(Luận văn) developing the domestic government bond market, country experiences and suggestions for vietnam

t to MINISTRY OF EDUCATION AND TRAINING ng hi UNIVERSITY OF ECONOMICS, HO CHI MINH CITY ep FULBRIGHT ECONOMICS TEACHING PROGRAM w - n lo ad ju y th VO CHAU THUY TRIEU yi pl n ua al DEVELOPING THE DOMESTIC GOVERNMENT BOND MARKET: COUNTRY EXPERIENCES AND SUGGESTIONS FOR VIETNAM n va ll fu m oi Major: Public Policy Code: 60340402 at nh z z ht vb k jm MASTER OF PUBLIC POLICY THESIS om n a Lu Dr Jonathan R Pincus l.c gm SUPERVISOR n va y te re Ho Chi Minh City – 2013 CERTIFICATION t to ng I hereby certify that hi ep - I wrote the thesis by myself w - the study has not been submitted for any other degrees n lo ad - any help I received as well as all sources used have been acknowledged in this thesis with y th the best of my knowledge ju yi - the study does not necessarily reflect the views of the Ho Chi Minh City Economics pl n ua al University or Fulbright Economics Teaching Program n va ll fu Author m oi Vo Chau Thuy Trieu at nh z z ht vb k jm om l.c gm n a Lu n va y te re Table of Contents t to CERTIFICATION ng ABBREVIATIONS hi ep LIST OF GRAPHS .5 ABSTRACT w Chapter INTRODUCTION n lo 1.1 Background .7 ad 1.2 Policy questions 10 y th Chapter LITERATURE REVIEW 11 ju 2.1 Financial repression is ineffective for the economy 11 yi pl 2.2 Benefits of a developed domestic government bond market 13 ua al Chapter COUNTRY EXPERIENCES 16 n 3.1 How did Malaysia develop their domestic bond markets? .16 n va 3.1.1 Situation and motivation for reform 16 fu 3.1.2 Key policies 18 ll 3.1.3 Achievements 21 m oi 3.2 How did Thailand develop its bond market? 23 nh 3.2.1 Situation and motivation for reform 23 at 3.2.2 Key policies 25 z z 3.2.3 Achievements 29 vb ht Chapter VIETNAM 31 jm 4.1 Developing the bond market is important for Vietnam 31 k 4.2Vietnam government debt market overview 32 gm 4.3 Types of government debt securities .36 om l.c 4.3.1 Government bonds 36 4.3.2 Government-guaranteed bonds 37 a Lu 4.3.3 Municipal bonds .37 n 4.4 Investors base 37 va 4.5 Factors hinder Vietnam’s domestic government bond market 38 4.6 Suggestions for Vietnam’s bond market 44 y 4.5.3 Primary dealers .43 te re 4.5.2 Statutory liquidity ratios of banks 43 n 4.5.1 Interest rate cap 41 Chapter CONCLUSION 46 t to REFERENCES 48 ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re ABBREVIATIONS t to ng BTH: Thailand Bath hi ep HNX: Hanoi Stock Exchange w HSX: Ho Chi Minh City Stock Exchange n lo ad MOF: Ministry of Finance y th ju OMO: open market operations yi pl SBV: State Bank of Vietnam n ua al USD: U.S dollar n va ll fu VND: Vietnam dong oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re LIST OF GRAPHS t to ng Graph 3.1: Bond outstanding value of Malaysia Page 22 hi ep Graph 3.2: Domestic financing profile of Malaysia 23 w Graph 3.3: Size of Thailand financial market .24 n lo ad Graph 3.4: Financing profile of Thailand (% GDP) 29 y th ju Graph 3.5: Regional Government bond turnover ratio 30 yi pl Graph 4.1: Bank credit to GDP of regional countries .31 ua al n Graph 4.2: Vietnam bond outstanding value 34 n va ll fu Graph 4.3: Vietnam domestic bond issuances 35 m oi Graph 4.4: Vietnam GDP growth and inflation rate 39 nh at Graph 4.5: Regional bond market size in % GDP 40 z z ht vb Graph 4.6: Regional countries’ government bond bid-ask spreads 41 jm Graph 4.7: Vietnam government bond auctions over years 42 k om l.c gm n a Lu n va y te re ABSTRACT t to ng While other countries use open market operations (OMO) as an indirect instrument to hi ep manage the liquidity in the economy to steer market interest rates, Vietnam has to use direct instruments of interest rate control which have been proved inefficient for the w economy After reviewing papers on using OMO to implement monetary policies of n lo countries in the world, the thesis finds that Vietnam is lacking a vibrant domestic ad government bond market to facilitate the conduct of OMO y th ju Vietnam’s conventional secondary government bond market is just seven years old and the yi country’s government debt market is just beginning to develop By looking at the pl ua al experiences of countries in the region which have similar features to Vietnam’s domestic bond market, this thesis aims to derive lessons to help improve and boost the development n n va of the domestic government bond market fu ll This paper goes through the development of government bond markets in Malaysia and m Thailand when they were at the first stage of developing their bond markets twenty years oi nh ago in order to discover key policies to promote the bond market From that result, the at dissertation considers whether these