July 14h 2008

Fixed Income Weekly

4th weekJuly 14h 2008
of November
September 2009

1-yr Govt. Bond Yields (%) Trading Values (Billion VND)

Weekly bond yields & trading
Week beginning Week ending Spread Total value < 3 yrs 3 - 5 yrs > 5 yrs
02/11 - 06/11 9.29% 9.32% 0.0% 1269 83.1% 16.9% 0.0%
09/11 - 13/11 9.42% 9.58% 0.2% 1480 70.3% 17.8% 11.9%
16/11 - 20/11 9.74% 10.09% 0.4% 1508 36.5% 6.0% 57.5%
23/11 - 27/11 9.97% 10.28% 0.3% 484 95.2% 0.0% 4.8%
30/11 - 04/12 10.19% 10.26% 0.1% 52 100.0% 0.0% 0.0%
Source: Bloomberg and Hanoi exchanges

Market Overview
• The week ending on December 4th, 2009 experienced a another rise in bond yields accompanied with a total col-
lapse in turnover after a 68% drop the previous week. Recently only bonds tenors of 3-years or less have been
sought and accounted for about 95% of the bond trading value in the 1st week of November.

• Bond yields have now largely completed their adjustment following the 1% base rate hike the week before last.
However with speculation rife over future possible interest rate hikes on raised inflationary expectations, inves-
tors are clearly reluctant to trade at the moment. The aftershock from the recent policy moves continues to cast
a shadow over market sentiment.

• Money market rates led by the overnight rate continue to increase as SBV’s liquidity window through the OMO
continues to come up short. Deposit rates from 1 month all the way out to 60 months have in many cases
pushed over 10% in the past week and are now close to the new ceiling of 10.5%.

• The target of all this tough medicine; stabilising the forex market has had a calmer few days as the SBV added
some supply and guided the interbank rates down towards the upper band of the trading range in the past two
or three trading days. However dollar supply remains tight and the unofficial rates remain stubbornly high as a
consequence.

• The authorities are now considering some action to restrict the operation of the gold trading floors which is
viewed as one of the direct causal factors behind volatility in the forex market. Any crackdown especially of un-
regulated trading floors may cause dollar demand to drop off. We wait and see what happens here.

• The next week or two should see a peaking of year-end US$ demand and thereafter forex and money markets
should enter calmer waters with remittance flows and the cooling down of economic activity improving the sup-
ply/demand balance. However with the risk of an inflation shock and the interest rate cycle having entered a new
phase the bond market is likely to remain rather tense for some time.

Premium between domestic and international prices of gold (USD/Oz)

Source: Reuters and HSC Calculations
1250 10

1200 Premium (%)

Domestic (mid rate, US$/oz ) 8
1150 International (mid rate, US$/oz)
6
1100

1050 4

1000
2
950
0
900

850 -2
06/01/2009

06/09/2009

06/17/2009

06/25/2009

07/03/2009

07/11/2009

07/19/2009

07/27/2009

08/04/2009

08/12/2009

08/20/2009

08/28/2009

09/05/2009

09/13/2009

09/21/2009

09/29/2009

10/07/2009

10/15/2009

10/23/2009

10/31/2009

11/08/2009

11/16/2009

11/24/2009

12/02/2009

Fiachra Mac Cana Head of Research Head Office Hanoi Office

+848 3 8233299 fiachra.maccana@hsc.com.vn Level 1, 2 & 3 Capital Place Building, 6 Le Thanh Tong St.,
6 Thai Van Lung St., District 1, HCMC Hoan Kiem District, Hanoi
Nguyen Tan Thang Economist & Head of Fixed Income Research T: (+84 8) 3 823 3299 T: (+84 4) 3 9334693
Doan Thi Thu Hoai Analyst F: (+84 8) 3 823 3301 F: (+84 8) 3 9334822
www.hsc.com.vn
+848 3 8233299 thang.ngt@hsc.com.vn; hoai.dtt@hsc.com.vn Page 1

www.hsc.com.vn
 July 14h 2008

4th week of November

September 2009

Daily Overnight Interbank Rates

Source: Reuters Fixing rates and HSC Collection

11.8%
10.8%
9.8%
8.8%
7.8%
6.8%
5.8%

10/14/2009

10/22/2009

10/30/2009

11/15/2009

11/23/2009
9/12/2009

9/20/2009

9/28/2009

10/6/2009

11/7/2009

12/1/2009
9/4/2009

ON rates - Reuters Fixing ON rates - HSC Collection

Money market
• Interbank overnight rates increased to 11.5% last week. We use both Reuters data and our own HSC model to
track these numbers; giving a composite view of the trend. Clearly the liquidity squeeze shows no sign of abat-
ing and some smaller banks are struggling a bit to raise short term funds.

