VietNamNet
Bridge – In recent weeks, Vietnam’s government debt has become a hot topic,
which attracts public opinion, international institutions and community.
Information about government debt of Vietnam
and other countries in the world has once again made analysts to be more
interested in the Vietnamese government’s effort in curbing inflation and
raising the economy, which seems to be ineffective, since it is related to
Vietnam’s ability to pay debt.
Contracting a debt is actually not a big
problem for an individual, an enterprise or a country when they need capital
for development. The biggest and most important is how to bring into full play
of loans to be able to pay debt timely and build trust with creditors. It is
especially important for loans of government or businesses that are guaranteed
by the government, which are called government debt, to differentiate from
commercial loans.
Mentioning government debt, the ratio between
loans and GDP is a significant parameter. It is considered safe if the ratio is
less than 50 percent. However, it is not an absolute parameter because the
potential of the economy, the ratio of domestic, foreign, short and long term
loans are also important.
In the last two weeks, there is some
information about Vietnam’s government debt that attracts the public opinion.
Firstly, the report on Vietnam’s foreign debt
2010, published by the Ministry of Finance, the government’s foreign debt and
loans of businesses guaranteed by the government reaches $32.5 billion, $4.6
billion more than 2009. Foreign debt accounts for 42.2 percent of the GDP, in
comparison with 39 percent in 2009. This is the highest level since 2006.
Notably, from now to 2015, Vietnam will have
to pay foreign debt and interest of nearly $1.5 billion a year on average.
Vietnam’s sovereign liabilities will peak in 2020, to hover at about $2.4
billion when the government’s $1 billion worth of overseas bonds issued in 2010
matures.
The Ministry of Finance’s Agency for Managing
Debts and Finance estimates that in 2011, government debt (both domestic and
foreign debt) will be VND1,375 trillion ($65.47 billion), equivalent to 58.l7
percent of GDP. From 2007 to the end of 2011, Vietnam’s government debt has
increased by 25 percent, to reach 5 percent annually. With this pace, the
country’s government debt will be equivalent to 100 percent of GDP in eight
years, under Vietnam’s calculation, and will be higher under the World Bank and
the International Monetary Fund’s calculations.
This is a big challenge for Vietnam in the
context that the economy is facing many difficulties due to the government’s
measures to control inflation are not effective yet.
Secondly, Standard & Poor’s (S&P) has
just lowered Vietnam’s local currency long-term sovereign credit rating to
‘BB-‘ from ‘BB’. In its announcement launched on August 19, S&P said that
the local currency rating on Vietnam is now equal to the foreign currency
rating, because the Vietnamese dong’s pegged exchange rate limits its monetary
policy independence, and its domestic financial and capital markets are at
early stages of development.
While stressing that Vietnam’s underlying
creditworthiness has not changed since it downgraded the country’s dollar debt
in December 2010, the rating agency warned that Vietnam’s fragile banking
system was still vulnerable to shocks in light of ongoing macro-economic
instability and capital flight.
Though the downgrade comes from S&P’s new
rating method, but this firm suggested that the outlook for Vietnam’s credit
rating was “negative”, because of the risk of near-term instability caused by
rising balance-of-payments pressures or contingent liabilities from the
financial sector.
It predicted that Vietnam’s GDP would grow at
5 percent this year, below the above 7 percent average of the last decade and
the government’s downgraded target of 6 percent.
Echoing the views of many doing business in
Vietnam, the rating agency added that to improve confidence, the government
must maintain currency stability and work hard to reduce leverage in the public
and private sectors.
It said that it could lower Vietnam’s credit
rating if pressure on the balance of payment or financial risks increases. If
it happens, it will be very difficult for Vietnam to borrow foreign loans.
The worry over Vietnam’s government debt is
mainly sourced from the ineffective use of government loans. Poor government
spending and the government’s capital assistance to state-owned enterprises are
key reasons for overspending, which urges the government to borrow more.
According to the National Assembly Standing
Committee, by December 31, 2008, the total domestic debt of state-owned groups
was VND287.1 trillion ($13.66 billion). If foreign debt is included, the total
debt of the state-owned sector accounted for 23.9 percent of Vietnam’s GDP.
In 2009, debt of 81 out of 91 State-owned
groups hit VND813.435 billion ($38.7 billion), equivalent to 49 percent of GDP,
according to the government’s report. If the Vietnam Shipbuilding Industry
Group’s debt – VND86 trillion ($4.1 billion) as estimated by the Finance
Ministry, is added, the State-owned sector’s debt was up to 54.2 percent of GDP
by the end of 2009 (the debt of nine State-owned groups is not fixed yet).
Obviously, debt of the State-owned sector and
the government has quickly increased in the short period of time, particularly
debt of the State-owned sector. In 2009, the State-owned sector accounted for
around 60 percent of the increase of total domestic debt of the entire economy.
Though government debt is considered to be in
the safe threshold, but Vietnam is facing many risks.
The first risk is the country’s foreign
currency reserve, in which the part to pay foreign debt is very modest,
according to the Ministry of Finance.
The second risk is exchange rate. Vietnam’s
foreign debts are based on the US dollar. As the Vietnam dong depreciates,
Vietnam’s foreign debt is higher.
The trend of depreciation of the Vietnam dong
is considered as serious. According to the Finance Ministry’s statistics, the
Vietnam dong depreciated by over 2 percent in 2007, in comparison with the US
dollar, the level was over 10 percent in 2010. In early 2011, the Vietnam dong
was devalued by over 9 percent.
The depreciation of the Vietnam dong, plus
high inflation, soft foreign loans (with interest rates from 1 to 3 percent
only) can increase highly. Dr. Le Xuan Nghia, Vice chair of the National
Committee for Financial Supervision, said: “We borrowed loans when the exchange
rate was only VND11,000/US$1, but now the exchange rate is over VND20,000/$1.
Our biggest risk is foreign exchange rate.”
The third risk is objective: Vietnam has
passed the threshold of middle income countries, so it no longer enjoys donors’
incentives.
Vietnam is now at the first level of the group
of middle-income countries (with per capita income from $1,000 to
$10,000/year). Accordingly, foreign loans like ODA will reduce. If Vietnam
wants to maintain these loans, it will have to pay higher interest rates.
Vietnam’s ODA in 2010 accounted for 75 percent
of total foreign debt. It also enjoys some other loans with interest rates of
less than 3 percent of year for low-income countries. When Vietnam joins the
group of middle-income countries, it will have to pay higher interest rate and
have less soft loans.
However, the biggest difficulty is internal
risks of the macro economy, including high inflation, ineffective use of
capital, corruption, which make interest rates of loans higher.
DNSGCT
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