measures can apply to Vietnam The main z z recommendation is for the government of Vietnam to set up a primary dealer system vb facilitating bond auctions and trading as well as supporting the conduct of open market ht k government bond investors jm operations, to build a market-based benchmark yield curve and provide tax exemption to om l.c gm n a Lu n va y te re Chapter INTRODUCTION t to 1.1 Background ng hi ep Transition to indirect instruments: global trends w Inflation control is among the top priorities of every government Controlling inflation n lo requires careful management of the money supply by the central bank Central banks ad possess three main indirect instruments of reserve requirements, discounting eligible bank y th assets, and open market operations (OMO) However, Mishkin (1995, 540) argues that ju yi OMO has more advantages than the other two in implementing monetary policy Thus, pl using this instrument has become a common trend in the developed countries ua al n Country experiences show that indirect instruments especially market-based operations va have brought greater benefits for economies than direct tools whether in developing or n ll fu developed countries The benefits are mentioned by William et al (1996), in which the oi m authors state that “They [indirect instruments] permit the authorities to have greater flexibility in policy implementations Small, frequent changes in instrument settings nh at become feasible, enabling the authorities to respond rapidly to shocks and to correct policy z errors quickly.” Meanwhile, direct instruments including interest rate controls, credit z k jm to go around them, according to the paper ht vb ceilings, and directed lending often lose effectiveness because economic agents find means gm Research on implementing monetary policies has shown that there has been a clear trend of l.c switching to using indirect instruments and then a greater reliance on market-based om operations since the 1970s given the advantages of market-based instruments Buzeneca and Maino (2007) find that direct instruments of monetary policy are no longer used in the a Lu majority of countries and there is a trend towards reliance on indirect instruments n around the world, there is no developed country using direct instruments while a few results in the 1998 survey y and developing economies using market-based instruments has increased compared to te re developing countries still use them Meanwhile, the ratio of emerging market economies n va especially on open market operations In the 2004 survey of IMF of 45 central banks Vietnam: delaying the trend t to Thus the transition to greater reliance on market-based operations, particularly open market ng hi operations, in implementing monetary policy is a global trend which is relevant to ep Vietnam The country liberalized interest rates in 2002 and since 2000 has introduced open market operations in conducting monetary policies However, Vietnam’s transition has w n been delayed lo ad y th Since 2008 the State Bank of Vietnam (SBV) has reintroduced direct or administrative ju instruments to implement monetary policy yi pl The year 2007 saw a boom on the stock market that was mainly caused by a massive al ua inflow of foreign capital, equal to about 18 percent of GDP SBV was unable to sterilize n these inflows, with the result that money supply increased sharply According to World va n Bank data, net foreign portfolio investment strongly increased from USD1.31 billion in ll fu 2006 to USD6.24 billion in 2007 Stock market capitalization increased from three percent at nh (2009, 90) oi m of GDP in December 2005 to 43 percent of GDP by March 2007, according to World Bank z In addition to the price bubble on stock and property markets, the rapid increase in money z vb supply contributed to price inflation which peaked at 28 percent per annum in 2008 High ht inflation led to rising nominal lending rates which hindered enterprises’ access to bank jm k loans In 2008, SBV tried to use indirect instruments of raising policy rates and reserve gm requirements, aiming to rein in the inflation However, it did not have much effectiveness l.c since banks had considerable excess stocks of reserves (Riedel and Pham 2012).The om central bank therefore had to use the direct instrument of the ceiling rates again and also n a Lu forced banks to buy central bank bills totaling VND20.3 trillion in March 2008 nominal interest rates as instructed by the government, so they officially came back to 16/2008/QD-NHNN on the prime rate managing mechanism, ending the period of six y percent of the prime rate set by SBV By May 16, 2008 the central bank issued directive te re direct