Comparing Government Bond:Vietnamese & Japanese - Đỗ Ngọc Điều

Discussion in 'Tiểu luận - Đồ án' started by dungtvsb01223, Jan 3, 2015.

  1. dungtvsb01223

    dungtvsb01223 New Member

    Executive Summary
    Objectives: Comparing Vietnamese Government Bonds and Japanese Government Bonds to make suggestions to customers.
    Methods: Comparing government bonds of the two countries in different terms.
    Results: Customers had better invest in Japanese government bonds.

    The Structure:
    - Types of bonds and their issuers; Process of issuance of Government Bonds
    - How Government Bonds are traded in the market
    - Some statistic data about the Government Bond market during the past 5-10 years
    - Compare Vietnamese Government Bonds and Japanese Government Bonds
    - Advantages and Disadvantages of Vietnamese Government Bond market
    - Prospect of Vietnamese Government Bond market
    - Suggestions and Conclusions

    Part 1: Overview of the Japanese Government Bond Market
    Types of bonds and their issuers:
    1. Short-term bills (6-month and 1-year),
    2. Medium-term notes (2-year and 5-year bonds),
    3. Long-term bonds (10-year bonds) and
    4. Super long-term bonds (20-year, 30-year and 40-year bonds)
    5. JGBs for retail investors (3-year, 5-year and 10-year)

    Process of issuance of Government Bonds
    The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors.
    Indeed, JGBs are mainly issued as either underwritten by primary dealers (PDs, so- called participants) and re-sold to the public market or direct subscription by BOJ and other government-affiliated parties. Major volume of JGB issuance and distribution are sustained by PDs, while BOJ underwriting has given assurance of balance of supply and demand in the JGB market.
    Methods of JGB issuance are broadly categorized into “issuance to the market”, “issuance to retail investors”, and “issuance to the public sector”.

    How Government Bonds are traded in the market
    1. There are so many issues of bonds that it is practically impossible to list all of them on exchanges;
    2. Due to the wide variety of transaction forms and other specifications that different buyers and sellers require, it is difficult to instantly locate a matching counterparty for a particular transaction;
    3. Tax on bond interest varies according to the tax profiles of bondholders; and
    4. Corporate investors, who account for the bulk of the bond trading volume, tend to trade in large lots and often carry out complex transactions involving more than one issue

    Some statistic data about the Government Bond market during the past 5-10 years
    The JGB secondary market consists of brokers such as JGB market special participants (PDs) and investors. Basically, the maintenance and enhancement of liquidity should be achieved by autonomous functioning of the market, which is stimulated by active transactions among such market participants. Consequently, issuing authorities should support this autonomous functioning by arranging amounts and maturities, as well as reopen issues in the primary market.
    However, the JGB market may also see a rapid fall in liquidity in times of global financial market turmoil such as that following the September 2008 Lehman Shock. In such circumstance, issuing authorities have flexibly executed auctions for enhanced-liquidity and buy-backs and measures utilized previously, and have pursued steady and smooth issuance of JGBs while providing liquidity support to the JGB market.
    In the near term, amid prospects of continued JGB issuance in large volumes, to maintain the liquidity of JGB markets remains a critically important point. While a basic stance lies on the autonomous function of the market, the issuing authority views that the use of supplemental means is effective given it remains within the scope required. (Japanese Government Bonds. 2014)

    Issuers with a circle on the left side of its name are issuing public offering bonds mainly to institutional investors nationwide, and issuers without a circle however shows a figure in "Row B" only issue public offering bonds which mainly could be subscribed by local residents.
    The outstanding of public offering bond at the end of FY 2008 is JPY 37,349 billion.
    In terms of outstanding of public offering bond, the largest among prefectures was Tokyo, and the largest among government-designated cities was Yokohama city. (Amount of Local Government Bond issued, sorted by prefecture and Government-designated cities. FY 2008).

