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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang GRADUATION THESIS Major: Banking and International Finance PROPOSALS FOR DEVELOPMENT OF VIETNAMESE BOND MARKET www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 1
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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Acknowledgement This graduation thesis is the result of thirteen weeks of research and writing during the spring of 2015. It has been an interesting and learning experience. In fulfilling this thesis, I would like to give my special thanks to many people for their significant help, contribution, and recommendations during my writing process. First and foremost, special mentions and grate thanks must go to Mr. Phan Tran TrungDzung, my supervisor at Hanoi Foreign Trade University. With his master knowledge and experience in writing thesis, he has wholeheartedly helped me in writing this thesis. I could not have been able to complete this thesis without his positive suggestions and guidance. Secondly, I would also like to give my heartfelt thanks to the authors who provided me with valuable books for my thesis. My appreciation is to my family and my friends for their supports and encouragements. Gratefulness is to the readers also, whose feedback will help much in improving the thesis. Hanoi, May 2015 Chu Le Thuy Quyen www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 2
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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Contents Abbreviation Content of Tables and Graphs Preface Introduction CHAPTER 1: OVERVIEW OF BOND AND BOND MARKET ............................................. 4 1.1. Overview of bonds ....................................................................................................... 4 1.1.1. Definition and characteristics of bond .................................................................. 4 1.1.2. Types of bonds...................................................................................................... 5 1.1.3. Sources of profit from bonds ................................................................................ 7 1.1.4. Factors affecting the price of a bond .................................................................... 8 1.1.5. Risks in investing bonds ....................................................................................... 9 1.2. Overview of bond market .......................................................................................... 11 1.2.1. Definition of bond market................................................................................... 11 1.2.2. Roles of bond market.......................................................................................... 13 1.2.3. Types of bond trading ......................................................................................... 15 1.3. Factors affecting to bond market ............................................................................... 17 1.3.1. Political and economic stability.......................................................................... 17 1.3.2. Legal environment .............................................................................................. 17 1.3.3. Participation of objectives .................................................................................. 18 1.4. Credit rating ............................................................................................................... 18 1.4.1. Definition of credit rating ................................................................................... 18 1.4.2. Function of credit rating ..................................................................................... 18 1.4.3. The importance of credit rating agencies............................................................ 19 CHAPTER 2: OPERATION OF VIETNAMESE BOND MARKET ..................................... 22 2.1. Formation and development of Vietnamese bond market ......................................... 22 2.1.1. Legal framework for the development process of Vietnamese bond market ..... 22 2.1.2. The process of Vietnamese bond market’s formation and development............ 24 2.2. Operation of Vietnamese bond market ...................................................................... 25 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 3
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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang 2.2.1. Situation of bond issuance .................................................................................. 25 2.2.2. Bond trading status ............................................................................................. 37 2.3. Assessing operational status of Vietnamese bond market ......................................... 39 2.3.1. General comments .............................................................................................. 39 2.3.2. Achievements...................................................................................................... 41 2.3.3. Limitations .......................................................................................................... 44 2.4. Limitations’ cause...................................................................................................... 46 2.4.1. Small market size, low liquidity ......................................................................... 46 2.4.2. Liquidity of the bond market .............................................................................. 47 2.4.3. The lack of market makers.................................................................................. 48 2.4.4. The lack of specified credit rating agencies........................................................ 50 2.4.5. Awareness of corporation and investors about bonds are limited ...................... 52 2.4.6. The competitiveness of bonds is low.................................................................. 54 2.4.7. The legal system is not appropriate .................................................................... 54 Chapter 3: PROPOSALS FOR DEVELOPMENT OF VIETNAMESE BOND MARKET.... 56 3.1. Vietnamese bond market’s prospect in the future...................................................... 56 3.1.1. Opportunities and challenges for the development of bond markets in the coming period ............................................................................................................................ 56 3.1.2. The views and orientation Vietnamese Bond Market Government.................... 58 3.2. Lessons learned from the development of bond markets in some countries.............. 59 3.3. Proposals for developing Vietnamese bond market................................................... 62 3.3.1. Stabilizing macroeconomic environment, encourage saving and investment .... 62 3.3.2. Diversifying bonds, raising market liquidity ...................................................... 62 3.3.3. Establishing market makers to facilitate operation of the bond market ............. 65 3.3.4. Contributing and developing system in Vietnam credit rating ........................... 67 3.3.5. Raising the awareness of businesses and investors on the bond market ............ 69 3.3.6. Completing the legal system related to the operation of the bond market ......... 70 Conclusion ................................................................................................................................ 72 References www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 4
