Communist Review - Issuing government bonds to the international capital market is an important channel to secure capital for development investment. However, it also poses several problems related to national monetary security and foreign currency debt. So, is it now a good time for Vietnam to issue government bonds to the international capital market? This study focuses on discussing this issue.

Requirements for raising capital for development investment

The document of the 13^th Party National Congress sets out a strategic goal that by 2030, Vietnam strives to become a developing country with modern industry, high middle income, and a developed, high-income country by 2045. To achieve these goals, three strategic breakthroughs consisting of improving institutional quality, comprehensively developing human resources, building a synchronous and modern economic and social infrastructure, and ten key tasks and solutions have been proposed. With the economy scale of 343.6 billion USD at the end of 2020, GDP of about 7%/year, the average total social investment from 33% to 35%, capital needs for socio-economic development are huge (it is estimated to need about USD 1,676 billion to USD 1,778 billion from 2021 to 2030). To develop major transport infrastructure and a national road network for the period 2021 - 2030, it is estimated to need about 900 trillion VND⁽¹⁾. Regarding energy infrastructure, according to the draft national electricity master plan for the period 2021 - 2030, about 13 billion USD/year is needed. Vietnam also wants to finance about 3.5 billion USD/year in infrastructure to respond to climate change. In addition, some prioritized spearhead, new and high-tech industries are capital-intensive industries.

If only relying on the domestic financial market and capital from abroad, such as concessional loans, official development assistance (ODA), and foreign direct investment (FDI)..., it is difficult to mobilize sufficient funds to ensure a harmonious, equitable, proactive development and especially to maintain national finance. At the end of 2020, Vietnam's credit-to-GDP ratio was at 140%, the stock market capitalization-to-GDP ratio reached over 84%, higher than most countries with the same income level. Meanwhile, although the bond market achieved breakthrough growth compared to the set target, government bonds accounted for a large proportion (about 80% of total government bonds) when compared to other countries at the same income level. With the current financial market structure, the domestic bond market needs more room for the growth of businesses that are unable to raise capital in the international market. Besides, prestigious enterprises with big assets and financial potential need to attract foreign investment to expand their size and dimension and become international firms. The Government's mobilization of capital through bond issuance in the international market helps reduce pressure on the domestic financial market and creates a benchmark for local enterprises to issue bonds in the international market.

Vietnam’s experiences in issuing government bonds in the international capital market

Under the authorization of the Government, the Ministry of Finance issued government bonds in the global market under rule 144A in 2005, 2010, and 2014. The bond issuance volume of these years reached USD 0.75 billion, USD 1 billion, and USD 1 billion respectively with the tenor of 10 years. In addition to the goal of raising capital for major national projects, the issuance in 2014 also aimed at swapping bonds that were issued in the two previous periods and will reach maturity. The nominal interest rate and bond’s yield decreased through each issuance from 7.125% to 6.75% and 4.8%/year. Through three successful government bond issuances in the international capital market, the following conclusions can be drawn:

Firstly, the issue of bonds has confirmed the clear-sighted policy of the Party in international integration, and the success and international prestige of Vietnam's Government macroeconomic management.

Secondly, issuing government bonds in the international market has mobilized funds for domestic economic growth, contributing to reducing the pressure of capital mobilization in the domestic market.

Thirdly, the issuance of government bonds in the international capital market created a benchmark for valuation of new bonds issues and opened up a new opportunity for local large firms to directly mobilize capital in foreign currencies in the international market.

Fourthly, international investors highly appreciate the openness and compliance with international standards when Vietnam shares information during the international bond issuance process. The government has built a reputation and trust among international investors and created conditions to prepare for large-scale mobilization operations in the coming years.

Fifthly, national credit ratings have a direct impact on the interest rates of bonds in the international capital market. Based on these ratings, investors can make a comparison with the interest rates of low-risk investments. In all three issuances, big credit rating agencies in the world have upgraded Vietnam's credit rating and/or its outlook.