    Part 2: Compare with the Vietnamese Government Bond market
    - The differences between the two markets
    Vietnamese Government Bond market: A YOUNG AND GROWING MARKET
    The Vietnam bond market development was boosted when Vietnam entered WTO in 2006. Total market capitalsisation is now at 15% of GDP. >500 government bonds outstanding on some USD 12 billion
    • After 2008 foreign exodus the market today is predominantly Vietnamese with a handful of big players. In the absence of mutual funds and pension funds, banks dare key players.
    Issuers
    • Government bonds: Issued by the Satte Treasury and authorised issuers such as Vietnam Development Bank (policy bank)
    • Municipal bonds: issued by city municipalities and provincial governments.
    • Corporate bonds: issued by SOE’s and private enterprises
    Investors
    • Domestic investor base still small. Ability to absorb supply and demand shocks limited
    • Off-shore investors still limited (no limitation on foreign holdings of bonds)
    Product range
    ● Mostly plain vanilla fixed coupon bonds
    ● Pseudo floaters fixed with 12m average deposit rate quoted by 4 big SOCB’s.
    ● Callable tier 2, convertibles although mostly with mandatory conversion
    Secondary market although on the increase, still thin
    ● Bond market tend to be very domestic
    ● At times >100 bps diff between public sources and the market.
    ● No surprise discrepancy tend to get worse during period of big movements.
    GOVERNMENT BONDS
    Government bonds here are State Treasury bonds and VDB (Vietnam Development Bank).
    • Issued institutional debt since 2000. Steady levels of 8.3-8.6% prior WTO.
    • Approximately 500 government bonds outstanding as of August 2009 with an average size of <USD20m equiv. Listed on HNX.
    • Ceiling rates are defined by MOF
    • In year 2009 Government has issued 19 trillion of VND denominated debt and 470m of domestic USD debt.
    MUNICIPAL BONDS
    • Approximately 65 Municipal bonds outstanding with an average size of USD10m equiv.
    • Only 3 known issuers; Ho Chi Minh City, Hanoi and Dong Nai Province, tightly controlled by central government
    • Ceiling rates defined by MOF (ca 20-30bps over govvies)
    CORPORATE BONDS
    • Corporate bonds market has grown rapidly in 2009 due to improvement in legal framework
    • Approximately 70-80 corporate bonds totaling ca USD 3.5bn equiv outstanding.
    • Credit culture will take some time to develop onshore.
    - No domestic rating service
    - Only some banks and the government itself have public international ratings at this time
    • Mostly vanilla structures but also some subordinated, callable and pseudo-convertibles have been issued.
    (Nguyen Ngoc Anh. 2009).

    - Advantages and Disadvantages of Vietnamese Gov Bond market
    Advantages:
    In the period 2010 - 2014, TTTP has flourished both in terms of volume released on the primary market and liquidity in the secondary market.

    About the legal framework: In the period from 2000 to the present, the legal framework for the issuance of bonds were issued fully synchronized create favorable conditions for the development of the market.
    On measures to support the development of TTTP: In addition to completing the legal framework, the Ministry of Finance has implemented various measures to support the development of TTTP, namely:
    - To diversify the bonds by increasing the long-term debt instruments to meet the needs of investors.
    - Perfecting System technology infrastructure transacted at the Stock Exchange to promote the registration, deposit, bonds traded on the secondary market.
    - Reduce time-to bonds issued in the transaction from T + 6 to T + 5.
    - Implementation of the restructuring scheme on the bond market goods to reduce the bond transaction code, increasing the size listed and increase the liquidity of government bond.
    - Reviewing and improving mechanisms taxes, charges and fees to encourage investors to participate in TTTP. (PHAN THỊ THU HIỀN. 2014)

    Disadvantages:
    - First, concerns about the legislation: Currently there is no regulatory framework for credit rating activities should investors do not have information about the level of risk of the bonds; Securities Law does not permit the sale of securities to control. Therefore, members bond tender bid can not be performed when there is 2-dimensional code is a bid bond; According to Article 15 of the Law on the SBV, only credit institutions to participate in open market operations. This is a major limitation for bidding members are securities firms than commercial banks, non-payment assistance from the central bank; Funds for the implementation of the government bond buying is not stipulated in the Law on the State Budget; work release depends on the management of revenues - budget that fails to observe the change in the market.
    - Second, on the basis of investors on Government Bond: System on Government Bond investors has not changed, focusing on commercial banks (holding approximately 87% of the total volume of bonds), no financial institutions other long-term investors participating in the market and the demand is mainly short-term bonds (bills and bonds 2, 3 years); Foreign investors are only cautiously returning to the country from TTTP in late 2012, holding approximately 13% of the total volume of bonds.
    - Third, information about transactions: Transactions of term (repo) is not true essence statements, being statements into 2 ordinary transactions (outright). Therefore, affect the accuracy of the nature and timing of interest rates; Corporate Bond almost no transaction, if the information is not published as a basis for market valuations.
    - Fourth, the risk of payment: Payment Bonds are being implemented through the Bank for Investment and Development of Vietnam (BIDV), leading to liquidity risks of the Bank as bond trading volumes increasing (PHAN THỊ THU HIỀN. 2014)
    - Prospect of Vietnamese Government Bond market
    2009 - 2010 foreign investors participate in the market is quite conservative with the proportion of primary market participants is 4% (2009) and the proportion of transactions in the secondary market are 18.5% (2010). However, from 2011 to the present, when Vietnam's economy began to show signs of stabilization and recovery, foreign investors have started taking back the proportion of transactions in the secondary market to stabilize at from 20-30%, the value of winning and the level of participation in bidding on the primary market is 12%.
    Bond market has good performance to raise capital for medium and long term budget for investment in service development. From 9/2009 to 9/2014 month, bidding concentrated in Hanoi Stock Exchange has mobilized 654,493 billion to the State budget, the State Treasury which mobilized 513 292 billion - 13 times more than the period 2000 to 2008.
    Specifically, in 2012, bidding to become the dominant channel in mobilizing capital raising for Budget through the issuance of bonds; value mobilize strong bidding. 2013, reached 194,000 billion - nearly 18% of the total social investment.(Khánh Nhi. 2014)