monetary instruments by asking banks to set lending rates within the band of 150 n va The central bank wanted to restrain inflation at that time but also wanted to decrease years of interest rate liberalization However, as large amounts of money were withdrawn t to via central bank bills, many banks experienced a liquidity shortage and had to raise deposit ng rates which in turn pushed nominal lending rates higher Banks competed with each other hi to attract deposits, which also put upward pressure on lending rates for enterprises Stricter ep administrative instruments from the central bank to punish banks breaking the rule were w applied The central bank even set up a hot line to receive information about banks giving n lo loans at rates higher than the ceiling level ad y th Inflation has become the biggest threat to the Vietnamese economy since 2008, except in ju 2009 during the global recession Given the lower inflation rate in 2009, SBV let banks yi pl negotiate lending rates in 2010 However, when high inflation rose again in 2010 and 2011 ua al prompting a rise in interest rates, the central bank came back to administrative controls n again in 2011 aimed at decreasing market lending rates These measures have continued ll fu by the central bank n va until the end of 2012 as banks have to give loans at rates no higher than the ceiling given m oi SBV in fact used two indirect instruments of required reserve ratios and lending facilities at nh to rein in inflation - but they didn’t help much The reason is that Vietnam has maintained a pegged foreign exchange rate regime and does not have an independent monetary policy, z z according to Riedel and Pham (2012) Theoretically, there are three things that cannot vb ht happen at the same time, namely free capital inflows, pegged exchange rate, and jm independent monetary policy Vietnam received massive foreign capital inflows in 2007 k gm and still wanted to peg its foreign exchange rate to support exports, so its monetary policies l.c cannot have effectiveness as the central bank’s purposes For example, large foreign capital entering Vietnam has made local currency stronger To keep the foreign exchange rate om stable, the central bank had to buy foreign capital and supply money to the economy which a Lu put pressure on prices Meanwhile, Vietnam could not rely much on open market n money supply, like other countries with developed financial markets Because Vietnam’s operations y secondary market was low, the government could not sterilize its foreign exchange te re domestic bond market was too small relative to the capital inflow and liquidity in the n va operations to manage the money supply, or in this case sterilize the unexpected increase in 36 Transparency is a very important factor in the development of the financial markets t to including the government debt market BIS (2002, 72) says a transparent market which ng disseminates pre-trade and post-trade information to traders can help lower spreads, hi improve efficiency, and attract more participants by increasing confidence in the pricing ep process The government should announce the issuance calendar and maximum w information about completed auctions in advance n lo ad Understanding the importance of transparency in the development of the debt market, the y th Ministry of Finance of Vietnam in the Circular 17/2012/TT-BTC issued in February 2012 ju says that the ministry will provide an annual debt issuance plan as well as expected yi pl issuance plan for each quarter of the year based on annual budget needs, and this n and HNX ua al information will be published on the websites of the finance ministry, the State Treasury, va n 4.3 Types of government debt securities ll fu oi m There are three categories of government bonds in terms of issuer: they are government bonds, government-guaranteed bonds, and municipal bonds These kinds of government nh at bonds can be bought and sold in open market operations under the central bank’s z regulations z ht vb 4.3.1 Government bonds jm k There are two kinds of government bonds, namely long-term and short-term bonds Long- gm term government bonds or treasury bonds are issued by the MOF through the State om l.c Treasury under two methods of auction and underwriting Most are issued by auction Government bonds usually have tenors longer than one year while treasury bills (T-bills) a Lu have tenors less than 52 weeks Long-term bonds include treasury bonds and investment n bonds having terms of 2, 3, 5, 10, 15, and 30 years However, three-year and five-year va tenors are currently the most popular In 2011, the Government raised VND22.68 trillion in n Vietnam Before August 2012, T-bills were not traded