 Domestic and international capital market

Between 2016 and 2021, the international capital market has favorable conditions for capital mobilization. The interest rate level in the capital market is still lower than that of the period 2011 - 2016 when most governments chose to maintain an appropriate loosening monetary policy to ensure a stable economic recovery. Based on these low-interest rates and abundant liquidity, developing countries, including those in the Asia-Pacific region, have stepped up the issuance of bonds to mobilize capital for domestic economic growth and to refund bonds at the maturity date.

The COVID-19 pandemic broke out and has rapidly spread around the world, seriously affecting people's daily life and businesses. To deal with the adverse effects of the epidemic, governments have mobilized most of the economic tools to save their economies from a severe crisis and regain their momentum. Through large-scale public purchases and fiscal packages by governments, government bond's yield has fallen sharply compared to the previous period.

The phenomenon of “cheap money” combined with the expectation of the reopening of economies when people are mostly vaccinated accelerates investment activities and portfolio restructuring. Investments shift from developed markets to frontier and emerging markets to look for higher-yielding investment opportunities. This shows the strong recovery of the stock market and foreign investment flows to these countries. 

Regarding the domestic situation, the effective handling of the epidemic and the positive growth in 2020 indicate the clear-sighted strategies and policies of the Party and Government as well as the determination and consensus of the entire political system. Macro balances, such as inflation rate, foreign exchange reserves, exchange rates, the balance of payments, budget deficit, public debt, and so forth are successfully controlled. The period 2016 - 2020 witnessed the Government's success in controlling the budget deficit, public debt, government debt, and external debt. On average, in this period, the budget deficit accounted for 3.45% of GDP, ensuring that this rate was not higher than 3.9% of GDP. The ratio of public debt at the end of 2020 was 55.3%, government debt was 49.1%, and foreign debt was 47.3% of GDP. All these rates were lower than the ceiling rate approved by the National Assembly in the five-year financial plan.

Between 2016 and 2021, Vietnam's national credit rating has been continuously improved, reflecting the positive assessment of international credit rating agencies for its efforts in maintaining macroeconomic stability and promoting sustainable economic growth in recent years. Moody's has upgraded Vietnam's national credit rating from B1 to Ba3 (August 2018) and raised its outlook from negative to positive (March 2021). Fitch Ratings, an international credit rating agency, upgraded Vietnam's credit rating from BB- to BB (May 2018) and affirmed to maintain the BB rating, continuing to raise its outlook from stable to positive. (April 2021). International credit rating agency Standard & Poor's for the first time in 9 years has changed Vietnam's credit rating from BB- to BB (April 2019).

Moreover, the USD/VND exchange rate in recent years has been relatively stable due to the management of the State Bank and the relatively abundant supply of foreign currency. These factors reduce exchange rate risk when raising capital in international financial markets, avoid high debt value and ensure a timely repayment.

In summary, the macroeconomic performance in the past period and propitious circumstances of the international financial market have enabled the Government to consider issuing bonds in the international capital market to achieve economic development goals for the period 2021 - 2030.

Some recommendations when issuing government bonds in the international capital market from 2021 to 2030

Based on the above points, the issuance of government bonds in the international capital market in the coming time aims to meet capital needs for investment and Government debt restructuring with costs and risks suitable to international market conditions and domestic debt repayment capacity, contributing to ensuring the Government's debt repayment, public debt safety and national financial security from 2021 through 2030. On that basis, the Government will determine capital needs by mobilizing government bonds in the international capital market for the whole period of 2021 - 2030 according to each of the following targets: 1- The demand for structural loans and debt recovery of the Government to reduce refinancing risks, increase the proportion of long-term debt, reduce the pressure of short-term refunding; 2- The need for additional issuance to finance some investment projects to develop significant infrastructure and key industries; 3- Diversifying investor structure by issuing more debt instruments with a longer-term, lower costs and limiting non-financial constraints; 4- Shifting the Government's loan guarantee commitments to the re-lending mechanism from international bond issuance; 5- Establishing a benchmark yield curve for Vietnamese bonds in the international capital market.