• HSC collated rates shows an even more significant increases in ON rates in the past few days. We have seen
one-week-tenor rates being recorded as high as 13-14% (1-2% above the ceiling rate). With soaring year-end
demand and reduced liquidity rates are likely to peak in the next two weeks.

• One goal of the about face in SBV policy is the need to cool down 34.5% YTD credit growth before the year-end.
The OMO is one policy tool in determining liquidity levels and in recent weeks the banks have been on a very
thin diet. Talk of possibly raising reserve ratios has been denied however it remains an option.

• Another policy tool has been the deposit rate cap of 10.5% which was raised only 50 pbs after the rate hike,
effectively limits deposits growth and prevents access to the largest pool of capital used by banks to fund loan
growth. Bank deposit rates have quickly bumped up against this ceiling already across most tenors and the SBV
is monitoring rates closely.

• Therefore deposit rates would move even higher if the SBV lifts the ceiling deposit rate. This signals that a fur-
ther interest rate hike in Q1 cannot be ruled out.

Open Market Operations, Weekly Net Buying 2009 Average Deposit Rates
Source: HSC Collection
Billion VND 18%
Source: Reuters and HSC Calculations
17%
12000
16%
10000
15%
8000
14%
6000
13%
4000
12%
2000
11%
0
10%
-2000
9%
-4000
8%
-6000
7%
-8000
April-08

April-09
April-09
May-08
May-08

September -08
September -08

May-09

September -09
October -08

October -09
October -09
August -08

November-08
November-08
December-08

August -09
August -09

November-09
July-08
July-08

July-09
June-08

June-09
June-09
March-08
March-08

March-09
February-09
January-09
January-09
4-Dec-09
2-Oct-09
9-Oct-09
16-Oct-09
23-Oct-09
30-Oct-09
6-Jul-09

3-Aug-09
13-Jul-09
20-Jul-09
27-Jul-09

10-Aug-09
17-Aug-09
24-Aug-09
31-Aug-09
14-Sep-09
18-Sep-09
25-Sep-09
1-Jun-09
8-Jun-09

6-Nov-09
15-Jun-09
22-Jun-09
29-Jun-09

13-Nov-09
20-Nov-09
27-Nov-09

www.hsc.com.vn Page 2
 July 14h 2008

4th week of November

September 2009

4th December 3th December 2nd December 1st December 30th November
Unofficial Rate 19,350/19,400 19,200/19,300 19,420/19,460 19,450/19,550 19,450/19,500
Reference rate 17,943 17,945 17,948 17,953 17,956
Upper ceiling 18,481 18,483 18,486.44 18,491 18,494
Band 3% 3% 3% 3% 3%

Source: HSC collection

FX Market
• Interbank rates have been brought more line with the upper ceiling band in recent trading days through a
combination of additional US$ supply from the SBV to selected importers and strict monitoring of the interbank
markets. But transactions levels have dried up and with liquidity needs not being met in the interbank market the
unofficial market rate has taken up the slack and remains stubbornly high.

• The SBV is of course hoping that by limiting dong liquidity demand for US$ will abate. This is very likely but
may take some time. Meanwhile fluctuations in the gold market is a big complicating factor and the SBV has
turned its attention there to try to plug this leak. Demand for gold and the unofficial forex market rates have been
closely linked. And the SBV hopes to control one through the other.

• Confidence that they will succeed is growing and the USDVND non-deliverable forward outright contracts con-
firm this. However, whatever about the short term, given the widening of the trade deficit (may hit $12 billion at
year end) and uncertain capital inflows, the medium term VND/US$ outlook has not changed.

• Meantime the SBV has announced that it stands ready to sell dollars to any bank with a 5% dollar deficit and
they stand ready to punish any bank that trades outside the official band. However with the news that the na-
tional foreign reserve is currently at US$16 billion which is, according to our calculations, less than two and a
half months of current money import the bank has limited liquidity to supply to the market.

• Therefore the current diet of limited supply and heavy enforcement will continue until the SBV plugs all the
leaks it can and waits for the current policy to do its job. If we can make it past the year-end without any further
hiccups then the worst will be over for now. And we are betting that they will. But medium to longer term we are
likely to revisit this issue time and again.

