UPDATE 3-Vietnam aims to sell $1 bln bond by early 2010-source

(Adds analyst comment, context, paragraphs 8-12)

HANOI, Nov 3 (Reuters) - Vietnam hopes to raise $1 billion by early next year in its long-awaited second international bond issue that will cap the coupon at 7 percent, a finance ministry official said on Tuesday.

The ministry wanted to sell 10-year dollar bonds before the end of the year but there might not be enough time to do so.

"Most of the money, about $700 million, would supplement the government's budget and the rest would be loaned to state-owned companies," said the official, who declined to be identified because he was not authorised to talk to the media.

The government had already approved the bond sale and has chosen Barclays Capital, Citigroup and Deutsche Bank to advise on the issue.

Vietnam's only foray into the international capital market was in 2005 when it sold $750 million worth of sovereign bonds maturing in 2016.

Those bonds were trading with yields of 6.3-6.4 percent, compared with the original coupon of 6.75 percent, a bond trader said.

Two years ago the government approved another issue worth $1 billion but the sale had been delayed several times.

Asia has seen a handful of high-yield sovereign issuances in recent months as countries try to raise money before interest rates start to rise.

Last month, the Philippines attracted solid demand with the sale of $1 billion of 25-year global bonds, its third sale of the year. In February, Indonesia raised $3 billion via a heavily oversubscribed sale of 5-year and 10-year bonds in the biggest deal out of Asia ex-Japan since 2003.

Yang-Myung Hong, a credit analyst for Nomura International, the backdrop was generally encouraging for Vietnam.

"However, the credit market has been under pressure over the past weeks together with the overall selloff in risky assets, and this provides for a more challenging environment compared to the situation until more recently," he said.

The 7 percent ceiling would probably not cause problems, given the level of other Asian sovereigns, although he said "the uncertainty of future market movements makes it difficult to predict whether it will still be the case in early 2010".

With the economy under pressure from the global slump, and the government extending parts of an economic stimulus package, many economists forecast the fiscal budget deficit will rise to 10 percent of GDP or larger, more than double last year's.

Questions have persisted for months about how the government would fund the deficit. Domestic dong-denominated government bond auctions have struggled this year, with the finance ministry's yield ceiling too low for the market.

Vietnam is also trying hard to boost its foreign exchange reserves and said last month it would borrow $1 billion from the World Bank this year and next, and also $1 billion annually from Japan from 2010 to 2012. (Reporting by Nguyen Nhat Lam, Ho Binh Minh and John Ruwitch in Hanoi and Umesh Desai in Hong Kong)