Anti-China Riots Spoil Vietnam Dollar Bond Rally: Asean Credit

Jun 03, 2014 2:30 am ET

June 3 (Bloomberg) -- Vietnamese dollar bonds are missing out on a developing-nation rally on concern a territorial dispute with China that has sparked deadly riots will deter foreign investment.

The securities gained 0.5 percent in May, the least since January and the worst performance among 12 regional sovereign indexes compiled by HSBC Holdings Plc. Asian dollar notes surged 2.2 percent in their biggest monthly advance in almost two years as disappointing U.S. economic data pushed down Treasury yields, boosting demand for higher-yielding bonds.

Prime Minister Nguyen Tan Dung said May 30 that Vietnam has prepared evidence and is ready to file a legal suit challenging Beijing’s claim to waters where China has placed an oil rig, risking economic retaliation from its major trading partner. Some foreign-owned factories were forced to close temporarily because of anti-Chinese riots that began May 11, helping to slow gains in Vietnamese dollar notes that had been the best performers in Southeast Asia in the six months through April.

“The recent anti-China protests may undermine Vietnam’s appeal as a destination for foreign direct investment over the medium term,” Vincent Tsui, an economist in Hong Kong at AllianceBernstein LP, which oversees about $457 billion globally, said in a May 29 e-mail interview without specifying a timeframe. “Security wasn’t a problem in the past.”

Workers Killed

China National Offshore Oil Corp. triggered the tension when it placed an exploration rig about 120 nautical miles off the Vietnamese coast on May 2. Metallurgical Corp. of China said May 20 that four of its workers were killed in an attack on May 14. Formosa Chemicals & Fibre Corp. and China Steel Corp. were among several Taiwanese companies that had to temporarily halt operations at the height of the riots in mid-May.

China accounted for 15 percent of Vietnam’s global trade last year, according to the Southeast Asian nation’s General Statistics Office.

“Anti-China riots and the fear that in the medium- to long-term foreign-direct investment flows between China and Vietnam will go down have negatively impacted sentiment for Vietnam,” Sergey Dergachev, who helps oversee about $10 billion as a senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said in a May 29 e-mail interview. Gains in dollar debt from Indonesia and India have also reduced the allure of Vietnamese notes, he said.

Indonesian and Indian U.S. currency bonds rallied 4.2 percent and 2.9 percent in May, according to HSBC indexes, amid speculation new leaders will pursue economic reforms.

Tight Spread

Vietnamese dollar securities have advanced 7.3 percent in the past year, the best performance after Sri Lanka among the 12 indexes tracked by HSBC. Inflation has stayed below 5 percent over the last four months and has fallen from more than 20 percent in 2011. The economy will expand 5.7 percent this year, compared with 5.42 percent in 2013, according to the median estimate in a Bloomberg survey.

The premium investors demand to hold Vietnam’s 6.75 percent dollar bonds due January 2020 over similar-maturity Treasuries reached 201 basis points on April 3, the least since the notes were issued in 2010. The comparable spread that day for dollar debt due 2020 from Indonesia, ranked five levels higher than Vietnam by Moody’s Investors Service, was 207.

“Even before the protests, Vietnam’s sovereign spread was already too tight,” AllianceBernstein’s Tsui said. “In terms of valuation, Vietnam’s dollar bonds are less attractive” than the country’s higher-rated peers, he said.

Tax Relief

Vietnamese officials were quick to offer compensation to companies affected by the protests. Prime Minister Dung directed agencies to delay collecting taxes for up to two years and said workers could be supplied and other levies reduced for firms that reported damage, according to a May 21 statement on the government’s website.

“We have timely contained the incident and successfully prevented its recurrence,” Dung said in a May 30 interview. “Vietnam has also provided timely and effective assistance to the affected enterprises, enabling most of them to resume normal production and business activities.”

U.S. companies are committed to staying in Vietnam and “appreciate” the way its government is handling the dispute with China, U.S. Secretary of Commerce Penny Pritzker said at a briefing in Hanoi yesterday.

Vietnam’s dong weakened 0.3 percent in May, the most since June, data compiled by Bloomberg show. The country’s benchmark stock index lost 2.8 percent, although it has rallied 8.5 percent since closing at a four-month low on May 13. Foreign investors added about $99 million to their holdings last month.

Vietnam’s importance as a low-cost manufacturing hub means Chinese companies are unlikely to relocate factories from the country, Union Privatfonds’ Dergachev said, adding that he hadn’t reduced or added to holdings of Vietnamese dollar debt since the dispute began.

Supply Disruption

The cost of insuring Vietnamese bonds for five years using credit-default swaps fell four basis points, or 0.04 percentage point, in May to 206, according to CMA. That compares with a decline of 34 basis points to 140 for Indonesian debt and a 15 basis-point drop to 86 for Philippine notes.

The protests will hurt Vietnam in the short term because the country is reliant on China for the supply of parts and materials, especially for its electronics and textile industries, according to Hai Nguyen, the Ho Chi Minh City-based head of fixed income at the local unit of Manulife Asset Management, which oversees $44 billion of Asian debt.

“The tension might result in the disruption of supply and reduce the output for export,” Hai said in a May 30 phone interview. “In the longer term this could be an opportunity for Vietnam to be more open to the West and to be less dependent on the Chinese economy.”

--With assistance from K. Oanh Ha and Nguyen Dieu Tu Uyen in Hanoi.