Solutions to develop government bond market in Vietnam

The government bond market plays an important role in the socio-economic development cause of every nation. In recent years, despite certain achievements it has gained, Vietnam''s government bond market has still remained many limitations. Upon researching the situation of market development in the 2010 - 2015 period from primary data, the article points out some limitations of the market in terms of product ranges, transaction modes, investors and identifies the main reasons for its development limitations such as market information system, infrastructure, legal environment, etc. On this basis, the author suggests orientations and solutions to help it develop safely and effectively in the coming time.

Vu Thanh Tu ANH - Fulbright University in Vietnam, USA

Le Xuan BA - Centural Institude for Economic Managerment, Vietnam

Hervé B BOISMERY - University of La Reuinion, France

H Eric BOUTIN - Toulon Var University, France

Nguyen Thi DOAN - Vietnam Learning Promotion Association, Vietnam

Haasis HANS - Dietrich - Institute of Shipping Economics and Logistics (isl) Bremen - Germany

Le Quoc HOI - National Economic University, Vietnam

Nguyen Thi Bich LOAN - Thuong mai University, Vietnam

Nguyen Hoang LONG - Thuong mai University, Vietnam

Nguyen MAI - Vietnam Economist Association, Vietnam

Duong Thi Binh MINH - University of Economics HoChiMinh City, Vietnam

Hee Cheon MOON - Korean Trade Research Association, South Korea

Bui Xuan NHAN - Thuong mai University, Vietnam

Luong Xuan QUY - Vietnam Economicst Association, Vietnam

Nguyen Van Song - Vietnam National University of Agriculture

Nguyen TAM - California State University, USA

Truong Ba THANH - University of Danang, Vietnam

Dinh Van THANH - Institude for Trade Research, Vietnam

Do Minh THANH - Thuong mai University, Vietnam

Le Dinh THANG - University of Québec à Trois Riviéres, Canada

Tran Dinh THIEN - Vietnam Institute of Economics, Vietnam

Nguyen Quang THUAN - Vietnam Academy of Social Sciences, Vietnam

Le Nhu TUYEN - Grenoble École de Managment, France

Washio TOMOHARU - Kwansei Gakuin University, Japan

Zhang YUJIE - Tsinghua University, China

THE Members

Editor in chief NGUYEN BACH KHOA Deputy Editor in Chief

SECTRETARY OF EDITORIAL OFFICE

PHAM MINH DAT Editor in English NGUYEN THI LAN PHUONG Editorial SCIENTIFIC COUNCIL Dinh Van SON - Thuong mai University, Vietnam - President

Pham Vu LUAN - Thuong mai University, Vietnam - Vice President

Nguyen Bach KHOA - Thuong mai University, Vietnam - Deputy President

Trade Science

C O N T E N T S

1 Nguyen Thi Phuong LIEN - Solutions to Develop Government Bond Market in Vietnam

2 Nguyen Tran HUNG - Attract Online Customers to Job Websites in Vietnam

3 Nguyen Thi Kim OANH - Research Factors Affecting Hanoi Consumers Buying Decisions of

Fashion Products

4 Chu Viet CUONG - Trade development in the mountainous region of northern Vietnam: Lessons

from Chongqing and Yunnan, China

5 Dang Thi Minh NGUYET - Factors Affecting Productive Efficiency of Vietnam Joint Stock

Commercial Bank for Industry and Trade

6 Ying-Kai LIAO and Vu Minh QUAN and Alfiyatul Qomariyah - An Integrative Approach to

Investigate Antecedents, Moderators and Consequences of Brand Equity

Page

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1 Development situation of government bond

market in Vietnam in the period of 2010-2015

Government bond market is an important

compo-nent of the bond market and was officially opened on

24 September 2009 at Hanoi Stock Exchange (HNX)

The products traded on the government bond market

include different types of government bonds, local

government bonds, government-secured bonds

Government bonds are traded by put through trading

method with two tools including ordinary trading

(out-rights) and repurchase agreement (repos) The

govern-ment bond market consists of primary and secondary

markets

* Primary market:

Primary market is the place of offering bonds for

the first time HNX operates and arranges for the

elec-tronic bidding system

During 2010-2015, government bond market

organized 1,375 bidding sessions for bonds issued by

State Treasury, Bank for Development, Bank for Social Policies, etc In this period, the primary market gained the average growth rate of 67.5% The development in scale, quantity and quality of the issuance, especially State Treasury bonds in standard bond codes has con-tributed to the increased liquidity in the secondary market