on the Hanoi exchange and were only available to commercial banks However, by late June 2012, MOF and the State Bank y investors tend to prefer short-term treasury bonds given recent macro uncertainties of te re five-year treasury bonds and VND30.12 trillion in three-year treasury bonds Bond 37 of Vietnam (SBV) issued Circular 106/TTLT-BTC-NHNN that allowed T-bills to be t to traded on the electronic trading system of HNX Since then, T-bills have been issued by ng the State Treasury under authorization of the MOF by auction via the main transaction hi office of SBV and all institutions which meet requirement of MOF regulated in the ep Circular 17/2012/TT-BTC can join the auctions T-bills have three tenors of 13, 26, and 52 w weeks In developed countries like the US, T-bills are the main instrument for open market n lo operations Developing a liquid T-bills market plays an important role for the transition to ad open market operations in implementing monetary policies Allowing T-bills to be traded y th on the electronic trading system is an effort of Vietnam Government to create a liquid ju yi market for this instrument The HNX now publishes a daily report on T-bill trading on its pl website ua al n Government bonds also include central bank bills After issuing compulsory central bank n va bills in early 2008 to quickly withdraw money from the market to rein in inflation, the ll fu State Bank of Vietnam in 2012 issued central bank bills again with terms of one, three, and oi m six months in order to mop up redundant credit from commercial banks at nh 4.3.2 Government-guaranteed bonds z Government-guaranteed bonds are issued by corporations like State-owned companies or z ht vb banks to mobilize funds for projects that the Government wants to invest in There are three institutions that usually issue bonds guaranteed by the Government, namely the jm k Vietnam Development Bank, the Vietnam Bank for Social Policies, and the Vietnam gm Express Corporation that raise fund for public projects approved by the Ministry of om l.c 4.3.3 Municipal bonds Finance a Lu n Municipal bonds are issued by provincial governments to finance works or projects at the n va local level At present only Ho Chi Minh and Hanoi are active issuers of municipal bonds y te re 4.4 Investors base Vietnam’s regulations not limit who can hold and trade government debt securities, including foreigners Even individuals can invest in government bonds, government- 38 guaranteed bonds, and municipal bonds which are traded on the HNX by trading through t to exchange members They just need to open a trading account at a securities company ng which is a member of the HNX and have enough money to buy bonds hi ep The secondary government bond market in Vietnam is dominated by commercial banks which want to hold government bonds to ensure liquidity for their operations In 2011, w n HNX reported that the top ten members by proprietary dealing of bond trading were all lo ad commercial banks, which traded VND85.17 trillion in total, more than 86 percent of the ju y th total trading value of government bonds (HNX 2011) yi Taxes are imposed on investors in the bond market in Vietnam For individuals, when pl selling securities, investors can choose one of two options: either a tax equal to 0.1 percent al n ua of the sale value of bonds on the transaction date or 20 percent of the premium coming va from the difference between the total buying and selling value over one year Most n individual investors choose the first method to avoid paper work For institutions selling fu ll bonds, a tax of 0.1 percent of the sales value is levied at the time the transaction is made In m oi addition, capital gains tax is also applied, which is five percent for individuals and 0.1 at nh percent for institutions on the total bonds’ face value and coupon.11 z z 4.5 Factors hinder Vietnam’s domestic government bond market vb ht It should be clear that Vietnam’s government bond market has taken the very first steps on jm its development trajectory, much like the bond markets in Malaysia and Thailand after the k om l.c similar to the two regional countries more than 10 years ago gm financial crisis in 1997 Although Vietnam has made some progress, conditions are still Vietnam has just passed through a period of macroeconomic turbulence that began in 2007 a Lu with an asset bubble in stocks and real estate Since then, the country has experienced high n inflation and slow growth, especially in 2008, 2010, and 2011 Investors’ confidence has 11 http://hnx.vn/web/thi-truong-trai-phieu/huong-dan-dau-tu# y in strong downward pressure on the exchange rate and exacerbated the loss of confidence te re credit rating