Recognizing the necessity of developingthe Vietnam governmnet bond market, the PhD candidate has choosen the topic Developing the Vietnam government bond market in the context of financi
Trang 1STATE BANK OF VIET
BANKING ACADEMY OF VIET NAM
TRAN THI THU HUONG
DEVELOPING THE VIETNAM GOVERNMENT BOND MARKET IN THE CONTEXT OF FINANCIAL
Trang 2HA NOI, 2019
2
Trang 3THE DISSERTATION WAS COMPLETED AT
BANKING ACADEMY OF VIET NAM
Academic Supervisors:
1 Assoc.Prof, Dr TO KIM NGOC
2 Assoc.Prof, Dr TRAN DANG KHAM
Referee 1 :
Referee 2 :
The dissertation is defended against University-level Examination Board at Banking Academy of Vietnam
Time: ………… date …… month …… year 2018
The dissertation could be found at:
- Library of Banking Academy of Vietnam
- National Library of Vietnam
Trang 5INTRODUCTION
1 Significance of the research
Formed in the 1990s, the Vietnam government bond market, though beingborn later than other countries in the region and the world, has also had certainsuccesses, becoming an important capital mobilization channel for the state budgetand for development investment However, the Government bond market still hassome limitations and has not been developed to match its potential Market size isstill small, the market is mainly developed in width without depth There are manyoutstanding issues such as simple goods on the market, non-diversified investorbase, under-developed infrastructure Government bond market has not yet fulfilledthe benchmark market role as a reference for other parts of the financial market Inaddition, Vietnam ‘s economy in general and the financial market in particular are inthe process of integration very quickly through a series of newly signed tradeagreements Regional and global financial integration brings many benefits andchallenges to Vietnam’s fledgling financial market In this situation, the Governmentbond market needs further development steps to meet the requirements of integrationand take advantages that integration offers Recognizing the necessity of developingthe Vietnam governmnet bond market, the PhD candidate has choosen the topic
Developing the Vietnam government bond market in the context of financial integration This dissertation aims to study and contribute to the theory of the
development of Government bond market in financial integration context and toassess the status of Vietnam Government bond market under the effects of financialintegration Thereby, some solutions are suggested to develop this market
2 Objectives of the research
The main objectives of the dissertation are:
- Build a theoretical framework for developing the Government bond market in thecontext of financial integration
- Analyze the development status of Vietnam government bond market, then assessthe development level of this market in the context of financial integration
- Build an econometric model to determine factors and effect of each factor on thedevelopment of Government bond market
Trang 6- Propose a system of solutions to develop Vietnam government bond market in thefinancial integration context
3 Subjects and scope of the research
- Research subjects : the development of government bond market
- Scope on space: Vietnam government bond market, including the primary
market and the secondary market
Scope on time : the dissertation has studied the Vietnam government bond
market since the market was formed, but focused mainly in the period of 2000-2017
4 New contributions of the dissertation
The new academic, theoretical contributions
- The dissertation has systematized the basic theoretical issues of government bondmarket, financial integration, and developing government bond market in the context
of financial integration
- The dissertation has built a complete and comprehensive measures to evaluate thedevelopment level of government bonds market in financial integration context It isvery improtant new point of the dissertation
The new practical contributions
- The dissertation has analyzied situations of the Vietnam’s government bond marketcomprehensively in different dimensions under the impacts of financial integration
- The dissertation has evaluated the development level of Vietnam Government bondmarket via the measures that are mentioned in theoretical framework Severalachievements, limitations, and causes are concluded as a base of suggestedsolutions
- The dissertation examines the determinants of government bond marketdevelopment in financial integration context and the association between each factorand the development of government bond market using the regression method
- According to the theoretical and practical research results, the dissertation hasproposed a system of scientific solutions to develop the Vietnam government bondmarket by taking advantages and reducing risks of financial integration
5 The structure of Dissertation
Besides the introduction, conclusion and references, the dissertation isorganized in five chapters as follows :
