July 18, 2012 (LBO) – Sri Lanka has sold a 10-year bond to yield 5.875 percent sharply lower than the 6.25 percent paid last year for a bond of similar size and tenor, though risk premiums had widened. Vietnam – which like Sri Lanka – has a so-called soft-pegged central bank ran into trouble because of ‘stimulus’ spending, which pushed credit growth above 30 percent.
Soft-pegged central banks, which sterilize foreign exchange sales by printing money can drive credit to unsustainable levels, push external trade and current accounts wide open and send currency pegs careening downwards.
The State Bank of Vietnam raised policy rates above 14 percent last yar, imposed credit ceilings especially for property, to protect its dollar peg after dong depreciated rapidly and inflation hit 20 percent before credit growth was arrested and state spending curbed.
Vietnam has also announced fast-track privatization or equitization (listing) of over 200 state enterprises.
Unlike in Sri Lanka where inflation is still rising, in Vietnam credit growth has slowed to just 0.76 percent percent in the year to June, inflation is falling and the state bank is now cutting rates and promoting fresh lending.
Update II According to data on Bloomberg newswires the fixed rate bond has a settlement date of July 25 and will pay interest semi-annually.
The 10-year US Treasuries now yield about 1.53 percent indicating Sri Lanka had a premium of about 434 basis points amid global credit uncertainties.
Last year’s bond though sold at a higher coupon, had a narrower premium of about 332 basis points above US Treasuries.
Sri Lanka’s last bond with 9-years to mature with a coupon of 6.25 percent is quoted around 5.80/90 percent in the secondary market, indicating that the lead managers had managed to get similar pricing for the 10-year bond.
The average risk premium on developing country debt was now 354 basis points according to an index compiled by JPMorgan Chase index quoted by Bloomberg newswires, down from 441 basis points on June 01.
According to Bloomberg data, Vietnam bonds maturing on 2021 with a coupon of 6.75 percent are yielding 5.32 percent.
Vietnam is now recovering from a prolonged period of balance of payments trouble, but its overall policy framework is aggressively liberal.