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Possible impacts of the issuance of US$ bonds   2009-03-17 - VietNamNet/TBKTVN

The government has announced a plan to issue $300mil worth of US$ bonds in the domestic market. Dr Vu Thanh Tu Anh, Research Director of Fulbright Economics Teaching Programme, talked about the possible impacts of the issuance.


He said:


Dr Vu Thanh Tu Anh, Research Director of Fulbright Economics Teaching Programme

With the current budget deficit, the government wanted to issue bonds to get money for state spending. However, the latest bond issuances all failed


The main reason for the failure was unattractive interest rates, which proved to be much lower than the levels expected by investors. Then the government thought of issuing bonds in dollars as it unsuccessfully issued bonds in VND.


The US$ bond issuance could have three impacts.

First, the issuance could influence the interest rates on the market. If the gap between the VND and US$ interest rates is as high as 4%, while the inflation rate is expected to be 6-7% this year, people will convert VND into US$ to purchase bonds if the bond interest rates are high enough.


Second, the issuance could cause dollarisation. The dollarisation level now in Vietnam is about 30%. However, with the issuance of bonds in dollars, I’m afraid that the dollarisation level would soar drastically.


If so, we would find it difficult to apply flexible monetary policies, simply because we used a lot of dollars.


Third, this could impact the exchange rate. If people convert VND into dollars, the dollar will appreciate.


The dollar appreciation will make import-export companies and companies which use dollars, suffer. It is clear that this will have very big impacts on Vietnam’s economy.


What is your comment about the 4% interest rate subsidy programme which is being implemented?


The policy has been implemented by many countries in the world, and many of them have not been successful with the policy. One of the reasons is failure to control loans.


In Vietnam, the interest rate subsidy programme kicked off this year. Loans in the past month have reached VND93tril, but actual credit growth is 0.5% only.


This means that there have been signs of debt turnover (getting new loans to pay old debts). Businesses have every reason to do that. The lending interest rate was 21% per annum last year, while the rate is 6% now.


Other problems are the terms of loans and the list of those eligible for the programme. Two groups of businesses have been added to the list of those eligible for the programme, mining and finance companies.


Under the current regulations, companies can only borrow capital under the interest rate subsidy programme to use as short-term working capital. What could be the ‘working capital’ for finance companies?


I also cannot understand why we need to support mining companies.


Are businesses worried that the policies on supporting exports will violate WTO commitments?


It is really a complicated problem. The government needs to be very cautious with any support policies at this moment, as all countries in the world have strengthened trade preventive measures on imports.


Supporting exports proves to be the thing that needs to be done. But it is still necessary to consider which measures to apply. Supporting enterprises in re-training labour, supporting in trade promotion and assisting in research and development prove to be effective ways of supporting businesses, which in no way violate WTO commitments.


As export markets have narrowed, businesses have focused on the domestic market. Do you think that their plan to focus on the domestic market will be feasible in the current conditions?


It is not so easy to return to the domestic market in the short term. A lot of policies have been designed to encourage exports and cater to foreign enterprises rather than domestic ones. A lot of products have been designed to fit export markets rather than the domestic market, from design, distribution and marketing method.


However, in the long term, businesses still need to target the domestic market.


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