Trang 7Chapter 1 : Literature review and research methods
Chapter 2 : Theoretical framework on the development of Government
bond market in the context of financial integration
Chapter 3 : Situation of the development of Vietnam Government bond
market in the context of financial integration
Chapter 4 : Empirical model to examine factors affecting the development
of Government bond market in the context of financial integration
Chapter 5 : Solutions to develop Vietnam government bond market in the
context of financial integration
CHAPTER 1 : LITERATURE REVIEW AND RESEARCH
METHODS 1.1 Literature review
1.1.1 Foreign studies overview
1.1.1.1 Research on Government bond market and developing Government bond market
The theoretical thesis on the development of the Government bond marketwas proposed by World Bank and International Monetary Fund in the study
“Developing a government bond market: A handbook” in 2001 và research “FSseries 12: Developing Government Bond Markets Primer, Diagnostic Checklist, andGuidelines for the Preparation of a Model Scope of Work” (2010) In addition tostudies of the entire market, there are also studies on a market issue such as theissuance of government bonds or secondary markets like studies of Claessens,Klingebiel, Schmukler (2007) and Siegfried, Simeonova, Vespo (2007)
1.1.1.2 Researches on financial integration and Government bond market
in the context of integration
Researches on financial integration
Many studies in the world on financial integration have been made, from thebasic issues such as concepts, characteristics, to deeper issues such as benefits andrisks of financial integration including researches by Stavarek et al (2011), Kenan(2007) [75], Mougani (2011) [94], Agenor (2001) [24] Research by Baele et al
2004 has developed a set of indicators to measure the level of financial integration
Trang 8for the European region based on price-based measures, news-based measures andquantity measures
Researches on government bond market integration
The previous researches on Government bond market integration werefocused mainly on the European region such as the sutdy of Baele et al in 2004.Government bond market integration in Asian countries is also mentioned in someprevious studies but very limited as research by Yu et al 2007, Lian 2016
Research on the impact of financial integration on the Government bond market
Financial integration has direct and indirect impacts on the Governmentbond market Previous studies have investigated some specific impacts of financialintegration on the Government bond market such as Claeys et al (2010), Claeys et
al (2012), Manganelli et al (2007), Furceri et al (2012), Bolton et.al (2011)
1.1.2 Studies overview in Viet Nam
1.1.2.1 Research on Government bond market and development of Government bond market in Viet Nam
There are some researches on the development of Viet Nam governmentbond market such as the master thesis of Trinh Mai Van (2005), the dissertation of
Le Anh Tuan (2011) Besides the overall market researches, there are studies thatfocus on one aspect of the market such as bond issuance, bond trading
1.1.2.2 Research on financial integration and developing Viet Nam Government bond market in the context of financial integration
Regarding to integration issues in general and financial integration inVietnam, although there have been a number of published researches, the number isstill very limited There is no specific, systematic research on financial integration,especially on the development of Government bond market in the financialintegration context
1.2 Research gap of topic
1.2.1 Research gap
In theory:
Trang 9Firstly, there is no general, systematic study on developing government
bond market in the context of financial integration
Secondly, most of the studies when evaluating the development of the
Government bond market have not yet built specific indicators to assess thedevelopment level of the market, especially when placed in the context of financialintegration
Thirdly, there is no specific regression model to assess the factors affecting
the Government bond market accordance with Vietnam’s market and the ASEANregion
In practice:
Firstly, studies on Vietnam’s government bond market have not been
updated before changes in the socical- economic situation, not set in the context ofdeeper region and the world integration
Secondly, there is no research that has measures the degree of integration of
Vietnam’s Government bond market
aspects in the context of financial integration in recent time?
Thirdly, What are factors affecting the development of Government bond
market in the context of financial integration?
Fourthly, What is the appropriate solutions to develop Vietnam’s
Government bond market in the current financial integration context in order toexploit the benefits of financial integration while reducing risks?
