg. The spread widened about 17 basis points last week amid a decline in emerging markets from China to Brazil. Investors said they are sticking to forecasts for gains in the nation's debt. A basis point is 0.01 percentage point.
The dollar-denominated bonds returned 9.6 percent in the past year, according to data compiled by JPMorgan Chase. The yield on the securities was quoted at 5.86 percent Friday.
The yield on the country's 10-year local bonds has fallen 45 basis points this year to 8.35 percent, according to data compiled by Bloomberg. Only Thailand had a bigger drop in yields among Asia's 11 most-active markets.
Gains in dong-denominated debt have been helped by a 0.25 percent rally in the currency in December, the biggest monthly increase in more than 11 years. The State Bank of Vietnam's governor, Le Duc Thuy, may allow the dong to strengthen, said Ashish Agrawal, a strategist at Merrill Lynch in Hong Kong.
The yield premium on the dollar bonds compared with Treasuries may narrow 20 basis points this year, said Didier Lambert, who helps oversee the equivalent of $4.5 billion in emerging-market bonds for Fortis in London. Assuming Treasury yields hold unchanged, that would translate into a gain of 6.2 percent, according to data compiled by Bloomberg.
Vietnam's dollar bonds now yield about 25 basis points less than similarly rated bonds from Indonesia, 87 basis points less than Pakistan's bonds and 91 basis points less than Turkey's, Bloomberg data show.
Government officials voiced optimism that the country will win a higher rating as trade expands. Standard & Poor's in September raised the nation's long-term foreign-currency debt rating by one step to BB, two rungs below investment grade.
Vietnam's entry into the WTO in January followed a year in which foreign-investment pledges rose 49 percent to $10.2 billion and currency reserves swelled to $11.5 billion. Vietnam's benchmark stock index is up 52 percent so far in 2007, the most in the world.
"We are hopeful that we will receive an upgrade this year," said Nguyen Thanh Do, head of external financing at the Ministry of Finance in Hanoi. The government has not set the size for its next dollar bond sale, he said. The country may sell as much as $1 billion this month, Vietnam Investment Review newspaper reported on Feb. 5.
Prime Minister Nguyen Tan Dung oversaw 8.2 percent growth in 2006 as Vietnam won pledges from companies including the Santa Clara, California-based Intel, the world's biggest semiconductor maker, and Posco, the world's third- biggest steelmaker based in Pohang, South Korea, to build factories. The government is predicting the economy will grow 8.5 percent this year.
JPMorgan Chase and Australia & New Zealand Banking Group both published reports last month saying Vietnam could seek to curb the amount of money that overseas investors funnel into the country to ease pressure on its currency to appreciate.
The Vietnamese government will probably stop short of imposing similar penalties that prompted funds to boycott Thai debt in December, said Fortis's Lambert.
Bloomberg News - March 4, 2007.
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