In bond terms: The terms of bonds increased, lead-ing to the average term of listed bond portfolio increas-ing from 2.37 years (2010) to 3.77 years (2015) In

2015, the average term of bonds issued by organiza-tions was 5.7 years, in which Treasury bonds had the average term of 6.1 years With 20 - year and 30 - year retailing bonds, the average term of treasury bonds was 6.97 years

Regarding issuance methods: The rate of govern-ment bonds issued by bidding through HNX rose from 49% in 2009 to 100% in 2014 Since 2014, all govern-ment bonds have been issued by electronic bidding It

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Nguyen Thi Phuong Lien Thuongmai University Email: ntplien@tmu.edu.vn

Received: 15th February 2016 Revised: 10th March 2016 Approved: 13th March 2017

Keywords: Government bond, Bond market, Growth

he government bond market plays an important role in the socio-economic development cause of every nation In recent years, despite certain achievements it has gained, Vietnam's government bond market has still remained many limitations Upon researching the situation of market development in the 2010 - 2015

peri-od from primary data, the article points out some limitations of the market in terms of prperi-oduct ranges, transac-tion modes, investors and identifies the main reasons for its development limitatransac-tions such as market informatransac-tion system, infrastructure, legal environment, etc On this basis, the author suggests orientations and solutions to help it develop safely and effectively in the coming time

proved the information transparency and disclosure

through HNX

Regarding investors: In the primary market,

com-mercial banks have been the main investors with

near-ly 90% market share In 2015, the structure saw some

changes with the participation of insurance companies with the purchasing power of 10.2%, relatively higher than 7.8% in 2014 (regardless of 20-year and 30-year retailing bonds to insurance companies) Besides, the market participation tended to focus on some leading

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Unit: billion VND

Source: Hanoi Stock Exchange

Chart 1: Bond mobilization through years

Source: Hanoi Stock Exchange

Chart 2: Terms of bond issuance and listing (2013-2015)

banks Top 10 banks accounted for 60% - 70% market

share in both primary and secondary markets

Regarding bidders: Domestic commercial banks

have been the main bidders over the years with the

winning rate of 77% - 83% of the total market value;

followed by foreign banks with 11% - 12%

Regarding market infrastructure: In June 2012,

HNX officially put electronic bidding system into use

It directly connects the exchange to market participants

and management bodies It links primary and

second-ary markets and shortens time from issuance to listing,

transaction as well as provides timely information for

the management of the authorities

* Secondary market

Secondary market organizes transactions for

gov-ernment bonds after the first issuance HNX is the

mar-ket organizer and operator with transaction services

and system to secondary participants and investors

Commercial banks and securities companies are two

major market participants

Situation of listing: By 31 December 2015, there were 537 codes with the listed value of nearly VND 753,451 billion Treasury bonds remained the highest rate in the market (over 80% listed value in 2015)

Situation of transaction:

- Transaction size: The size of transaction in the market saw sharp increase over the years By 31 December 2015, total trading value of the market reached approximately VND 906,387 trillion including VND 606.39 trillion of Outright transactions (67% of total value) and VND 299.99 trillion of Repos transac-tions (33% of total value) The average trading value of each session was VND 3,655 billion With the increase

in size, the rate of repos transaction was also on the rise Repos transactions in the system rose from 1.8%

of total market value in 2011 to 33% in 2015 (with the decrease in outrights) The most frequent repos term

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Unit: bond

Source: Hanoi Stock Exchange

Chart 3: Listed government bonds by issuers

was one-month repos, accounting for 30% of the repos

transactions The following frequent terms were 2

months and 3 months with around 18% In general,

long terms (over 14 days) were still frequent with

91.5% of repos transaction value

- Investors: Two groups of investors in Vietnam's

government bond market include domestic and foreign

investors After the regional financial crisis in 2009,

foreign investors massively withdrew capital from the

bond market in Vietnam Since 2011, they have come

back with steady transaction of 30% of total bond

mar-ket The transaction rate of foreign investors in 2015

was 10.7% of the total market value, lower than 15%

in 2014 They mainly participated in outrights

transac-tions with repos transactransac-tions of less than 1% the total

repos transactions.(Chart 5)

- Traded bond terms: Government bond traded

focused on terms of 1 to 5 years with 82% of the total

value Terms of under 1 year and over 5 years only

accounted for 18% Among them, 5 year term and 2

-year bond had the highest liquidity with turnover rate

of 1.51 and 1.39 times, respectively The general turnover rate of the total bond portfolio in 2015 was 0.84 times The term structure in secondary market was similar to the primary market.(Chart 6)

