HO CHI Minh City has passed a new rule allowing foreign investors to purchase municipal bonds.
The city plans to issue VND2 trillion ($130 million) worth of the bonds this year, half of them by early-September. The Ho Chi Minh City Fund for Urban Investment and Development (HiFu) and the Department of Finance and Pricing will be responsible for the issuance.
Both organisations are considering a wholesale issuance but are waiting for the government’s decision on the coupon rate for five-year bonds. In principle, municipal bonds must carry higher rates than government bonds and lower than those of medium and long-term bank loans.
But investors are worried the planned rate – estimated to be only about 30 basis points higher than that of government bonds – will not be attractive enough. They say the rate needs to be higher because interest will be subject to income tax and municipal bonds are a riskier investment than government bonds.
Investors say the rate should be at least three-quarters of a per cent higher than that of government bonds.
But Hifu general director, Giao Thi Yen, says the bonds will be attractive because compound interest will be calculated every Local banks say they are not worried the bonds will threaten future deposits.
“If the city mobilises only VND2-3 trillion every year [by issuing municipal bonds], commercial banks like us will feel no negative impact,” Vietcombank’s Ho Chi Minh City branch director Nguyen Phuoc Thanh said.
The Ministry of Communications and Transports estimates Ho Chi Minh City will need $2.6 billion per year for roads, bridges, railways, metro and ports before 2005.
Between 10 and 15 per cent of this money will come from the city’s budget. The rest was to have been sourced from bank loans but Ho Chi Minh City banks said they could provide only $200 million in loans a year — just 7.5 per cent of the required funds.
Financial experts pointed out large amounts of money could be mobilised by issuing municipal bonds.
Decision 146 signed by the prime minister has already cleared the way for foreign investors to purchase of government bonds on the market.
Foreign life insurers operating in Vietnam such as Prudential, AIA and Manulife are reported to be very interested in the bond market.