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Cycle continues

Released at: 06:16, 05/12/2014 Reining in Public Debt

Cycle continues

Vietnam not only faces major pressure in keeping its public debt to GDP ratio under the 65 per cent threshold but is having trouble mobilizing funds to pay off its obligations.

by Minh Tien

Figures from the government and the Ministry of Finance (MoF) show that Vietnam’s public debt is rising rapidly. In 2013 it stood at VND1.9 trillion ($88 billion) and seems likely to reach VND2.4 trillion ($112 billion) for 2014. Estimates for 2015 put the figure at VND2.9 trillion ($135 billion), or nearly 65 per cent of GDP and the ceiling on public debt set for 2020. “If public debt is not repaid then the 2020 ceiling will definitely be breached,” said Mr. Tran Quang Chieu, Member of the National Assembly’s Committee for Financial and Budgetary Affairs.  

If the debts of State-owned enterprises (SOEs) were to be taken into account the actual figure would be much higher. Repayment obligations have skyrocketed in the last few years. In 2013 the fund for public debt repayment accounted for just 22.3 per cent of State budget revenue. For 2014 and 2015 the expected figures are 26.2 and 32.9 per cent, respectively. “According to international practice, the figure should be under 25 per cent,” said Mr. Tran Dinh Thien, Director of the Vietnam Institute of Economics. “No one should feel safe after looking at these figures.”

So what is Vietnam’s debt repayment capacity? What other sources of capital can be mobilized to repay debts in 2015 and beyond? What are the risks? These are all questions that have given members of the National Assembly (NA) headaches as 2014 comes to a close.

Repaying debts

The State budget is a very important source of funds for public debt repayment. Nevertheless, to be a sustainable resource the budget must be in surplus, which appears unlikely for the foreseeable future. With the economy in a difficult state, utilizing part of the State budget on debt repayment will come at the expense of investment and development. In the first quarter of 2014 the government spent VND145.4 trillion ($6.8 billion) on public debt repayment, which was 62.66 per cent of the State budget expenditure of VND232.1 trillion ($10.8 billion). In 2015 the government plans to spend VND150 trillion ($7 billion) on debt payment while setting aside VND196 trillion ($9.1 billion) for investment and development. 

For the short-term, more money must be borrowed to pay off debt that has become due. Of the VND367 trillion ($17 billion) in loans this year, the government plans to spend about VND70 trillion ($3.3 billion) on debt rollover. The “golden rule” of fiscal policy is that over the economic cycle the government will only borrow to invest and not to fund current spending, as all things being equal an increase in government borrowing raises the real interest rate, consequently crowding out investment because a higher rate of return is required for it to be profitable. Mr. Nguyen Sinh Hung, Chairman of the NA, emphasized that “to rollover loans is not safe and the NA agreed to raise the deficit for new investments, not for paying off debt.”

The situation is even worse for Vietnam as the investments themselves are not yet efficient. Moreover, the debts of SOEs, which are likely to be covered by the State budget once they become non-performing, will be another threat to the sustainability of Vietnam’s public debt situation. According to Mr. Tran Du Lich, Member of the NA Committee for Economic Affairs, the practice of rollover is becoming more and more severe. In 2014 the debt repayment obligations of the government were VND208.8 trillion ($9.9 billion) but the State budget for public debt repayment was only VND118.7 trillion ($5.6 billion), and as a consequence the government had to borrow some VND90 trillion ($4.28 billion) to make up the shortfall. “This figure will increase over the next few years and is worrisome,” said Mr. Lich. 

Vietnam has issued international bonds at lower interest rates than anticipated, of approximately 4 per cent (the average is 6.8 per cent) and successfully sold $1 billion worth in the US market. The term, though, was also much longer than normal, at ten years instead of five years. Vietnam’s borrowing structure has shifted substantially from foreign loans to domestic loans. This has positive benefits for trade but is also a burden on the public debt situation, as government bonds in the local market are mostly offered for short terms (normally two, three or five years at most) while the loans are used for extremely long-term investments (usually 10 to 20 years). “The total of amount of loans might not be too high but the pressure on repaying them is fierce,” said Mr. Thien.

The value and the volume of bonds issued are increasingly high to compensate for the budget deficit and to contribute a considerable proportion to the debt rollover process. If the government fails to build up sustainable resources for public debt repayment the debt will accumulate and the risk of default will shoot up. “With the pressure from the issuance of government bonds and the rollover of due debt, the risk of reaching an unsecured level of public debt and instability in the banking system becomes entirely possible,” said Mr. Dao Van Hung, Member of the National Advisory Council for Monetary and Financial Policies.

Root cause

For domestic loans, theoretically the government will never have to default as it has taxation revenue to use as settlement. Furthermore, even when these revenues are insufficient, the government can literally print more cash to repay its debts. Printing more money, though, reduces the net incomes of the people as inflation rises. Both these movements would distort the behavior of the economy and raise various other macro-economic instabilities.

For foreign loans, the government cannot just raise taxes or print more money; it must find sufficient foreign currency like US dollars, euros or Japanese Yen, for instance, to settle its debts. The ability to repay depends on the level of existing foreign currency reserves as well as the potential to accumulate foreign currency in the future. If the reserve is too thin it will not only pose risks to repayment capacity but also create pressure on exchange rates. The Governor of the State Bank of Vietnam recently announced that this year’s foreign exchange reserves reached a record $35 billion, but it must be recognized that the reserve itself is another form of debt, as Vietnam had to issue IOUs in exchange for foreign currency due to its trade deficit.  

In the short term, foreign currency reserves may be useful to help repaying foreign loans as the government has the right to use it temporarily. But in the long term this is not a good idea, as Vietnam is still recording a trade deficit. Repayment capacity should not come from foreign currency reserves but from internal production capacity together with international competitiveness, in order to earn foreign currencies from exports. To enhance repayment capacity and reduce risks, it is clear that besides enhancing the efficiency of the State budget and public debt management, it is also essential to develop the national economy.

“If public debt exceeds 65 per cent of GDP next year, both the National Assembly and the government will find it difficult to allow for budgetary overspending while investment for development will also be cut. As such, there will be little money for infrastructure development to enable Vietnam to realize its target of becoming an industrialized economy by 2020.”

Mr. Nguyen Sinh Hung, 
Chairman of the National Assembly

 “Determining whether public debt is at a safe level or not depends on how one looks at the issue. There is more than just the ratio of debt to GDP. There are also indicators such as repayment obligations against total budget collections, foreign debt payments compared to total export value, and government debt against total budget collections.”

Mr. Nguyen Duc Kien,
Deputy Chairman of the National Assembly’s Economic Committee

 “I think the public debt issue is being exaggerated. In the financial sector, public debt goes through the public investment channel. This channel, along with private investment, consumption, government spending, and net exports and imports, contributes to economic growth. The country’s GDP has kept expanding and is expected to reach $208-$210 billion next year compared to $180 billion this year. I think it is necessary to warn about public debt but the issue should not be exaggerated.”

Mr. Truong Van Phuoc,
Deputy Chairman of the National Financial Supervisory Commission

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