1.3 Research methods
Research methods
Trang 10The dissertation uses both qualitative research method and quantitativemethod, combined with statistical method, analysis and synthesis Econometricmodel is also used
Data source
The dissertation uses both primary and secondary data sources
CHAPTER 2 : THEORETICAL FRAMEWORK ON THE DEVELOPMENT OF GOVERNMENT BOND MARKET IN THE CONTEXT
OF FINANCIAL INTEGRATION 2.1 Government bond market
2.2 Developing Government bond market in the context of financial integration
2.2.1 Financial integration
2.2.1.1 Definition of financial integration
Financial integration is the process of a country’s financial market becomingincreasingly connected to the financail markets of other countries in the region andthe world, leading to the free capital and financial services transfer among countries,non- discrimination between market participants, making financial assets withsimilar characteristics will be traded at the same price regardless of the origin
2.2.1.2 Types of financial integration
2.2.1.3 Financial integration contents
Standardize the legal framework for financial activities
The entry of foreign elements and participation in the international market
of domestic organizations and individuals
Capital account liberalization
Monetary integration through monetary union formation
2.2.2 Impact of financial integration on the Government bond market
2.2.2.1 Positive impact
Increasing market size and liquidity
Reducing capital cost – interest rate
Improving investor base on the market
Improving the infrastructure and micro-structure of the market
Enhancing market discipline
Trang 112.2.2.2 Negative impact
Increasing market risk
Impact on raising interest rate
The risk of public debt crisis
2.2.3 Developing the Government bond market in the context of financial integration
2.2.3.1 Viewpoint of Government bond market development in the context
of financial integration
Developing the Government bond market in the context of financialintegration requires a change in both quality and quantity in the market to enhancethe efficiency of the market in order to meet the requirements of integration process,take advantages and limit risks that financial integration brings
2.2.3.2 Indicators of assessing the development level of Government bond market in the context of financial integration
- Indicators of market size: Government bond market size/GDP, domesticgovernment bond market size/ regional government bond market size, governmentbond market trading value/ GDP, government bond market trading value/ regionalgovernment bond market trading value
- Indicators of market sustainability: Government bond interest rates in allmaturity, proportion of long-term government bonds, proportion of governmentbonds/ total bonds, risk monitoring and warning indicators system
- Indicators of the level of market integration: spread of government bond’sinterest rate and bond interest rate of benchmark country, the convergence beta indexand coefficient index
- Indicators of market access: For issuers, market access, especially fordomestic market is only useful and effective when the cost of capital mobilization islow and the capital mobilization process is easy (FSDI) [60] For investors, it is easy
to participate, access and trade in the market Therefor, in order to assess the level ofaccess to the Government bond market, the author has built some indicators: ratio ofgovernment bond that is issued in domestic market, total value of internationalgovernment bonds/ GDP, investor base (types, proportion of goverment bonds held
Trang 12by foreign investors), diversified issuance, distribution, and trading methods,instruments are diversified and synchronized to international standards, modern andsynchronic infrastructure
- Indicators of effectiveness: bid- ask spreads, turnover of government bonds
on exchange
- Indicators of stability: daily return of government bond index, volatility ofgovernment bond index (annual standard deviation), ratio of long-term investorsholding government bonds
2.3 Factors affecting the development of Government bond market in the context of financial integration
A number of factors affecting the development of government bond marketare proposed such as size of the economy, macroeconomic conditions, the credibility
of the government as an issuer, financial sector characteristics, legal framework andmarket transparency
2.4 Lessons on developing Government bond market in the context of financial integration from international experiences
Developing government bond market must be associated with economic development and strengthening the basic conditions for the market
Developing government bodn market in the direction of complying with market laws, limiting and gradually eliminating the market manipulation and intervention.