agencies There has been an outflow of foreign exchange, which has resulted n va been negatively affected and country has been downgraded continuously by international 39 More recently, a sharp rise in non-performing loans of commercial bank has also t to contributed to the gloomy outlook of Vietnam’s economy ng hi Graph 4.4: Vietnam GDP growth and inflation rate ep Vietnam GDP growth and inflation rate (%) w n 25 lo ad 20 y th 15 ju yi 10 pl n ua 2006 2007 2008 2009 2010 2011 2012 2013 n va 2005 al fu GDP growth (annual %) ll Infaltion(annual %) oi m at nh Source: World Bank Data (2012 data comes from General Statistics Office) z Government securities dominate the domestic debt market The total trading value on the z ht vb government bond market of Vietnam in 2011 was VND90.2 trillion, averaging VND363.8 jm billion (or USD18.2 million) per session The daily traded value on the government bond k market is still much lower than the daily trading value of government securities in gm Malaysia in 2001 (USD179.4 million) and of Thailand in 1999 (USD37 million), BIS compared to other countries in the region om l.c (2002) In addition, size of the local currency bond market relative to GDP is low n a Lu n va y te re 40 Graph 4.5: Regional bond market size in % GDP t to ng Size of domestic bond markets in % of GDP hi ep 250 w 200 n lo 150 ad Corp Govt pl ID JP KR MY PH SG TH VN n ua CN al yi 50 ju y th 100 va n Source: Asianbondsonline ll fu oi m One measurement of the liquidity of the debt market is the bid-ask spread From 2007 to nh 2011, the spread of government bond trading on the market ranged from 13 to 33 basis at points, and up to 75 basis points in 2008 Meanwhile, the bid-ask spread of government z bond trades in Malaysia from 2000 to 2012 was only two to five basis points, excepting z ht vb 2008 when it rose to 12 basis points For Thailand, except in the three years 2004, 2007, jm 2008 - when the bid-ask spread on government securities trades was seven, six, and ten k basis points respectively - the spread in the years in 2000-2012 was only around three basis gm points.12 Those figures show that government bond market’s liquidity in Vietnam is low om l.c compared to other countries in the region n a Lu n va y te re 12 Data on Asianbondsonline.adb.org 41 Graph 4.6: Regional countries’ government bond bid-ask spreads t to ng Govt bond bid-ask spreads of regional countries hi ep 100 w 90 CN 80 HK n 70 ID lo KR 50 MY ad 60 TH pl VN 2007 n 2000 ua al 10 SG yi 20 PH ju 30 y th 40 2012 n va ll fu Source: Asianbondsonline (Vietnam data in 2000 not available) oi m 4.5.1 Interest rate cap nh at In May 2008, after six years of interest rate liberalization, the central bank officially came z z back to direct interest rate control measures in Directive 16/2008/QD-NHNN and then a ht vb series of circulars on interest rate ceilings through 2013 The interest rate cap has been jm issued with the purpose of reducing competition for funds among banks that need liquidity k The interest rate ceilings in fact did not reflect the prevailing market rate gm l.c Meanwhile, bond yields on government securities must be within a band regulated by the om Ministry of Finance under Circular 17/2012/TT-BTC, meaning that the maximum winning a Lu bond yields in bond auctions cannot exceed the ceiling yield given by the ministry at the n issued time It should be understood that as the government risk is almost zero and much ceiling rates set by the central bank The banks’ ceiling rates were lower than the market y te re higher than banks’ deposit rates, or the government’s bond yields cannot exceed banks’ n va lower than commercial bank risk, that means fund raising cost of the government cannot be rates, thus bond yields have not been market-determined, which was one of factors making investors refrain from involvement in the government bond market The results of 42 government debt securities auctions during the period 2008-2012 were often unsuccessful t to with the total winning bid value accounting for only 36.2 percent of the offered value ng Investors expected higher yields than the maximum allowed by the regulator For example, hi two-year government bonds offered in 2012 totalled VND57,100 billion, and total ep registered value was VND81,383 billion, but the winning value was only VND31,740 w billion, just more than half of the offered volume Bidding yields ranged from 8.73 to 13 n lo percent per year while the maximum winning yield was only 10.8 percent This year, the ad ceiling deposit rate given by the central bank was 11 percent These figures showed that y th investors were interested in government bonds but they did not agree with the regulated ju yi bond