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G-bonds vs access to capital

Apart from the lower capital efficiency due to the amount raised from G-bond issues outpacing the disbursement of public investment capital, which has resulted in the cash balance in the State budget soaring, the excessive capital mobilized from via G-bond sales has also worsened the crowding-out effect.

Higher capital efficiency mandatory

At the 23rd session of the National Assembly’s Standing Committee, the NA Economic Committee called for flexible measures to allocate and utilize capital, and urged restriction of G-bond issues unless the amount of mobilized capital has been used up. Such a proposal is reasonable, as the amount of capital mobilized from G-bond issues since early this year has steadily increased and outpaced allocation, resulting in wastefulness.

Specifically, statistics about G-bond auctions at the Hanoi Stock Exchange show that in the first four months of this year, the amount of bonds (including bonds underwritten by the Government, municipal bonds and T-bills) put forth for auction totaled VND172.5 trillion, rising by 68% year on year. The amount successfully auctioned was VND139.68 trillion, a staggering year-on-year increase of 204%.

Meanwhile, the total amount of investment capital disbursed from the State budget in the four months was estimated at VND131.2 trillion, which although rising 17.9% year-on-year met only 19% of the full-year target. In the first four months, this amount of disbursed capital was smaller than the amount of capital from G-bond issues, at VND131.2 trillion versus VND139.68 trillion, not to count the 2022 surplus amount carried over to 2023.

That is not to mention the rising State budget revenue which has helped maintain a positive budgetary surplus. After having a surplus of VND222.5 trillion in 2022, the State budget in the first four months of this year recorded a surplus of VND145.1 trillion. The budget revenue in the four months fell 5% year-on-year but reached 39.8% of the year’s target, while budget spending though increasing 6.1% was equal to only 24.1% of the year’s estimates.

As public investment projects were barely moving, the amount of capital mobilized by the State Treasury via G-bond issues in recent years has become redundant, eroding the capital efficiency, and possibly leading to a waste in the State budget.

In late 2022, a representative of the State Treasury revealed this State body deposited some VND900 trillion in the banking system. “The amount of VND900 trillion was the cash balance from the central State budget, and the State budgets of 63 cities and provinces, 700 districts and over 10,000 wards or communes, plus the balance from over 100,000 accounts of other organizations and economic entities.”

This amount is divided into two tranches. The first is kept as call deposits at the State Bank of Vietnam as per regulations. The second is kept as time deposits at commercial banks that meet standards of the Finance Ministry, with tenures of one to three months – mostly one-month tenure – with the annual interest rate of some 6%. Though this interest rate is higher than the winning coupon at G-bond auctions, not all deposits are time ones, while call deposits carry a very low interest rate, at under 0.5% a year. Minister of Finance Ho Duc Phoc in November last year revealed that the tranche for call deposits amounted to VND600 trillion while the amount for time deposits totaled only VND290 trillion. (*)

In late 2022, the State Treasury remarked that the central budget revenue was high while disbursed capital for public investment from the central State budget remained low, resulting in a high cash balance. Therefore, this State agency would keep a close watch on the progress of disbursement to adjust the G-bond issues so as to ensure that the mobilized capital is aligned to the capital demand, thus enhancing capital efficiency.

Crowding-out effect

Apart from the lower capital efficiency due to the amount raised from G-bond issues outpacing the disbursement of public investment capital, which has resulted in the cash balance in the State budget soaring, the excessive capital mobilized from via G-bond sales has also worsened the crowding-out effect, as capital for the private sector can be driven down due to the competition for funds that tend to flow into safe channels like G-bonds as the economy is still exposed to risks.

It is apparent that the banking system’s liquidity has improved, but that does not mean enterprises’ access to capital is easier. In the first four months of this year, the credit growth was slighly above 3%, or an increase of VND362 trillion, while in the year-earlier period, the increase was VND755.7 trillion.

G-bonds vs access to capital
In the meanwhile, strong liquidity prompted banks which are also major investors on the bond market to boost investment in G-bonds, though the coupon has tumbled lately. Statistics show that the winning rate at G-bond auctions in the first four months was 81%, almost twice the rate of 45% in the corresponding period of 2022. In the first half of May, this rate was even higher, at 86%.

Data also show that banks with a high cash balance are competing strongly with one another to purchase G-bonds, as the ratio of bids to offers rose to 310% in January-April, compared to 193% in the first four months of 2022. Most of the successful auctions were for long-term bonds of 10 and 15 years, indicating banks are holding a positive view on the interest rate trajectory in the long term.

Like in a seesaw game, the State Treasury issues G-bonds, then deposits the mobilized funds at banks, and in turn, banks with excessive liquidity use the funds to purchase G-bonds for capital gains due to the interest rate differential. By nature, such a volume of capital does not benefit the economy. It is a play for organizations to look for gains from interest sums and for risk management.

Therefore, as the cash balance in the State budget remains high while disbursement for public investment projects remains low, restricting G-bond issues will not only help enhance capital efficiency for the State, but also make access to capital easier for enterprises, when the banking industry with ample liquidity has to boost lending. By then, the crowding-out effect will be eased, making it possible to pull down interest rates to the targeted level.


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