VND vs US dollar, official band and unofficial rate USDVND NDF Outright
Source: Reuters and HSC Calculations VND
Source: Bloomberg
06/01/2008
06/20/2008
07/09/2008
07/28/2008
08/16/2008
09/04/2008
09/23/2008
10/12/2008
10/31/2008
11/19/2008
12/08/2008
12/27/2008
01/15/2009
02/03/2009
02/22/2009
03/13/2009
04/01/2009
04/20/2009
05/09/2009
05/28/2009
06/16/2009
07/05/2009
07/24/2009
08/12/2009
08/31/2009
09/19/2009
10/08/2009
10/27/2009
11/15/2009
12/04/2009

22000
USD/VND
21500 12M NDF
21000 6M NDF
15,500
20500 3M NDF

16,500 20000 1M NDF

19500
17,500 19000
18500
18,500
18000
10/10/2009
10/13/2009
10/16/2009
10/19/2009
10/22/2009
10/25/2009
10/28/2009
10/31/2009

11/12/2009
11/15/2009
11/18/2009
11/21/2009
11/24/2009
11/27/2009
11/30/2009
10/1/2009
10/4/2009
10/7/2009

11/3/2009
11/6/2009
11/9/2009

12/3/2009

19,500

Official rate Actual rate

www.hsc.com.vn Page 3
 July 14h 2008

4th week of November

September 2009

Bond Issuance Pipeline

Corporation Issue date Maturity (years) Volume (VNDbil) Coupon
2 1st-yr 10.5%, 2nd-yr 4-bank-average-rate + 2.6%
Maritime Bank To be finalized in October 09 1000
3 1st-yr 10.5%, 2nd-yr 4-bank-average-rate + 2.8%
Vietnam Steel Corporation Not yet finalized 3 1000 1st-yr 11.25%, 2nd-yr 4-bank-average-rate + 3.5%
BIDV Planned to be issued in Dec 09 2 2000 TBC
Vietcombank Not yet finalized 3 2000 - 3000 TBC
Eximbank Not yet finalized 2-3 2000 - 2500 1st-yr 10.4%%, 2nd-yr 4-bank-average-rate + 2.6-2.8%
Source: HSC collection

Bond Market
• The rally in bond yields slowed down last week as the prime rate increase has now been priced in. However, medium
term up tick in overall yields has now been firmly established since been October. From 15/10/2009 to 04/12/2009,
1-year government yield has increased by 111 bps. And more significantly with yields moving up, turnover dwindled
away to almost nothing last week. This market’s appetite for Vietnamese bonds is quite low and for long-term tenor
bonds in particular. And if the SBV moves on rates again in Q1 we may see a similar overshooting of yields before
adjustment.

• The main participants in Vietnam bond market are local banks who trade bonds for liability matching purposes. And
foreign banks are completely shying away from Vietnam bond market because of the four keys risks liquidity, inflation,
exchange rate, and credit risk all present at the moment. And we don’t expect those risks to abate for the time being.
Therefore we don’t see trading values in the secondary market picking up much any time soon. Even the most active
bonds are trading a mere VND2,000 billion or less per week. Corporate bonds are still unattractive to all but a few
institutions mainly because of the lack of credit ratings. Having said that KBC did manage to place come corporates
bonds last week.

• Going forward we see inflation risk is the principal risk for the bond market next year. With money supply and credit
growth at high levels for most of the year and a recent 5.4% depreciation higher inflation would seem a foregone con-
clusion. The link between inflation and credit growth but is not contemporaneous of course. In developed market, this
link has a lag of 6-8 months. But in Vietnam we estimate the lag is shorter, with inflation following credit growth pattern
after just 5-6 months.

• Therefore the bond market is bracing itself for another possible rate hike as soon as Q1 depending in the CPI number
releases in January and February. As the SBV’s main target now is to stabilise the economy and get a grip on the BOP
and the currency, clearly growth is taking a back seat. And therefore we can see significant parallel shifts of the yield
curves.

• Meanwhile we also see some banks may be under pressure to unwind some bond positions to improve liquidity pur-
pose at the end of the year. With volatility risk high and investors risk-averse only short-term bonds (less than 3 years)
are seeing any action.

VN Government Bond - Fixing Yield Curves Credit growth vs CPI growth in Vietnam
Source: Bloomberg Source: State Bank of Vietnam and General Statistics Office Inflation
11.6% maximized
Credit
12/1/2009 70% 30.0%
Inflation maximized
11.1% 11/16/2009 60%
Credit starts
starts growing 25.0%
growing
10.6% 10/15/2009 50%
20.0%
9/15/2009
40%
10.1% 8/17/2009 15.0%
30% Credit
9.6% 7/15/2009 minimized 10.0%
20% Inflation
6/15/2009 8-month 5-month
minimized
Delay
9.1% 10%
Delay 6-month 5.0%
Delay

8.6% 00% 0.0%

May-06

May-07

May-08

May-09
Mar-06

Mar-07

Mar-08

Mar-09
Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09
Sep-05

Sep-06

Sep-07

Sep-08

Sep-09
Nov-05

Nov-06

Nov-07

Nov-08

Nov-09

8.1%
1Y 2Y 3Y 5Y 7Y 10Y 15Y Credit growth Y/Y (Left) CPI growth Y/Y (Right)

www.hsc.com.vn Page 4
 July 14h 2008

September 2009

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