Investor base is an important factor affecting the development of the Government bond market
CHAPTER 3: SITUATION OF THE DEVELOPMENT OF VIETNAM GOVERNMENT BOND MARKET IN THE CONTEXT OF FINANCIAL
INTEGRATION 3.1 The process of Vietnam financial integration and integration of Vietnam Government bond market
3.1.1 The process of Vietnam financial integration
1986 marked an important milestone for Vietnam’s economy when thecountry began to carry out the renovation and proactive international economicintegration Since then, Vietnam has continuously expanded bilateral and
Trang 13multilateral external economic cooperation with many partners, in many forms,fields, including the financial sector
3.1.2 Vietnam government bond market integration
After becoming a member of WTO, the Vietnam government bond markethas gradually integrated more and more deeply into regional and world markets
3.2 Overview of the process of formation and development situation of Vietnam government bond market
3.3 Analyzing the development of Vietnam government bond market in the context of financial integration
3.3.1 Using the set of indicators to evaluate the development of Vietnam government bond market in the context of financial integration
3.3.1.1 Indicators of market size
Government bond market size
Looking at the size of Vietnam government bond market, it can be seen thegrowth of the market over the years
Domestic government bond market size/ regional government bond market size
Comparing size of Vietnam Government bond market with other countries’market in ASEAN+3 area over the last 5 year, the size of Vietnam government bondmarket has been still small
Trading value of government bond market/ GDP: the ratio of trading value
of Vietnam secondary government bond market to GDP is low, reaching the highest
in 2016 at only 35% GDP
Trading value of government bond market/ regional trading value:
Compared to the trading value of some regional market such as Indonesia, Malaysia,Thailand, it is clear that Vietnam government bond market has gradually increase intrading value over the year
3.3.1.2 Indicators of market sustainability
Government bond interest rates in all maturity
Interest rates of government bonds tend to decrease over the years in allmaturity The process of liberalizing Government bond interest rates, following the
Trang 14market rules, has been advocated very soon but the implementation has been slow.The introduction of the directing interest rate into bond auction has affected the level
of freedom of Government bond market The interest rates have not reflected themarket’s assessment of government bonds
Ratio of long-term government bond market/ total government bonds
Along with the development of the market, the maturity of government bondhas been changed in positive trend, that is longer in line with the capital utilizationmaturity of government Issuance maturity of Vietnam government bonds has beenlonger to improve maturity structure of government bonds, reduce risks, enhance themarket sustainability In 2017, the remaining time to maturity of government bondsunder 5 year is only about 60%, significantly lower than the rate of 88% in 2013 and100% in 2000
Ratio of government bonds/ total bonds: Vietnam government bonds
account for a large part of the total bonds in Vietnam bond market while corporatebonds account for a very small part, leading to the crowding out effect
Risk monitoring and warning indicators system: not yet available
3.3.1.3 Indicators of level of market integration
Spread of Vietnam government bond’s interest rate and Thailand government bond interest rate: the spread has decreased gradually over the years,
reflecting the increasing integration of Vietnam government bond market However,this indicator is still quite high in recent years (about 2%), proving that Vietnam
government bond market still has a gap of integration with the regional market The convergence beta index: While Thailand’s beta with US is quite stable
and tend to progress to 1 (about 0,8 in recent years), showing a high integration level
of Thailand government bond market, the beta indicators of Vietnam with Thailand’shas been unstable and often low, average about 0,2, confirming Vietnam’s regionalintegration level is still low
Coefficient: α of Vietnam shows that the level of Vietnam interest rate
fluctuation is quite large in a systematic and independent way compared to thefluctuation of Thailand It is suggested that Vietnam government bond market isweakly integrated with the region
3.3.1.4 Indicators of the level of market access
Trang 15Proportion of government bonds that are issued in domestic market to total bonds: Government bonds of Vietnam are mainly issued on the domestic
market The number of international bonds is very limited
International bonds value/ GDP: insignificant
Investors base
Diversity of types of investors in Government bond market: Investors in the
market has made positive progress However, it can be seen that the base ofinvestors still has no diversity
Proportion of government bonds held by foreign investors: this indicator has
increased gradually over the years, from 5-6% in 2014 to 8,35% in 2015 and 12,38%
in 2016 However, these numbers are still low
Issuance and trading methods
Issuance method: auction has become the most popular issuance method and
accounted for a large proportion of the total issued government bonds in Vietnam It
is consistent with international practice
Trading method: When the specialized government bond market was
established, only agreement trading method has been applied It was suitable to thecurrent characteristics of Vietnam market that the transaction frequency is not much,but the value of each transaction is high Investors could perform electronic orconventional agreement transactions
Repo transaction: Sine the specialized government bond market was
established in 2009, repo transactions began to be seperated form outrighttransactions In the first three years, the value of repo transactions was low,insignificant compared to outright transactions’ value The later accounted for over90% of total market trading value In the following years, the value of repotransactions reached to 47% of total trading value, continuing to follow the outrightvalue
Quality and diversity of instruments on the market: instruments are simple
despite the addition of other instrument other than periodic interest – paying bonds.Besides, the quality of instruments is not good when there are too many bonds codes
on the market and the volume of bonds for each code is small
Mordern and synchronic infrastructue