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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Abbreviations MOF: Ministry of Finance VGB: Vietnamese Government Bond ADB: Asian Development Bank CIC: Credit Information Center OTC: Decentralized market (Over the Counter) Content of Tables and Graphs Tables Table 2.1: Size of Government bonds from 2006 to 2014........................................... 26 Table 2.2: Interest rate of Vietnamese government bond from 2013 to Q1/2015 ....... 29 Table 2.2: Value of corporate bond issuance in recent years ...................................... 35 Table 2.3: Size and Composition of Local Bond Markets........................................... 37 Graphs Graph 2.1: Trading volume and Successful biding rate............................................... 28 Graph 2.2: Growth rate of Asian Countries ................................................................. 34 Graph 2.3: Trading and Listed value of bonds 2005-2008 .......................................... 38 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 5
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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Preface A developed securities market consists of the following assets: stocks, bonds, and treasury certificate and derivative products. However, looking back at the Vietnamese securities market at the moment, it has yet to achieve a high level or in other words is not the internationally recognized as a developed securities market. The causes of this issue include many factors such as the size of the market or the market capitalization, the legal framework, the liquidity of the market ... However; the size of goods traded bonds in the total size of the market is one of the most important factors. In total daily trading volume on the official or unofficial market the stock items are a big attraction for investors, while the trading of commodity bonds are still silent and seems to be rather strange concept for most investors, especially domestic investors. Meanwhile, for foreign investors and banking institutions, the commodity bonds are indispensable items in the portfolio even commodities investment strategy for improving fertility rates interest rate risk as well as the list of these units, and they have also achieved some good results. Vietnamese securities market was born this way more than nine years, while the Vietnamese bond market is only beginning to develop more than three years and is promising as an attractive market for investors and financial institutions. Study, learn some basic content of bonds, actual formation, operation and development of the bond markets of some countries in the world to compare with reference to the situation in Vietnam stock market Men to be given a number of measures to promote and develop the bond market in Vietnam, which is now the main goal to choose and studies on the subject. In this project the author neglected to mention the formula calculation or valuation of the bonds that have focused on analyzing the current situation and development formed so that gives some solution for markets. Due to the limited time and knowledge of the writer, this thesis inevitably contains some limitations and shortcomings. Therefore, I would like to receive every feedback or comment from instructor, teachers and all people who are interested in this topic to improve the quality of this thesis. 1
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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Introduction Rationale Bonds are a useful tool to help governments, local governments and enterprises to mobilize capital for development investment. At the same time, bonds are also a tool on securities market helps investors get profit and limit risk. The presence of bond markets has varied over the financial markets, overcome some of the limitations of the market and facilitate the transfer of capital, enhancing social savings. Because of the important role of the bond market that the countries with economies in developed markets and countries with developing economies are interested in this market. At present, Vietnam has a lot of bonds are issued such as government bonds, local government bonds, corporate bonds with different purpose and maturities. According to the Ministry of Finance, the bond market last time there was a remarkable development, system specific mechanisms and policies for bond market performance so far has been enacted relatively complete, covering most of the issuance and trading of bonds, created the foundation necessary to encourage, promote and diversify the forms of long-term capital mobilization through issuing bonds. In terms of market operators, in 2014, the bond market was more volatile. Government bond yields continued to be operated flexibly, closely followed developments of the market reality, meeting the requirements of capital market development, gradually coordinated with the operator of the central bank monetary policy and as a basis for the mobilization of capital in the current period. In terms of the number of bonds issued are also constantly increasing. However, Vietnamese bond market also exhibited many limitations. According to statistics, the majority of bonds AseanBondOnline in Vietnam's government bonds, only some are allowed to issue corporate bonds, such as Vietnam Electricity Group, financial company shares oil and gas, investment and development companies freeway ... the aim is to invest long-term projects. On the other hand our country's stock market has mainly occurred stock transactions, bond transactions are limited, mostly to buy and hold to maturity. To improve the efficiency of raising capital, in order to perform the tasks of economic development - social, integration needs the world economy, the development of Vietnam bond market became a mobilization channel capital quickly, efficiently, addressing the demand for capital investment projects, the budget deficit of the government, needs capital for the production and reproduction of the business expansion as well as create additional industrial goods to market demands faced by the government and the enterprises. 2
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Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang According to the above reasons I chose research topics: “PROPOSALS FOR DEVELOPMENT OF VIETNAMESE BOND MARKET” Purposes for study First: To systemize fundamental issues of bonds and bond markets Second: To evaluate the activity of our country's bond market Third: Since the limitations exist given some suggestions to develop the bond market in the future Objectives and scope of the study Objectives of the research are the issue related to the issuance and trading of government bonds and corporate bonds of Vietnam. Besides thesis also examines the operation of the bond market in some countries such as the USA, the East Asian countries to compare and have better overview of our country's bond market. About time, limited research thesis is the operation of Vietnam bond market from 2006 to 2015. Methodology To resolve the purposes of the topics, I have to apply theoretical subjects: Financial Market and Institutions, Corporate Finance, Financial Investments, Stock, ... underlying reasoning; Besides, I use statistical methods and data aggregation methods to assess the operational status of Vietnamese bond market; using methods comparable to some local bond market for further evaluation of Vietnam bond market, using the experience of other countries as a basis to propose appropriate solutions, to promote market Vietnam bonds advocacy and development. Structure of the thesis The thesis consists of 72 pages, the structure as follows: Chapter 1: Overview of bond and bond markets Chapter 2: Operation of the Vietnam Bond Market Chapter 3: Proposals for development of Vietnamese bond market. 3
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