now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
The return of Vietnam’s debt market
Once burned, twice-shy foreign investors remain on the sidelines
Bayani S Cruz 11 Feb 2015

Vietnam’s debt capital market has been overlooked by global institutional investors since the economy overheated in 2008.

 

Perhaps this oversight is best illustrated by the fact that the country’s biggest fixed income mutual fund, Dragon Capital’s US$43 million Vietnam Debt Fund (VDeF), currently has no external investors.

 

But the fund’s strong performance in the past five years, the economic recovery experienced in 2013-2014, as well as prospects for continuing growth in 2015-2016 make for a solid case that fixed income investors should start looking into investing in this market again.

 

On a macro level, Vietnam’s GDP grew by 6% in 2014, the highest since 2011. A new cycle of economic growth was confirmed by an onslaught of positive indicators including the recovery of the property market, strong external accounts, robust industrial production, accelerating retail sales, a steady uptrend in PMI figures, a pick-up in credit expansion, improving bank balance sheets and a significant progress in financialsector reform, according to a report by Dragon Capital’s research team.

On the monetary front, the easing of inflation in the last 12 months has provided the State Bank of Vietnam (SBV), the country’s central bank, with the needed room to further ease monetary policy to support growth. During 2014, the SBV slashed its deposit rate cap on the dong by 150bp to 5.5%.

 

As a result, one-month deposit rates have become more reasonable and the domestic sector has started to recover, with total credit in the economy estimated to have grown by 14% in 2014 from 12.6% in 2013. Given much lower inflation, the credit situation last year fared better than in 2013, especially in the second half, following a dismal +3.6% in the first half.

 

For 2015, the government is targeting 13%-15% credit growth, slightly higher than 2014’s 12%-14%.

 

“We believe credit growth can reach 14%-16% in 2015 as there are increasing economic activity and ample liquidity at banks now,” says Dan Svensson, portfolio manager of the VDeF and director at Dragon Capital.

 

As recently as three years ago, VDeF’s investor profile included a mix of supranationals, insurance companies and Dragon Capital. However, as of last year, Dragon Capital and related entities were the investors.

 

“I think it’s sad that we don’t have any external investors because Vietnam has been a good market. Not only has the Vietnam debt fund posted good performance but also, if you look at passive strategies like investing in a two-year bond, it has given really good returns over the years in US dollar terms,” Svensson points out.

 

Foreign investors have been wary of Vietnam’s debt market since many of them were stung in 2008 when the country’s surging economy was hit by high inflation, high deficit, falling stock index and currency depreciation in the wake of the global financial crisis.

 

Also, the market’s relatively small size has made the lack of liquidity an issue for bond investors.

 

“People remember that too much. It is true that for many global investors, the Vietnamese market is too small. They’re afraid of lack of liquidity and that is fair,” Svensson notes.

 

But he argues that the local currency debt market has grown substantially in size and that liquidity has been improving.

 

“If you asked me two years ago what the maximum size of the fund would be, I would say I don’t like to have more than US$100 million. But nowadays, very often the daily turnover in US dollar terms sometimes hits US$200 million which means that trading has improved dramatically for the past one-and-a-half years. Now it is extremely possible to manage US$250 million and still be able to manoeuvre the fund. I believe the market has improved so investors may now come,” he enthuses.

 

In terms of investor profile, most of the existing investors have been proprietary traders and hedge funds trying to diversify their portfolios.

 

The traditional institutional investors such as pension funds are not expected to come back soon as they look at credit ratings, the depth of the market, and other factors before investing – all of which are still missing in Vietnam.

Conversation
Nneka Chike-Obi
Nneka Chike-Obi
head of APAC ESG ratings and research
Sustainable Fitch
- JOINED THE EVENT -
6th ESG Summit
Beyond the hype
View Highlights
Conversation
Robert Coughlan
Robert Coughlan
finance sector lead
Google Cloud
- JOINED THE EVENT -
Webinar
Unlocking the value of automation and AI in asset management
View Highlights