Remaining within limits. Still in the comfort zone. At a safe level. These are all phrases used over recent years by local authorities to allay the concerns of nervous stakeholders about Vietnam’s public debt. National Assembly (NA) delegates and economists, however, have begun to sound the alarm about rapid and unsustainable public debt growth.

Risks apparent

“Remaining within limits” is officially true but only if the data is reliable and consistent. The figures reported by the Ministry of Finance (MoF), however, have differed from those used by international agencies such as the Asian Development Bank (ADB) and the International Monetary Fund (IMF). The latest figures from the MoF show that the country’s public debt rose to 54.2 per cent of GDP in 2013 and is expected to be at 60.3 per cent this year. 

Under the Law on Public Debt Management, public debt does not cover State-owned enterprise (SOE) debts, except for government-guaranteed loans. This is why the total debt may be much higher than the number calculated, according to Mr. Pham The Anh, acting Director of the Public Policies and Management Institute under the National Economics University. He believes that Vietnam’s public debt may account for as much as 98.2 per cent of GDP when debts held by SOEs that are not guaranteed by the government and accumulated debts for infrastructure development are taken into account.

Meanwhile, the Economic Intelligence Agency (EIU) said that Vietnam’s public debt increased from 36 per cent of GDP in 2001 to 54 per cent of GDP in 2013. Although the rate remains under control, it is higher than the 30-40 per cent seen in other developing countries and emerging economies. A particularly worrying trend is that, in the 2001-2013 period, the budget deficit increased from 2.8 per cent of GDP to 5.3 per cent. Thus, while public debt increased continuously, the State budget dwindled. 

These figures matter a great deal. On paper, the country’s total debt, including government debt and the State’s overseas loans, is still at a manageable level of less than 65 per cent of GDP. However, as Mr. Phung Quoc Hien, Chairman of the NA’s Finance and Budget Commission pointed out, public debt is within the stipulated safe limit but close to the ceiling, while the repayment of public debt is disproportionately high compared with State budget revenue. 

Analysts raise several concerns. First, they argue that, as Vietnam’s public debt has increased rapidly, the country’s approach has been to seek new loans to repay old debts. This, argues Mr. Tran Dinh Thien, Director of the Vietnam Institute of Economics, violates the principle that loans should be used to expand production, while money for debt repayments should come from profits from production expansion. 

Regarding the structure of the debt, there are also fears that short-term loans make up a major proportion of the country’s total debt. In particular, government bonds are mostly short-term, maturing within two to five years after issuance. “Vietnam’s total public debt is not too big, but the high proportion of short-term debt makes debt repayment more difficult,” Mr. Thien added.


Mr. Tran Du Lich, Member of the NA’s Economic Committee, is also aware of the problem. “Vietnam’s current public debt structure is exerting greater pressure on annual debt repayment obligations, which surpass State budget revenues, thus leading to more loans for debt rescheduling,” he said. For example, in 2014 the government’s repayable debts amounted to VND208.8 trillion ($9.9 billion) while State budget revenues reserved for debt repayment only reached VND118.75 trillion ($5.6 billion), with the deficit of around VND90 trillion ($4.28 billion) to be borrowed. This figure will gradually increase in subsequent years, becoming a worrisome feature of public debt.

When speaking about public debt safety, Vietnam has often placed emphasis on the ratio of public debt to GDP, not on the more important element of total debt to be repaid annually against total State budget revenue. Mr. Lich believes that whether a public debt crisis occurs or not will greatly depend on the latter ratio. In 2013 this ratio was 22.3 per cent and will surely rise quickly in the years to come. When this ratio exceeds 25 per cent it’s time to be truly alarmed, and when it exceeds 30 per cent everything becomes unsafe.

What next?

If Vietnam’s economy continues to stagnate in 2015, the debt-to-GDP ratio will soon head towards 65 per cent of GDP or even higher. Perhaps the biggest question is what Vietnam will do if public debt crosses the 65 per cent ceiling. Pessimists may have a follow-up question: At what point does Vietnam become insolvent? 

Regarding the risk of insolvency, the Academy of Policy & Development, the research arm of the Ministry of Planning and Investment (MPI), cited several reasons in its recent report to claim that this risk is low. Firstly, domestic debt is larger than foreign debt and accounts for 50.99 per cent of total public debt, and has tended to increase. The majority of domestic debt is short term and solvency is within reach. Secondly, foreign debt is on the decline, while having a very low risk compared with the safety standards set by the IMF and the World Bank.

Thirdly, the ratio of public debt to GDP, if calculated in accordance with the Law on Public Debt Management, was 54.2 per cent in 2013 and is estimated at 59.9 per cent for 2014. If calculated in accordance with the principles suggested by the research team, the figures would be 61.28 per cent in 2013 and 65.2 per cent in 2014. All are within the safety limits drawn up by the government, of 65 per cent of GDP.

Last but not least, given that credit ratings agencies such as Fitch Ratings, Moody’s and S&P have rated Vietnam’s foreign and local currency issuer default ratings at BB- and B1 with a stable outlook, the research team at the Academy claim that Vietnam is yet to fall into any debt crisis.

However, due to a long-standing regulation, if public debt hits the 65 per cent of GDP ceiling the government can’t borrow more money. So if Vietnam wants to take out loans for development, it can only hope for GDP to increase sharply over the next few years so that public debt becomes more manageable. But it is a little naïve to think that the economy will miraculously begin to grow rapidly considering the existing conditions. The country’s economy is now in the middle of a restructuring process and high economic growth won’t come overnight. A large proportion of public debt is set to fund major construction projects for airports, road and bridges, but the government won’t come close to making its repayments without borrowing abroad. Assuming that the government can’t borrow, large infrastructure projects such as Long Thanh International Airport and urban railway lines will be delayed and the economy will soon feel the impact.

So what are the realistic options for Vietnam? The best hope lies in the NA’s hands, as it can raise the public debt ceiling and this remains the most likely of all the possibilities. The research team at the Academy of Policy & Development has suggested the public debt ceiling be increased to 68 per cent of GDP from the current 65 per cent, but this is little more than a short-term solution.

In the years to come Vietnam has to implement a policy of proactive budget overspending by borrowing loans for investment in the development of social infrastructure. However, Mr. Lich believes that this policy should be accompanied by very strict conditions, such as a clear strategy on government debt and national debt, conditions guaranteeing investment efficiency, ensuring the capacity exists to pay annual debts in local and foreign currencies, compliance with the principles of opportunity cost and synchronization in investment, thrifty State expenditure, a transparent investment capital distribution mechanism, and strict supervision over investment capital flows. 

There are also suggestions that the government needs to change loans from short term to long term and make a connection between internal and foreign debt to better manage public debt. In particular, the MoF should adopt the measures necessary to ensure the security and safety of public debt by changing them from short-term loans to long-term loans, issuing government bonds of longer duration, reducing the State budget deficit, and avoiding the repayment of old debts through new loans. Meanwhile, risk management and supervision of public debt must also be improved, with a priority on researching and implementing projects to resolve the risks.