Vietnam - The origin of public debt

VietNamNet Bridge – Ineffective public investment is the main reason that causes increasing public debt.

>> Vietnam’s public debt is safe? 

Vietnam has 194 industrial parks, totaling nearly 46,600 hectares in area. It will also have 1,643 industrial complexes, licensed by provincial authorities, that cover nearly 73,000 hectares by 2020. On average, only 50-60 percent of the area of industrial parks are hired at present. Vietnam will need at least 10-15 years and $50 billion of capital to fully fill up these industrial parks.

The central government has also ratified 15 coastal economic zones, with a total area of 662,000 hectares (two percent of Vietnam’s natural area). The country needs $2 trillion (equivalent to Vietnam’s entire investment in the next 50 years) to invest in these zones.

In the central coastal region, there is one seaport for each 30-40km. However, these seaports are not fully used.

In 2011, the government tightened public investment but there were 333 unnecessary projects were kicked off. Briefly, the growth of public investment in the last ten years was higher than the growth of gross domestic product (GDP). The State-owned sector has highly benefited from public investment but this sector’s public investment effectiveness is the lowest.

Public investment is high but ineffective while Vietnam’s savings reduces. This is one of the main reasons that have led to high inflation, increasing interest rates and quickly increasing public debt.

Particularly, debts of State-owned enterprise have been rising, which makes the increase of public debt, bank’s bad loans and capital appropriation.

According to Deepak Mishra, chief economist of the World Bank in Vietnam, State-owned enterprises are holding up to 60 percent of credit of banks and credit institutions. They also own 70 percent of bad debts of banks.

The National Financial Supervision Council reports that by the end of August 2011, the total bad debt of banks in Vietnam was over VND76 trillion ($3.8 billion) and it tends to rise. Credit institutions may lose VND37 trillion ($1.85 billion).

Credit institutions that have high bad debts consist of the Vietnam Thuong Tin JS Bank, De Nhat JS Bank, the PetroVietnam Finance Company, Viet Thai Joint Venture Bank, United overseas Bank, etc.

The bad debts of some banks are higher than the average bad debt ratio of the entire banking sector (3.21 percent). Bad debts of the Bank for Agriculture and Rural Development of Vietnam is 6.67 percent, and it is 3.47 percent for the Bank for Foreign Trade of Vietnam (Vietcombank).

According to a recent report, some State-owned economic groups are big debtors, for examples the Electricity of Vietnam (EVN) Group with nearly VND8 trillion ($4 billion), the Petroleum Import Export Group (Petrolimex) with VND1.5 trillion ($750 million), the Vietnam Shipping Lines Group (Vinalines) with more than VND600 billion ($300 million).

While bad debts of banks are quickly increasing, the purchase of bad debts under the State Bank of Vietnam’s Decision 59 is complicated and time-consuming. When a business is insolvent, it is difficult to deal with their mortgage assets. As a result, foreign financial institutions do not want to join this business.

This fact does not only cause difficulties for banks, but it is also a worrying sign for the entire economy. Once bad debt of banks increases, the nation’s credit goes down, the image of Vietnam in the eye of the international community will be affected.

In addition, dealing with public assets and debts of the State-owned sector is a long and slow process. Public debts in Vietnam are mainly purchased and solved by the Debt and Asset Trading Company (DATC), a wholly-state owned company under the management of the Ministry of Finance. This company is assigned to deal with debts and assets of State-owned enterprises and promote the arrangement and changing ownership of State-owned enterprises.

The total debts and public assets that DATC has received from State-owned enterprises is VND3.03 trillion ($1.5 billion), including VND1.31 trillion of debts ($600 million) and VND1.8 trillion ($900 million) of public assets.

This firm has collected only VND12.6 billion ($600,000) out of VND1.31 trillion of debt, accounting for 2.2 percent of debts, with necessary documents, and VND363 billion worth of assets, or 22 percent of the total asset value on books.

Up to three fourth of DATC’s capital (VND641 billion - $300 million) has not been invested in business. This huge volume of capital is deposited at banks. This company’s investment and service activities are implemented slowly.

Measures to control public debt

Firstly, to maintain public debt at safe level, Vietnam should learn from expensive lessons of other countries, including developed ones.

The fact shows that the trap of public debt develops rapidly and more seriously than the anticipation of any government and international organization. Moreover, it is cheaper and easier to prevent the increase of public debt from the beginning rather than when the public debt ‘bomb’ explodes.

Vietnam should warn itself about public debt, especially when its foreign debt has approached the limit of the economy’s ability to bear it and when the public debt crisis is a global threat.

Secondly, Vietnam should continue exploring international preferential loans in order to increase the source of cheap and safe capital.

It is good news for Vietnam that in a meeting with PM Nguyen Tan Dung last November, the World Bank’s Vice President James Adam confirmed that the bank would maintain its grant of preferential capital and ODA to Vietnam to invest in infrastructure development, hunger eradication and poverty reduction and anti-climate change.

In addition, Vietnam’s foreign debt seems to reduce while domestic debt seems to increase. This is a good trend that helps Vietnam reduce its dependence in foreign sources.

The government has told relevant agencies to improve the transparence of public debt and debt management. Public debt is updated for every three months by the Finance Ministry. The ministry has also formed the Debt Management Agency and it is developing a project on national credit rating in a bid to raise Vietnam’s credit.

Thirdly, it is needed to develop the public debt trading market.

This market must have the participation of many State-owned and non-State debt purchasing companies, not only the State-owned Debt and Assets Trading Company (DATC) as at present.

Fourthly, public investment must be re-organized and strictly controlled to raise effectiveness.

Dr. Nguyen Minh Phong

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