Vietnam's overseas debt sale is a significant step on road to market economy
October 30, 2005
On the list of underappreciated Asian economies, Vietnam deserves a good mention, but the impoverished, Communist-run nation isn't for everyone.
It hardly helps that Vietnam has been discovered before, and not with positive results. In 1986 lots of foreign capital flowed in. When the roof caved in, investors fled.
Anyone now thinking of taking another look at Vietnam has the perfect excuse: the nation held its first overseas debt sale this week.
It's not just because Vietnam's economy is set to grow by 8 percent this year, or that Moody's Investors Service considers it a lower credit risk than Indonesia and the Philippines; what should intrigue investors is the nature of Vietnam's progression from a state-run command economy to capitalism.
Expect the southeast Asian nation to be in the news often between now and June 2006, when Vietnam may join the World Trade Organisation. It's a natural next step for an economy steadily opening its doors to foreign investment and tourism.
Vietnam has long since put the war years of the 1960s and 1970s behind it; the US, its adversary then, is now its biggest trading partner.
However, any enthusiasm needs to be tempered by the hurdles to economic modernisation. Vietnam is dogged by opaque decision-making. Its banking system has been recapitalised at a cost of $1.3 billion (R8.6 billion) over the past four years and still burdens public finances.
Monetary policy is inflexible, and the central bank has taken only half-hearted measures to manage excessive credit growth. And yet, even the spectre of a bird flu pandemic has not unnerved credit-rating companies.
The reason: Vietnam's level of external debt is among the lowest for countries in its credit-rating category, says Agost Benard, a Singapore-based analyst at Standard & Poor's (S&P), which last week raised the outlook on Vietnam's long-term BB- debt rating to positive. Vietnam also has a diversified, open and resource-rich economy, according to S&P. "Its vibrant private sector and robust export potential are supported by trade liberalisation."
There is another reason to be bullish: Vietnam is stepping up efforts to create a vibrant bond market, taking the increasing trust it's enjoying from foreign investors out for a test drive.
On October 27, it completed its first dollar-denominated bond offering, selling $750 million in securities that mature in 10 years. The offering was 50 percent larger than planned after investors placed orders for $4.6 billion.
The sale "marks an important step in the country's long transition towards a market economy", Benard says.
Already, the government is saying that fuel parastatal Vietnam Oil & Gas and power utility Electricity of Vietnam may be allowed to sell bonds overseas after the government's debt sale. Once a benchmark for state-issued paper is in place and the corporate bond market gets going, Vietnam may turn to building mortgage-backed and asset-based securities markets.
The need for deep bond markets became clear during the 1997/98 Asian financial crisis, when underdeveloped debt markets left economies hypersensitive to surging interest rates, credit crunches and currency gyrations.
A robust debt market also lowers borrowing costs and offers creative financing options to firms that now borrow from banks. This may accelerate the growth of small and mid-size local enterprises over time and give Vietnam a chance to leave the so-called Brady Bunch of developing nations.
Brady bonds were created in the 1980s as part of a debt restructuring plan for nations that defaulted on bank loans by forgiving part of the debt while rolling the rest into bonds. In 1998 Vietnam issued Brady bonds in return for the cancellation of $553 million in defaulted loans from international banks. While handy rehabilitation tools, issuing Brady bonds comes with a stigma.
Vietnam's approach towards globalisation also is worth considering. The nation of 82 million certainly wants the benefits that come from trade and the increased movement of capital and people; it doesn't just want a Starbucks or McDonald's on every corner.
Recent decades have shown globalisation can be a temptress rather than a panacea for developing economies.
In the 1980s and 1990s, Asian economies opened to the world rapidly. While lots of fast-food joints and malls went up, stable growth and increased foreign investment remained elusive.
Officials in Hanoi want to avoid the boom-and-bust scenarios experienced by so many Asian nations during the past 20 years. If the strategy works, and so far it has, investors who got into Vietnam early may be a happy crowd. - Bloomberg
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