Strong foreign inflows injected excessive liquidity in the banking system. Thanks to strong foreign inflows, especially from the Sabeco divestment, SBV purchase a large amount of USD in December (more than USD3.5 billion on December 22) and pumped an equivalent amount of VND to the banking system.
November bond issuance surged 21.9% MoM to VND9.15 trillion (USD405 million). However, the VST raised only VND2.9 trillion (USD129.7 million) through G-bonds, down 58% MoM, G-backed bond issuance surged to VND6.22 trillion (USD275.3 million) from VND600 billion (USD26.6 million) in October thanks to more attractive yields.
Bond yields slid amid ample liquidity, low issuance pressure and low inflation. Primary bond market issuance surged 92.4% MoM to VND7.51 trillion (USD332 million) in October, partly thanks to the resumption of G-backed bond issuance after a five-month absence. The winning rate also rose to 60.5% (equally for both G-bonds and G-backed bonds) from nearly 49% in the previous month.
Winning rate for bond issuance increases from previous month. In September, the Vietnam State Treasury (VST) issued VND3.9 trillion (USD171 million) of G-bonds, up 22.8% from August. The winning rate also improved to 49% from 24.5% in August due to lower bond supply from VST while demand maintained stable.
Low offered yields led to unsuccessful auctions. Only VND3.2 trillion (USD141.3 million) of G-bonds were sold in the primary market in August (-79% MoM) out of VND13 trillion (USD573 million) offered, leading to a winning rate of 24.5% (vs 92.5% recorded in July).
The Vietnam State Treasury (VST) amended its 2017 G-bond issuance plan by halting issuance of three- and less-than-three-year bonds and reducing its 5Y bond issuance target to focus more on long tenor bonds instead. During the review period of July 17 to August 18, VND8.9 trillion (USD392.9 million) of G-bonds were issued in the primary market, a 53% drop from the previous reviewed period due to low yields, which discouraged investor demand, and a high completion rate of the annual target
Interbank interest rates declined further as liquidity remained high. Although credit grew by a strong 9.06% in H1 2017, from the end of 2016, liquidity in the banking system has remained high due to slow disbursement of allocation and capital for basic construction investment (state expenditures for investment and development completed only 23.3% of the FY2017 target in 5.5M 2017).
Bond yields should remain low in coming weeks due to lack of supply pressure and high liquidity in the bank system. Credit growth, which has risen at a slower pace recently (according to SBV statements), has partly helped to elevate liquidity in the interbank market and reduce interbank interest rates during our May 15 – June 16 review period. However, we believe credit growth will regain strong momentum, especially in the last quarter of the year, as it usually does.
Bond demand weakened because of strong credit growth in 4M 2017, the absence of G-backed bonds and the long holiday at the beginning of May. From April 17 to May 12, the State Treasury successfully auctioned VND18.1 trillion (USD797.4 million) on the primary market, but with a lower winning rate (72.1%) than in the previous period (81.1%) due to weaker bond demand, especially in the first three weeks of the reviewed period.
Several factors caused interbank interest rates to remain high for the first three weeks of the reviewed period. Interbank interest rates stayed high at 4.5%-4.7% from the beginning of the reviewed period on March 20, but started to drop slightly from April 12. Strong credit growth increased demand for VND capital in interbank market and reduced liquidity in the banking system during the period. Funding needs to pay for imports, which grew 24.9% YoY in 3M 2017,