yields pl n ua al Graph 4.7: Vietnam government bond auctions over years n va Government debt securities auctions (VND billions) ll fu m 2012 oi nh 2011 at Offer z 2010 z Register Winning bid vb 2009 ht jm 2008 k 50,000 100,000 150,000 200,000 250,000 l.c gm - om Sources: calculating from data in HNX (2008-2011) and 2012 auctions data on HNX a Lu When prices are not set by the market, few investors are willing to trade, which affects the n n bond benchmark yield curve based on market prices when the government caps yields va liquidity of the secondary bond market In addition, it is difficult to build a government y te re 43 4.5.2 Statutory liquidity ratios of banks t to Commercial banks, the biggest holders of government bonds, not have to hold a specific ng ratio of their assets in government securities, but they must hold government bonds to hi ep ensure that they meet the capital adequacy ratio (CAR) of nine percent in Vietnam based on Basel II Government bonds have a risk ratio of zero under the regulations, which helps w n banks maintain their CAR at the required level In addition, banks also have to ensure the lo payable capability ratio of 15 percent at the end of each day and government securities are ad y th among the most liquid assets under Circular 13/2010/TT-NHNN on safe ratios for ju commercial banks Government securities can also be used as collateral to access the yi central bank’s refinancing and discount operations Therefore, big banks which have pl al abundant liquidity tend to buy government debt securities while small banks, which have n ua limited liquidity and must mobilize capital at higher cost than big banks, prefer va investments with higher returns like giving loans This fact partly hindered small banks n from joining the primary and secondary bond markets, especially when interest rates are fu ll regulated directly by the central bank to ensure stability Meanwhile, big banks holding m oi large amount of government bonds not have many chances to trade bonds in an illiquid at nh secondary market z z 4.5.3 Primary dealers vb ht Vietnam’s Ministry of Finance has established some criteria for institutions that want to jm take part in government bond auctions and to register as bond trading members on HNX k gm The list is reviewed annually However, they are not primary dealers as in Malaysia and l.c Thailand and criteria for membership are not as stringent as in other countries where om primary dealers act as market makers for bonds In Vietnam, bond auction members and bond trading members not have to give two-way quotations on bond yields of some key a Lu maturities everyday or ensure a minimum bid volume in auctions and trade actively They n to the central bank’s discount window facility, or borrowing and lending securities at the y secondary market’s liquidity in Vietnam te re central bank Therefore, the bond market’s members not help much to enhance the n va also not enjoy privileges from the central bank as in the other countries, such as access 44 4.6 Suggestions for Vietnam’s bond market t to Setting up primary dealer system ng hi ep Many countries have used the primary dealers to promote the bond market as they can guarantee success of bond auctions, improving liquidity on the secondary bond market by w giving two-way quotes and actively trading on the market As in Malaysia and Thailand, n lo primary dealers can also help the central bank conduct open market operations to manage ad the liquidity of the financial system Therefore, the government should consider setting up y th a primary dealer system In fact, the Ministry of Finance stated its intention to so and ju yi criteria for bond auction members and trading members regulated by the ministry were pl partly set out 13 The central bank or Ministry of Finance can choose some banks and al ua securities companies which have a strong financial position and have been active on n primary or secondary markets over past years to be primary dealers or market makers for va n domestic government bond markets ll fu oi m The obligation of primary dealers should be to ensure a minimum amount of bids on the primary market with reasonable yields and to give the two-way quotes everyday on each nh at maturity Their privileges should include access to the central bank’s discount window, and z as in Malaysia they should be able to borrow securities from the central bank to short sell z k jm especially when Vietnam has not allowed short selling yet ht vb However, it needs to have transparent and clear regulation on this risky operation gm Vietnam also has a repo market which supports open market operations as in Thailand, and l.c Vietnam can learn from the experience of