For a successful bond issuance to efficiently use capital and ensure public debt safety and national financial security, due consideration should be given to the following issues:

First of all, in the immediate period, it is essential to base on the state budget balance for the period 2021 - 2025 as well as the targets of resource mobilization rate for government, the annual overspending rate, official development assistance loans, and concessional loans, the ability to issue government bonds locally, and mobilize capital from public financial funds to determine if issuing government bonds in the international market is appropriate. The plan formulation should be based on the scenario that the ability to mobilize ODA and concessional loans will continue to decline. It is also important to note that the time of issuing government bonds in the international capital market is determined in the overall plan of government bond issuance when the Government's direct debt repayment deadline compared to state budget revenue tends to increase rapidly and is likely to exceed the 25% threshold in some years to come due to the uneven principal scheduled maturity dates which are accumulated in certain years.

Secondly, the Government needs to forecast the potential economic (especially fiscal and monetary) impacts of each bond issue on the international capital market. Policy impact analysis, such as the impact on the national debt, sustainable growth prospects, monetary management, exchange rate, foreign exchange reserves, and liquidity should be taken into account. In particular, the State Bank and the Ministry of Finance need to coordinate to consider and forecast the impacts of exchange rate fluctuations on interest and debt repayment capacity on the maturity date of term bonds. Generally, any successful bond issue must be based on a stable monetary and fiscal framework. In addition, the Government needs to separate public foreign debt and private debt. Accordingly, it is recommended to set the foreign public debt ceiling on the total public debt and establish a warning index (instead of a fixed ceiling) for the foreign debt repayment targets of the public and private sectors to take prompt corrective action.

Thirdly, the Government should consider choosing an appropriate bond issuance among the current popular options in the world. Common bonds issued by many Asia countries are Regulation S global bonds under the rule 144A, Eurobond bonds, Samurai bonds, and Sukuk bonds. In the first stage, Vietnam should continue to issue Regulation S bonds under the rule 144A in USD as the capital market in USD has a high development level and high liquidity, which helps raise more long-term funds. The current US Treasury bond interest rate remains low due to the loose monetary policy of the US Government. Therefore, it will be more competitive in comparison with the bond issuance in other foreign currencies. Besides, Vietnam has gained experience in issuing international bonds in USD.

Fourthly, the Government should consider building a global medium-term bond issuance program. This is a standard international bond issuance framework that is widely accepted by international investors and bond issuers. The medium-term bond issuance program allows the Government to flexibly issue international bonds in different currencies with different volumes at different periods while using the same legal framework. The advantage of this program lies in its ability to proactively seize a favorable opportunity to conduct transactions, by reducing process time and costs for each issuance.

Fifthly, the Government needs to build a mechanism to mobilize, use and manage effectively capital raised from bond issuing. The funds raised from international bond issuances need to be disbursed for investment projects to limit capital accumulation and stagnation, resulting in wasted resources and minimizing risks arising between the volume of issued bonds and the capital needs according to implementation progress and ensure the source of debt repayment. Therefore, based on the list of preferential projects funded from international bond issuing under the re-lending mechanism, investors should establish a specific disbursement plan so that the Government can actively develop and implement the corresponding bond issuance plan amid the rapidly-changing international capital market. The Ministry of Planning and Investment, the Ministry of Finance, and the State Bank need to coordinate to determine the investment capital needs, the ability to mobilize capital of the domestic economy and the Government (debt restructuring, additional capital for key projects, foreign loans guaranteed by the Government under the mechanism of re-lending) to submit to the Government a plan to mobilize bonds in the international capital market.

 Sixthly, the Government may consider converting some high-cost government-guaranteed foreign loans to a re-borrowing mechanism from international bond issuance with lower costs when including fees commitment and risk premium.

Seventhly, large-scale issuance of government bonds poses significant challenges for the Government in the future when repaying the due debt. In addition to refunding from a new issuance, which is a normal approach, the Government may consider supplementing a plan for the gradual payment of principal, an option to buy back before maturity, or creation of a sinking fund in the issue plan.

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* Dr. Chu Khanh Lan, MSc. Dao Minh Thang, assistant to the Prime Minister's Economic Advisory Group

(1) See Decision No. 1454/QD-TTg, dated September 1, 2021, of the Prime Minister, “Approval of road network planning for the period 2021 - 2030, vision to 2050”

This article was published in the Communist Review No. 979 (December 2021)