- Participants: The participation of member com-mercial banks increased dramatically from 38.6% of the market in 2010 to nearly 84% in 2015 Meanwhile, the participation of member securities companies sharply dropped in both brokerage and dealing with the brokerage share decreasing from 50% in 2010 to 13.38% in 2015, the dealing of securities companies decreased from 11.65% in 2010 to 2.64% in 2015

- Liquidity: Over the past few years, the number of bond codes traded was 463/969 codes, accounting for 47.78% of the total codes in the market In 2010, the average liquidity (calculated by traded value over

list-ed value of the market) was 0.35; 0.6 in 2012 and 0.9

by the end of 2013

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Unit: billion VND

Source: Hanoi Stock Exchange

Chart 4: Government bond transactions (2010-2015)

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Unit: billion VND

Source: Hanoi Stock Exchange

Chart 5: Outrights share of foreign investors (2010-2015)

Source: Hanoi Stock Exchange

Chart 6: Outrights volume by remaining terms (2010-2015)

2 Evaluation of the development of government

bond market in Vietnam

2.1 Achievements

During 2010-2015, the government bond market

gained some encouraging results as an important

mobilizing channel for development, a signal for the

macro-economic administration, especially in

coordi-nating financial - monetary policies of the government

as well as building the image and rating of Vietnam in

the international financial market

First, the government bond market fulfilled its duty

as a channel for raising medium and long-term funds

for development

Over 5 years (2010-2015), centralized bidding at

HNX raised VND 835,253 billion for the State budget

including VND 711,037 billion for the State Treasury,

16 times as much as the period of 2000-2008

Particularly in 2012, bidding became the major

chan-nel for capital raising for the budget by issuing bonds

with a dramatic increase in value

Second, bidding sessions were organized competi-tively, transparently, openly and increasingly profes-sional

The issuance of the government bonds was reformed completely towards the goals of restructuring public debts and generating a standard product for the financial market Schedules for issuance were made public and the disclosure of bidding results, volumes, terms and interest rates enabled market participants to manage their funds and the participation in the bid The system of bidding organizers was rearranged The State Treasury as the largest issuer successfully organ-ized programs to issue bonds in bulk, additional bonds and swap bond These partly made fundamental changes in the product quality of government bonds in the financial market

Third, the types of products were various with shortened time for transaction and improved market liquidity

In order to diversify the products in the market, the development of new products was one of the major JOURNAL OF

Unit: %

Source: Hanoi Stock Exchange

Chart 7: Ratio of bond transaction by operations

points Apart from the traditional products, new

trad-ing tools like futures, zero coupon bonds, Repo pack

(including Sell/buy back Repo, Borrowing-Lending

Repo, Cross currency Repo) were launched and

wel-comed by market participants as well as investors

Regarding Bond Futures, HNX is coordinating with

State Securities Commission and Nomura consultants

to deploy the proposal of derivative securities market

for the approval of Ministry and the government

Moreover, the number of listed bonds was reduced to

90 from 300, with the average size of 6 times for each

code, which could improve the liquidity of government

bond trading in the secondary market

Government bond registration and depository from

bidding to listing, trading had been improved and

shortened from 15 days to 10 days, 6 days, 4 days to

enable bidders to complete the transactions right in the

secondary market

Market liquidity was raised greatly with the

aver-age trading value increasing by 10 times over 5 years,

from VND 370 billion/ session in 2010 to VND 3,655

billion in the first 6 months in 2014 The ratio of

sec-ondary sales and the outstanding bond value also rose

2.6 times By the end of 2015, the total value of

out-standing government bond portfolio reached

approxi-mately VND 753,000 billion, 4 times higher than 2010

and equaling to 18% of GDP The market size gained

23% growth rate over 5 years It has been rated as the

leading growth in the emerging economies in East Asia

and ASEAN + 3

Fourth, the number of traders and investors was

steady and on the rise

Specialized government bond market currently has

54 participants including 27 commercial banks and 27

securities companies The system of bidders is

rela-tively stable and professional Commercial banks have

steadily played their role in both primary and

second-ary markets There have been some positive changes in

the types of investors In addition to commercial

banks, insurance companies, fund management

com-panies and foreign investors have participated actively

in the market

Fifth, technical infrastructure and market informa-tion system have been improved

All activities of bidding, trading, information have been performed uniformly on a modern technological base system

