With a weakening currency, a cautious central bank and multiple restrictions on derivatives trading, Vietnam is not an easy market for a swaps dealer. The Bank for Investment and Development of Vietnam has retained its leading position amid challenging market conditions, with record volumes in cross-currency swaps, interest rate swaps, structured products and commodity derivatives.
“BIDV was the first bank in Vietnam to be licensed to provide derivatives products and we have been active since 2006, so we have extensive knowledge. Our clients have also become very familiar with the products over the years through our training and education programmes,” says Do Kim Thanh, assistant vice-president of BIDV’s Treasury department.
Against a backdrop of rising interest rates in the US and the strengthening of the dollar (USD), the State Bank of Vietnam has taken steps to control the dollarisation of its economy and limit the weakening of the Vietnamese dong (VND). Many banks have consequently struggled to attract onshore USD and have had to balance a deficit of dollars against a surplus of VND.
Given the record-low interest rate gap between VND and USD, Vietnamese corporates that have already borrowed in dollars would have the opportunity to hedge forex volatility at a very low cost or convert currency to pay out their loans.
By July, BIDV had increased the pool of clients using its cross-currency swaps and interest rate swaps to roughly 600, with a trading volume of $520 million in USD/VND cross-currency swaps and $144 million in VND interest rate swaps between January and July.
“Concern over forex risk creates an issue for corporates with USD-denominated loans that have to pay out in US dollars at maturity. Cross-currency swaps allow them to hedge these loans by transferring their USD obligations to VND, exploiting the record-low interest rate between USD and VND,” says Thanh.
In one landmark trade in April, BIDV arranged a cross-currency swap for a large state-owned corporation that needed $100 million for its business operations, but was concerned about the impact of exchange rate volatility. With many banks willing to lend at competitive rates, BIDV structured a package that combined a traditional USD loan with a USD/VND cross-currency swap to mitigate the forex risk.
While the corporate was initially reticent to enter into the deal, BIDV successfully explained the benefits of the structure and the deal marked BIDV’s largest cross-currency swap to date. It also helped to raise awareness of the value of derivatives in the Vietnamese state sector, says Thanh.
“At the time we did this trade, the forex rate was very stable, but we saw an opportunity to sell a product that would help the company to hedge its forex risk while exploiting the record-low interest rate. With the subsequent devaluation of the dong, the trade proved to be very successful,” she says.
Another recent highlight for BIDV was the USD/VND banking book cross-currency swap, which is also aimed at managing the USD shortage and VND surplus in BIDV’s banking book. The structure comprises a square mechanism, whereby instead of BIDV using the interbank market to square client positions, the USD and VND cashflow payable to, or receivable from, the client is retained for the banking book.
The square mechanism is a very new concept in our market. In fact, the USD/VND banking book cross-currency swap has proved to be optimal for many companies and BIDV’s book. Within a month of the official product launch in July, it had attracted interest from more than 20 corporates and we expect our current turnover of $25 million to increase
Do Kim Thanh, BIDV
As the banking book typically offers VND at lower rates and bids USD at higher rates, compared to the corresponding interbank rates, the product is very competitively priced and allows clients to hedge more economically. One of the most successful examples of these trades was completed in July for a steel producer with a value of roughly $6 million, enabling the company to mitigate its risk while BIDV released some of its VND surplus and gained USD funding.
“The square mechanism is a very new concept in our market. In fact, the USD/VND banking book cross-currency swap has proved to be optimal for many companies and BIDV’s book. Within a month of the official product launch in July, it had attracted interest from more than 20 corporates and we expect our current turnover of $25 million to increase,” says Thanh.
Beyond the high turnover and product innovation in forex and interest rate derivatives, BIDV remains active in multiple-commodity derivatives and over the past year it has expanded its focus to petroleum. While Vietnam is a crude oil exporter, oil is also imported to meet domestic demand, and BIDV has started to offer hedging products to mitigate the risk of price fluctuations in gasoil. This extends its offering in the petroleum space, which introduced jet kerosene products in 2009 and liquid petroleum gas in 2016.
“We have analysed the petroleum business model, and advised clients to adjust their purchase strategy and apply simple derivatives such as put options to limit the risk of price decreases. This is the first time gasoil has been traded in the Vietnamese derivatives market to manage commodity risk and we are confident there will be strong demand in the future,” says Thanh.