Challenges in government bond issuance

According to a report of the National Financial Supervisory Commission on the financial market in 2018, the government bond market constituted 27% of GDP, same as in 2017.

Illustrative photo.

Illustrative photo.

Furthermore, this was the second consecutive year that the bond issuance result did not meet the target. Total government bond issued in 2018 stood at VND 160,000bn, completing 91% of revised target of 2018.

Notably, the issuing amount of bonds with a term of 20-30 years fell significantly as banks have not been interested much in these terms. Hence, State Treasury had to issue more bonds at other terms like 10 years or 15 years. The reason that caused the bond issuing activities to not meet the target was the low and reduced yield.

According to the State Treasury, the government bond yield has gradually dropped over the last few years. In 2011, the average bond yield was 12%. However, in 2017 and 2018 the bond yield was only 5.98% and 4.73% respectively.

Previously, some market reports had expected that the government bond issuance activities will face difficulties in 2019 due to higher inflation rate and lower banking liquidity. So far, after two years of not meeting the target, the State Treasury has increased the target to issuing bonds in 2019 to VND 260,000bn, given the surge in matured government bond amounts. This target is 49% higher than the revised target of 2018 and 57% higher than the actual result of 2018 as well.

The target is to increase the issuing volume. However, the bond yield has still been kept at lower rate. Hence, the actual issuing number has also been far below the target.

In Q1/2019, about VND 69,000bn of government bonds have been issued, completing 95% of target of the first quarter, an increase of 72% YoY. However, the winning ratio only reached 76% vs 81% of Q1/2018. Over the last few years, the winning ratio has fallen gradually although the bidding ratio has remained high. This revealed that there has been a big distance between supply and demand.

In Q2/2019, the State Treasury issued VND 35,600bn of government bonds vs VND 80,000 of target of the second quarter. Notably, the State Treasury was proactively reducing the offering amount because of suspending in public investment disbursement which has created huge money amount in banking system over previous times.

So, in the first half, the State Treasury issued VND 105,000bn of government bonds.

In July 2019, the State Treasury did 20 auctions with total offering amount of VND 36,000bn. This amount was 3 times higher than the offering amount of June. The winning amount in July jumped 188% MoM to VND 32,081bn. However, the winning ratio still stood at 89.1%.

The State Treasury plans to issue VND 70,000bn in the third quarter. Until 15 August, 50% of target has been completed. The issuance of 10-year and 15-year bond was most successful and markets expect that the offering amount of these two terms to continue increasing in coming times.

Several experts said that the reason that made bond yield to decrease over the last time was the higher demand of bonds which caused the bond price to increase. However, if government bond yield continues to go down, the government bond issuance will face difficulties. Markets expect that the State Treasury will adjust the bond offering amount to avoid the impact on the bond yield, given the slow pace in public investment disbursement. Hence, the target of issuing VND 260,000 of government bonds this year is expected to face more challenges.

Do Linh

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