Thailand in promoting the private repo market om To this, the central bank initially should act as a matchmaker connecting borrowers and a Lu lenders of government securities to encourage active trading on the market However, the central bank will in parallel run the bilateral repo market with primary dealers When the n n y te re and only make repo trades with primary dealers to affect the market’s liquidity indirectly va private repo market’s liquidity develops to a certain level, the central bank can phase out 13 http://www.mof.gov.vn/portal/page/portal/mof_en/dn?p_page_id=2522361&item_id=2739929&p_details=1 45 Building a market-based benchmark yield curve t to A pre-requisite for the development of the bond market is a trusted benchmark yield curve ng hi built on diverse maturities of government securities which reflects market conditions of ep supply and demand However, due to interest rate controls in Vietnam, it is not easy to set up a market-determined benchmark yield curve To have an ideal benchmark yield curve, w n the government must restructure the economy including the banking system in order to lo ad stabilize the economy and strengthen the banking system as well as gradually shift to y th indirect control over interest rates In the meantime, the country must accept the distorted ju benchmark yield, and when the interest rate is liberalized, the yield will go toward the yi pl market equilibrium al n ua BIS (2002, 65) argues that benchmarks not only help to increase liquidity of the bond va market but also help to reduce the servicing cost for the government And one measure n mentioned in the paper which has been used by many countries to develop benchmarks is fu ll to concentrate issuance on some important maturities, about four to seven Vietnam’s m oi Finance Ministry should consider focusing on issuing debt securities at some liquid same of amount of bonds issued earlier at nh maturities like three and five years to establish a benchmark and have plans to reissue the z z ht vb Taxation jm k As the size of bond market in Vietnam is relatively small with a limited number of gm investors, there should be tax exemption to encourage investors to join in the market l.c Malaysia and Thailand did not impose taxes on bond investors in the past to develop the om debt market Malaysia has still maintained the tax exemption for bond investors until now n a Lu n va y te re 46 Chapter CONCLUSION t to This paper has outlined the brief and unsuccessful history of OMO implementation in ng hi Vietnam that has led back to the adoption of direct instruments of interest rate ceilings and ep limitations on credit growth by the State Bank of Vietnam All of these measures are still in effect w n lo Study of the implementation of monetary policies shows that Vietnam is lacking a liquid ad and deep government bond market which is the most important component of an effective y th OMO In addition, the underdeveloped debt market has also prevented the central bank ju yi from using the tools of open market operations to conduct monetary policies pl ua al Thus the paper has set out to identify the obstacles to Vietnam’s bond market development n by comparing the Vietnamese case with that of neighboring countries, namely Malaysia va and Thailand The findings are that Vietnam’s bond market is relatively undeveloped n ll fu compared to its neighbors The thesis outlines policy suggestions for the Government of oi m Vietnam including measures to broaden the investor base and enhance the liquidity of the nh government secondary bond market These measures reflect the path followed by Malaysia at and Thailand’s early bond market development and if implemented would strengthen the z bond market and enable SBV to implement OMO effectively The government must z k jm some things that the authorities should in short term run ht vb undertake deeper reform over the long run to development the bond market There are gm Like Malaysia and Thailand, Vietnam should set up a primary dealer system for l.c government security auctions and trading Experiences from the two countries also show om that primary dealers can facilitate the conduct open market operations of the central bank a Lu Second, as all developed bond market must set up a bond yield curve, and before that they n issuance of key maturities and gradually build up a trusted benchmark yield curve This y require patience from both investors and authorities te re measure is a long-term operation given the interest rate controls in Vietnam and will n va must develop certain benchmark securities with high liquidity, Vietnam needs to focus on 47 Third, in order 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