    Part 3: Suggestions and Conclusions

    - Solution to utilize and develop the Gov bond market of Vietnam
    +) Completed a draft decree on the establishment and operation of credit rating firms. The assessment of credit rating plays an important role for businesses to raise capital in the market, investors as well as state agency.
    +) Complete the legal framework of agent system development level I to support the issuance of bonds on the primary market and the liquidity of the secondary market.
    +) Encourage the development of market corporate bond.
    +) Development of derivative products and bonds bond products to suit the level of market development.
    +) Attract foreign investors. Research policies to attract foreign investors to enter the market through the mechanism of tax and hedging instruments. (Tạp chí Tài chính số 11. 2013)
    +) Improving and innovate management thinking and being effective in the use of capital
    +) Improving the legal framework, improving the effectiveness and efficiency of government managements and supervisions

    - Conclusions on your findings regarding the investment decision of your customer.
    +) Vietnamese government bond market is more risky than Japanese government bond market. For investors who prefer risks, Vietnamese government bond market is clearly a better choice to invest. You know a famous principle “High risk, high expected return”. Obviously, Vietnamese government bonds are more risky than Japanese government bonds, so the return of Vietnamese government bonds may be higher than the return of Japanese government bonds.
    +) Additional to according to some report Vietnamese government growing 23% per year on 5 recent years (2009-2014) (Trái phiếu chính phủ tăng trưởng 23%. 2014)

    To conclude. My opinion also experts 's view investor should invest to Vietnamese government bond.
    References:
    (Amount of Local Government Bond issued, sorted by prefecture and Government-designated cities. FY 2008. See on 30/10/2014. <http://www.chihousai.or.jp/english/05/data01.html > )
    (Japanese Government Bonds. 10/2014. See on 31/10/2014. <http://www.bloomberg.com/markets/rates-bonds/government-bonds/japan/> )
    (Nguyen Ngoc Anh. 11/2009. VIETNAM BOND MARKET. See on 2/11/2014. <https://www.bundesbank.de/Redaktion...kfurt_02_anh_paper.pdf?__blob=publicationFile> ).
    (Local Government Bond System and Market in Japan. 08/2010. See on 3/11/2014 <http://www.jlgc.org.uk/en/pdfs/MIC LGB.pdf> )
    (PHAN THỊ THU HIỀN. 30/07/2014. Thị trường trái phiếu Việt Nam và định hướng phát triển. See on 2/11/2014. < http://www.tapchitaichinh.vn/Chung-...-Viet-Nam-va-dinh-huong-phat-trien/52086.tctc> ).
    (Khánh Nhi.23/09/2014.Thị trường Trái phiếu Chính phủ Việt Nam tăng trưởng 23%/năm. See on 02/11/2014 <http://cafef.vn/thi-truong-chung-kh...-tang-truong-23nam-201409231407480808ca31.chn> )
    (Tạp chí Tài chính số 11. 2013. Thị trường trái phiếu Việt Nam và định hướng phát triển. See on 3/11/2014 <http://www.tapchitaichinh.vn/Trao-d...-Viet-Nam-va-dinh-huong-phat-trien/38303.tctc> )
    (Trái phiếu chính phủ tăng trưởng 23%. 24/092014. See on 3/11/2014. < http://www.baomoi.com/Trai-phieu-chinh-phu-tang-truong-23/126/14883742.epi> )

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  2. hoiang1988

    hoiang1988 Member

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