2003: THE YEAR OF THE VIETNAMESE BOND

UNCLAS HANOI 000218

SIPDIS

STATE FOR EAP/BCLTV
STATE PASS USAID FOR ANE: AFERRARA DMCCLUSKEY
STATE PASS USTR FOR ELENA BRYAN
STATE PASS OPIC AND EXIM
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO

E.O. 12958: N/A
TAGS: EFIN ECON EINV VM FINREF
SUBJECT: 2003: THE YEAR OF THE VIETNAMESE BOND

REF: 2003 HANOI 2972


1. SUMMARY: Following the success of Vietnam's first-
ever corporate bond issue, Vietnam has decided to embrace
this capital mobilization mechanism. In September, the
GVN outlined a plan to issue bonds totaling 63 trillion
Vietnamese Dong (about 4 billion USD) for infrastructure
development through 2010. Then, the GVN issued
legislation in December paving the way for sovereign
guarantees on bonds issued to fund "crucial" projects.
Although the expansion of capital market instruments is
welcome, the attending credit growth is unsustainable.
END SUMMARY.


2. At the beginning of September, PetroVietnam, the
State-owned oil and gas corporation, successfully issued
Vietnam's first-ever corporate bonds. 90 percent of
these five-year bonds were sold on the first day of issue
at a first year interest rate of 8.7 percent, which
primarily attracted banks and financial institutions.
The 300 billion Vietnamese Dong (VND) (less than 20
million USD) in capital raised through this issue is
scheduled to be used for a range of projects, including
an oil refinery and nitrogenous fertilizer-electric-gas
projects.


3. Building on this momentum, the Prime Minister issued
Decision 182 in September on the GVN's plan to issue 63
trillion VND (about 4 billion USD) in government bonds in
order fund investment in major transportation and
irrigation projects until 2010. The GVN decided to sell
a total of 11.5 trillion VND (less than 750 million USD)
of these bonds in 2004. While the majority of the funds
raised will be used for infrastructure and irrigation
projects, around one-fifth will be set aside for
education. The bonds, which will be denominated in
Vietnamese Dong, will have a minimum face value of
100,000 VND (less than 6.50 USD),a five to ten year
term, and can be traded on the stock exchange.


4. Finally, the Government recently issued Decree 141,
providing a full government guarantee on bonds issued by
certain enterprises in some cases. Those companies that
the Prime Minister appoints to mobilize capital for
"crucial" projects can issue bonds carrying a government
guarantee as long as the Ministry of Finance approves the
method of bond issue, use, repayment, and value.
Although the GVN has not specifically named businesses
that may qualify for this program, experts expect that it
is aimed at large State-Owned Enterprises, such as
PetroVietnam and Electricity Vietnam.


5. COMMENT: Given the infancy of the capital market in
Vietnam, this effort to expand the number of tools
available to raise funds is a welcome development.
However, it also compounds recent concerns raised by
international experts regarding the dramatic rate of
credit growth to the economy. Estimated at 29 percent
for 2003, such expansion is especially worrisome due to
the weakness of the financial sector (see reftel).
BURGHARDT