Mr. Hoang Ngoc Nang Hong, Department of Debt Management and External Finance, Ministry of Finance

There is no common standard for establishing a safe level of public debt. Factors to consider are the macro-economic situation, fiscal and monetary policies, economic setups, social systems, administrative polices, demand for development capital, and the level of confidence in the country. The Eurozone has a common ceiling on public debt of 60 per cent of a country’s GDP. 

Vietnam’s public debt began to be graded by the international credit rating system in 2005 and is currently appraised as stable by Moody’s, S&P, and Fitch. The International Monetary Fund (IMF) views it as under control and the country is not on its list of heavily indebted poor countries (HIPCs). Compared to other countries in the region like Indonesia, the Philippines, Mongolia and Sri Lanka, Vietnam has a higher reliability index.

According to Decision No. 958/QD-TTg from the Prime Minister on the “Strategy on Public Debts and National Foreign Debts in the period of 2011 - 2020 and vision to 2030”, dated July 27, 2012, Vietnam’s public debt is not to exceed 65 per cent of GDP by 2020. Its public debt index is still safe under this definition but has a tendency to escalate quickly in response to the need to invest in socio-economic development. The increase in government guarantees and provisioning for non-performing loans are also a burden on public debt.

Obstacles to handle

Demand for capital in Vietnam is substantial but as the State budget is insufficient the country must obtain foreign loans, and this puts huge pressures on the handling of public debt. The domestic bond market is not sufficiently developed to help the State mobilize capital internally, while external resources such as ODA, for instance, is not being used effectively to help reduce the public debt burden.

The norms for public debt remain under control but the risks have not been considered carefully. Credit risks, in particular, have not been reflected in government loan and guarantee decisions. There is also a lack of an early-warning system. The cases of Vinashin and Vinalines were lessons that should have resulted in measures for faster action being taken.

The rights and responsibilities of authorities still overlap. For example, the Law on Public Debt Management assigned the Ministry of Finance (MoF) to take full control of public debt management (from setting objectives and orientations for mobilization to managing the funds raised from public debt), but in reality the Ministry of Planning and Investment (MPI) has been appointed by the government to mobilize ODA and foreign capital. Likewise, MoF has the main responsibility for determining foreign borrowing limits and the debt ceiling and upper limits for each payment by enterprises, but the State Bank of Vietnam has the right to manage this in detail. These issues make it impractical to manage debt properly.

MoF’s resolutions

MoF is currently involved in completing institutional policies and public debt management tools. It is also working to improve the efficiency of the mobilization and use of loans, especially ODA use, which requires the elimination of inconsistencies from the very first steps of raising capital to repaying the debt. Public investments must be planned carefully, with all State priorities being considered in order to mobilize capital and allocate the funds appropriately.

It is necessary for the supervision and risk management of public debt to be strengthened. Vietnam has focused too much in the past on mobilizing as much capital as possible but has not paid sufficient attention to supervision and risk management and has had to bear the consequences. Lessons should be drawn from the Vinashin and Vinalines cases. Vietnam will have to conduct careful research from now on in order to develop and execute risk treatment plans. Authorities will also have to develop plans, frameworks and institutions to convert debt into aid and/or investment besides buying and selling debt, and should be more active in setting provisions for risk.

Vietnam should strictly control the issuance as well as the management of government guarantees. Various projects in different fields such as power, cement, infrastructure, transportation, and paper, etc., which have received government guarantees, are having trouble repaying their debts. Authorities should also pay greater attention to the management of provincial authorities’ public debt. Provincial public debt may be either from the State budget or from the issuance of local government bonds. It is therefore necessary that Vietnam improve the mechanism for mobilizing loans as well as the repayment of local government loans.

The country also needs to diversify the forms of capital mobilization by applying the most appropriate method out of government bond issuance, public-private partnerships (PPP), or build-operate-transfer (BOT), etc. Regarding the issuance of government bonds, Vietnam will need to develop a national bond market with a primary bond market as a top priority, followed by a secondary bond market to enhance liquidity and transparency. The determination of the yield curve, or the interest rate, on government bonds is also essential.

A special public debt management agency should be established soon for Vietnam to be in line with international practice. Transparency in public debt should also be strengthened through frequent internal audits, strict monitoring of operational risks, and the creation of an information system that monitors and evaluates the sustainability of public debt. Specialists in public debt management should also be trained and regularly appraised against international standards.

Finally, Vietnam needs to foster administrative reform to modernize and improve the efficiency of its debt management agencies, and promote international cooperation and research to gradually improve the national credit rating by keeping public debt under control. 

Sensible spending

Minister of Planning and Investment Bui Quang Vinh believes that the Law on Public Investment will make investment more effective.

  • The Law on Public Investment will take effect on January 1, 2015. How will it impact on public investment activities in the future?

The Law on Public Investment and the upcoming Decree on mid-term investment will be measures that increase efficiency in public investment. Medium-term public investment will give ministries, sectors and localities more self-control, and the law will help them know how much resources are being used in the socio-economic plan for the next five years. Public investment is the most important resource for the implementation of socio-economic objectives. When ministers and provincial chairmen and women review their medium-term investment plan they should consider whether it is in line with objectives and the five-year plan. This will make investment selection become more precise.
In previous years the capital allocation process only took place in the latter part of the year. December is the deadline for ministries and localities to disburse these amounts of capital and the money will be taken back if it is not disbursed. Fearing this loss of funds, ministries and localities often accelerate the disbursement process, but this haste can result in carelessness in the spending process.

As the Law on Public Investment will soon take effect, ministries and localities can proactively use the capital within a five-year term. Under the provisions of the law, if the capital is not used this year it can be used next year as long as the amount within five years does not exceed the plan. 

  • So what are the challenges for ministries, sectors and localities to implement the law and the decree?

Article 107 of the law says that the State will not allocate funds for inappropriate debts emerging on basic construction. It also means that money will be strictly used in accordance with the plan. In my opinion, this is a challenge because it requires a real step up in terms of quality in budget planning. 

  • What are your concerns once the law comes into being?

The issue I worry about the most is the “perceptions” of the people. For decades the whole system, from central to local levels, has become used to the allocation of capital on a yearly basis. With this new method, ministries and localities should step up their planning tasks and, more importantly, give up their personal interests since the “ask-give” mechanism is no longer in existence.

Vietnam has also learned a lot from three years of Resolution No.1792 on strengthening the management of investment from the State budget and Government bonds. Therefore, I believe that the introduction of the law and decree will bring in positive changes for Vietnam over the next five years and beyond.

  • Regarding with the Amended Law on Investment, could you tell us how the new features of the amended law will affect local and foreign investor?

What is prohibited will be written in this law. If it is not written in the law then it is permitted. This is a special feature of the amended Law on Investment and makes it clearer for all investors.