Electronic bidding system connects directly to mar-ket participants to bid online and links to Ministry of Finance and State Treasury to directly supervise and administer each session for the convenience of investors and close control of the authorities The bid-ding system was designed together with trabid-ding and information system for the connection between pri-mary and secondary markets The procedure from bid-ding to listing and trabid-ding was completed

automatical-ly, which could reduce time and errors The infrastruc-ture of secondary market has also improved In March

2013, the 2nd version of government bond trading sys-tem was officially launched with promising feedback from participants Trading functions were completed with additional risk management tools to assist investors in exchanging information, discussing the deals and keeping track of the results

Market information system was strengthened The central portal was initially formed Market indicators were also supplemented From March 2013, the yield curve was officially adopted and operated steadily, which provides fundamental information on changes in interest rate of different trading bonds in the secondary market It is also a reference indicator for macro-eco-nomic administrators, issuers as well as investors 2.2 Limitations

The government bond market still faced such limi-tations as follows:

First, fixed - interest government bonds were the single item in the market Limited choices discouraged investors, which made the market less lively and nar-rower HNX has made some efforts in researching new products, but has not had any positive results

Second, investors in government bond market have yet to be professional Trading activities by

institution-al investors like commerciinstitution-al banks and securities com-panies increased, but not enough to become market makers

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Third, trading methods in secondary market have

been simple From the beginning, bonds have been

traded by two forms: outright và repos

Fourth, the size of government bond market in

Vietnam remained modest compared with the

devel-oped ones despite dramatic increase recently with the

relatively small listing scale

2.3 Causes

There are some causes to the weaknesses in the

government bond market in Vietnam as follows:

First, market information and technological

infra-structure are limited

Despite some big improvement, the market

informa-tion system has not been able to prevent risks, to enable

participants to look for partners easily if needed It has

just provided basic data without value-added and

com-bined information, predictive indicators for investors

Technological infrastructure for transaction,

clear-ing, information exchange has not met the requirement

for centralization and sharing of information It has not

connected to the international portal to facilitate

for-eign investors HNX has just established the trading

portal with the international trading system

Bloomberg

Second, issuance planning by issuers is still

inade-quate

Schedules for issuance have not been specified

The State Treasury has just built the mobilizing plans

for years and quarters without any comprehensive

strategies for fund raising Therefore, the issuance of

government bonds has been highly passive and uneven

at different times

Third, legal system for the market operations has

not completed

The current legal framework for supporting

mech-anisms like the system of Primary Dealer (PD), Mark

to Market has not been specified The regulations on

reporting have been procedural with some mismatches

to the market conditions leading to some unqualified

operations The highest legal document on the issuance

and trading of government bonds was only Decree of

the government, but not yet to be built into laws The

lack of legal documents has hindered the operation of

the market and the participants, especially institutional

investors and professional market makers The

regula-tions on the authority of administration agencies have

not been clear, which reduces the management of

authorized agencies and the effectiveness

Fourth, there have been no credit-rating agencies

in the market Credit rating is an important and necessary indica-tor for market development, but there is a lack of these organizations in the government bond market in Vietnam Investors in the market have to evaluate and analyze by themselves, which is very time - consum-ing, costly and infeasible sometimes It could be easier

to identify risks with the assistance of credit rating in the market Ministry of Finance has planned to

devel-op a credit rating system, but it has been on discussion

3 Orientations and solutions to develop govern-ment bond market in Vietnam to 2020

Development orientation

- Products: Product diversification is significant It helps fully mobilize idle funds in the society, increase the choices for investors and diversify the market Therefore, it is necessary to provide a variety of prod-ucts in terms of interest rates, types and payment meth-ods In addition to the original products, it is essential

to introduce derivatives such as futures, term contracts, options, bond index, etc

- Trading methods: Apart from two existing meth-ods of outright and repos, it is needed to adopt repur-chase trading (repo-sell-buy back, cross-currency repo) at the right time

- Investors: Beside current investors, it is vital to attract more investors such as social insurance organi-zations, insurance funds or investment funds, etc

- Information and technological infrastructure: A modern electronic trading system and a comprehen-sive, exact and updated database will improve the effectiveness of the market supervision in order to (i) Easily identify and prevent errors and fraud; shorten time of circulation for products between markets; (ii) Ensure the uniformity of product development, improve the product attractiveness by coordination in developing new original products and new trading tools so as to improve the security and liquidity; (iii) Assist the connection between issuing and trading market through financial leverage; (iv) Improve the quality, capabilities and effectiveness of the mecha-nisms for checking and monitoring market operations

of administration agencies; and (v) Form a foundation

to enhance the market transparency, the effectiveness

of risk prevention measures Therefore, it is vital to JOURNAL OF