Emergence of Vietnam in the offshore capital markets

The following article is written by Euromoney and sponsored by HSBC.

Vietnam is having a great trade war. Not only is it still Asia's fastest-growing economy – it is winning the competition for global businesses shifting supply chains away from China.

Household names from Amazon to Apple to Google to Kyocera to Nokia are choosing to manufacture in Vietnam instead of Asia's biggest economy. They're joining Canon, Samsung and a who's-who of multinationals tapping Vietnam's young and growing population, enviable geographic placement and potential to surpass Singapore's economy soon enough.

These shifts are breathing unprecedented life into Vietnam's offshore capital markets. In the first six months of 2019, Vietnamese companies borrowed the most in six years in the international loan market. Even more importantly, the need to finance business shifting Vietnam's way is catalyzing the development of a thriving offshore debt market.

So far this year, Vietnam Prosperity Jsc Bank and Mong Duong Finance Holdings BV issued a combined USD979 million of dollar-denominated securities. The USD300 million Vietnam Prosperity deal hit markets in July; the USD679 Mong Duong Finance issue came in August, with HSBC acting as sole financial advisor. There is also market chatter about TP Bank selling offshore convertible bonds.

Yet Mong Duong's notes maturing in May 2029 are a particular milestone for Vietnam's foray into global debt circles. At USD2 billion, it is Vietnam's largest private-sector power project. Significantly, though, it is Vietnam's first private-sector corporate sale since 2013 and the nation's first-ever project bond. It is also the first-ever refinancing of a power plant in Vietnam. Proceeds will purchase Mong Duong's existing loan from current lenders.

For HSBC, this marks the investment bank's second public-project bond in Asia. The first was a market-opening project for Indonesia's Paiton Energy in 2017. Surely, Mong Duong speaks not just to HSBC's commitment to innovative transaction structures, but Vietnam's trajectory.

The nation's 7.3 per cent growth year-on-year in the third quarter fits with HSBC's house view of robust activity in manufacturing and services. Services, as HSBC economist Yun Liu points out, remain the "biggest contributor" to headline gross domestic product. Thanks to rising domestic demand and strong tourist arrivals, she reckons growth will average 6.9 per cent this year and, at worst, 6.4 per cent in 2020.

This means Vietnam's efforts to pivot engines from exports to domestic demand-led growth are bearing fruit. It also means global investors looking to diversify portfolios have yet another reason to place Vietnam at the top of the list.

Vietnam already boasts reasonable scale. It is making steady progress on surpassing the Philippines in GDP terms. From there, onto Singapore, Malaysia and Thailand. For now, Vietnam benefits from comparatively low labor costs, including versus China. As per capita income advances from today's USD2,600 in nominal terms, multinationals will be just as determined to sell goods in Vietnam as source from there.

Such transitions, though, require lots of capital. Issuing overseas can lower borrowing costs and, in turn, offer greater financing efficiency. Yet Vietnam has produced little supply historically.

Prior to this year, there were only three international floats since 2012. The biggest was the Vietnamese government's USD1 billion deal in 2014. Before that, Vinagroup issued USD200 million worth in 2013 and Vietnam Joint Stock Commercial Bank for Industry and Trade sold USD250 million the year before.

That's about to change. In May, Prime Minister Nguyễn Xuân Phúc approved a six-year plan to restructure the securities market. The idea is to make medium- and long-term capital-raising instruments the norm for Vietnamese businesses. Part of the plan is to use capital markets to restructure state-owned enterprises and eventually divest from them.

It is a work in progress, of course, but a vital one to transition Vietnam decisively from frontier to emerging market. So long as Phúc's team implements and improves securities laws, Vietnam's role in Asian bond markets will grow exponentially.

Offshore market development has a pivotal role to play in Vietnam moving upmarket – both in terms of attracting foreign capital and lowering borrowing costs. With the Federal Reserve, European Central Bank and Bank of Japan commandeering markets with ultralow rates, risks of a yield spike are manageable. And at nearly USD65 billion, foreign exchange reserves offer an ample cushion for should world markets crack.

Risks abound, of course. The US-China trade war could intensify in 2020, limiting Vietnam's comparative advantage. The International Monetary Fund expects 3 per cent growth this year, the slowest since 2008. Also, President Donald Trump has expressed frustration that countries like South Korea are using Vietnam to bypass US tariffs – and threatens levies on Phúc's nation.

Moody's Investors Service, meantime, hinted in October at a downgrade, voicing concerns about Hanoi's "institutional deficiencies." Finally, bigger peers, namely Indonesia, might suddenly bolt onto the scene with appealing offshore debt deals that siphon way demand from Vietnam.

Yet even more notable is the reform trade that investors can ride over the next few years. As Fitch Ratings pointed out in a July report, Vietnamese banks may eye increases offshore capital as Hanoi races to meet Basle II requirements. It estimates that capital needs heading toward January 1st, 2020 could be as much as USD20 billion.

This presents a potential bull market for punters looking to diversify. Particularly as Vietnam moves up the value chain. Today, it ranks 67^th out of the 141 countries in the Global Competitiveness Report 2019, behind Panama, Peru and the Philippines. But then Hanoi jumped 10 rungs higher in the space of 12 months.

As Phúc's government cuts red tape, liberalizes the financial system, increases the role of services, and fosters innovation, Vietnam can only grow more attractive. This effort to upgrade the economy will require exponentially more capital and more debt issuance, much of it in the offshore market.

With yields trending lower and inflation tame, there's rarely been a better time for Vietnamese issuers to hit the international market. The same goes for diversifying investors looking to ride Vietnam's economic journey upmarket.