European capital eyes government bond as EVFTA takes effect

Thursday, Nov 21, 2019 08:21

Cao Minh Hoang, investment director of IPA Asset Management. — Photo courtesy of VNDirect Securities Corporation

The Europe-Vietnam Free Trade Agreement (EVFTA) is the process of being ratified for early 2020. For European investors, it will be a good opportunity to penetrate Viet Nam’s financial sector. Cao Minh Hoang, investment director of IPA Asset Management, speaks to Viet Nam News reporter Hoang Son about the opportunities and challenges presented by the agreement.

What challenges and benefits will Viet Nam’s financial sector face when the EVFTA takes effect in early 2020?

The EVFTA will enable Vietnamese consumers to enjoy European goods and services at lower prices. European companies will also get better access to Vietnamese markets.

The Vietnamese securities market could become more attractive to European businesses, especially when bilateral trade between Viet Nam and the EU increases and more European firms explore Viet Nam’s market.

But in the case of the securities sector, European investors will need time to study the Vietnamese market. They will need assessments from third-party credit agencies such as Moody.

In recent years, negative interest rates have been applied by European central banks. This policy forces customers to pay for their savings. Because they don’t want to suffer from negative interest rates, they prefer to spend their money elsewhere and look for other investment channels.

If Viet Nam’s credit rating improves, European investors may look towards the debt market, followed by the equity market. In the bond market, government bonds will be targeted first, followed by corporate bonds in reputable local firms that may give them access to cheap capital.

The Vietnamese economy has become more open in recent years, with its import-export turnover growing from year-to-year. The EVFTA will help strengthen Viet Nam’s position and status in the global production chain. The nation will become a creditable production hub for foreign companies as they move from highly-volatile economies to Viet Nam.

Does this mean Viet Nam’s g-bonds will become more attractive to European investors?

Global investors have sought out safe havens in government bonds in 2018-19, and the trend is picking up given the vulnerability of the global economy due to international issues. In Viet Nam, the g-bond yield rate has fallen to a year-to-date 2.5 per cent per annum from 5 per cent in 2018, but investors are still interested in Viet Nam’s g-bond products.

The growth of the g-bond market is supported by a stable foreign exchange rate between the Vietnamese dong and the US dollar. The dong has not depreciated against the dollar so far this year, and it could get even stronger. Compared to other currencies like the Chinese yuan and the South Korean won – which have lost 4-6 per cent against the dollar – a stable dong is a good decision-making factor for g-bond investors.

Other qualitative and quantitative factors include the Vietnamese population of a working age accounts for a large part of the nation’s total, with a confidence and desire to learn and work. This labour supply will meet foreign companies’ demands and boost the economy, making g-bonds more attractive.

Is the low bond yield rate a major problem?

A low yield rate of 2.5 per cent per annum may make Vietnamese g-bonds less appealing to foreign investors. That's why investors with low-cost capital will seek opportunities in Vietnamese g-bonds. But in the long run, it will not be sustainable capital.

Investors are willing to buy g-bonds and hold on to assets. Viet Nam benefits from a large volume of foreign direct investment (FDI) and a stable foreign exchange rate. Investors can also use a credit default swap (CDS) – a financial derivative or contract that allows an investor to "swap" or offset their credit risk with that of another investor – which may increase their total cost by only 1 per cent. The 1 per cent rise in total capital costs is still acceptable compared to a yearly bond yield rate of 2.5 per cent.

As the market size will not expand quickly in a short period of time, investors from neighbouring economies with similar cultural features and close economic relations have been in Viet Nam before the Europeans for at least three years. They have offered to buy company shares and pour more equity capital into the local market to raise their influence. That comes along with the growth of FDI capital. If FDI capital from European investors increases, foreign indirect investment (FII) capital from Europe will increase and target Viet Nam’s debt market. – VNS

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