Debt burden risks budget stability

The government may have to borrow its way out of difficulties. Photo: Le Tien

With the National Assembly (NA) yet to consider and approve the ceiling for the government’s debt repayment targets, the government may recalculate these targets to ensure national financial security and promote rapid and sustainable economic growth.

Vietnam’s debt-to-GDP ratio has decreased greatly, from 63.7 per cent in 2016 to about 55 per cent in 2019, and was estimated at 56.8 per cent in 2020, helping the economy to withstand shocks caused by the pandemic and other calamities, without causing macroeconomic instability.

Nguyen Duc Do, deputy director of the Institute of Economics and Finance under the Ministry of Finance (MoF), said that in the next five years, public debt may not cause a lot of pressure because of lower interest rates and a suitable loan structure, which changed continuously compared to 10 years ago. He believed that, after the debt restructuring, the pressure to repay the principal will be greatly reduced and will only happen in the first few years, if at all.

Nevertheless, the optimism about the government’s debt repayment ability also comes with many worries as Vietnam has seen many years of taking new debt to repay previous ones.

Data from the MoF showed that the number of loans that have to repay the principal, maturity, and overspending is increasing rapidly. While in 2017, the payable debt stood at $6.26 billion, by 2020 public debt including interests more than doubled to about $13.8 billion.

Last year, the ratio of foreign debt repayment obligations to exports was 34.6 per cent, nearly 10 per cent higher than the 25 per cent ceiling.

This year, there is a forecast of more than $16 billion of direct debt, equal to about 27.4 per cent of the budget revenue and higher than the allowed ceiling. By the end of last year, the government’s direct debt payment obligation compared to state budget revenue was estimated at 24.1 per cent and the national external debt stood at about 47.9 per cent of GDP.

In addition, according to the 2021 budget allocation submitted to the NA at the recent session, the government will have to borrow about $25.2 billion to balance the central budget, including loans to offset an expected budget deficit of about $13.8 billion and to repay the budget’s principal of an expected sum of about $11.3 billion.

Managing the state budget revenue is increasingly complicated, causing the debt-to-GDP ratio – a measurement of the government’s debt repayment ability – to decrease. The reason is that budget revenue depends too much on unstable sources, while tax revenues are also decreasing as Vietnam joined international trade agreements. For example, a part of the budget revenue comes from the sale of state assets, but only once these are liquidated.

Last year, the state budget revenue did not meet the set target, putting pressure on debt repayment obligations compared to revenues, which has tended to increase in recent years, approaching the 25-per-cent threshold approved by the NA for the last five years. According to the State Treasury, state budget revenue in 2020 was only 96.35 per cent of the estimate.

Increasing pressure

The annual debt repayment burden continues to challenge the government, as Vietnam applies a new GDP calculation method from 2021. It is expected the ratio of debt to state budget revenue will mount to over 27 per cent, which will need to be controlled by the new government.

With this new calculation, Pham The Anh, chief economist of the Institute for Economic and Policy Research (VEPR), found that the public debt ratio will drop sharply to only about 45-46 per cent of GDP, but the absolute public debt and the ratio of public debt to state budget revenue are still increasing rapidly.

Anh, who has been monitoring the public debt situation for nearly 20 years, has warned more than once that the government may have to borrow money for covering the budget deficit and repaying its debts. As such, both principal and loan amounts will always be higher in the next than in the previous year.

The government may also want to consider the possibility that the NA will approve an increase in the state budget deficit ratio this year, which will consider the mobilisation of domestic financial reserve funds, state funds, and even consider the issuance of government bonds in the international capital market.

Limited capacity

The government’s expectation of borrowing 2-3 per cent of GDP to supplement development investment and support the economy to cope with the impact of the pandemic may also affect the ability of foreign debt repayments in the medium and long term.

Looking at the data of the MoF, disbursement of public investment capital, especially official development assistance (ODA) loans and foreign preferential loans, has been slow so far. The implementation of the capital usage plan for the last year that has been assigned by the NA and the government remained low, at over $10 billion in signed foreign ODA and concessional loans, which should be prioritised for disbursement in 2021 as well as the next period in accordance with commitments with donors.

Meanwhile, mobilising foreign loans to directly support the budget cannot be deployed quickly due to the small scale and associated policy constraints. In addition, mobilising foreign loans for new projects requires a long preparation time, possibly up to 2-3 years due to many procedures that must be implemented before the completion of negotiations and disbursement.

In addition, the capital absorption capacity of the domestic government bond market is still limited. The issuance of a large amount of additional capital will lead to the risk of putting pressure on the government’s borrowing costs or lead to risks associated with the refinancing in the following years in case the government must issue short-term bonds to meet the increasing demand for loans.

In 2014, the massive bond issuances, the main reason for pushing the public debt to exceed the 65 per cent ceiling set by the NA, put pressure on national financial safety. Debt growth rate was much faster than GDP, but borrowing was mainly for debt repayment, not for production, while the issuance of a large number of government bonds at that time had put great pressure on inflation.

At that time, the biggest risk lay not in the figures but the wrong view of public debt. Vietnam’s public debt calculation method back then did not include government-guaranteed debt, and outstanding debt in capital construction had not properly assessed the actual risk. The history of Vietnam’s public debt cannot ignore the lesson of Vinashin, which issued bonds with a terrible interest rate of 20 per cent a year, with a term of five years, one of the main causes of the state-owned enterprises’ (SOEs) failure.

Vo Huu Hien, deputy director of the MoF’s Department of Debt Management and External Finance, found that it is likely that the budget space for development investment and recurrent spending will decrease in the next five years.

According to Hien, the government’s direct debt repayment obligation will be highly concentrated in the 2021-2025 period, with a few years possibly exceeding the threshold of 25 per cent, mainly due to the issuance of domestic government bonds issued in the previous five years that will mature then.

Hien said that while closures and restrictions caused by the pandemic have affected the economy significantly since last year, past solutions to improve Vietnam’s public debt situation have not yielded impressive results.

The government increased investment from the public sector to encourage the private sector to follow suit, but in the current business environment, investment bait from the public sector can only attract the private sector to follow in the short term, with unstable results.

The government also demanded a rate cut to stimulate private investment, which is necessary but not sufficient for a market lacking confidence. Many other reform packages have also been launched, from restructuring public investment, the banking system, and SOEs, to reforming related laws, but none of these measures has shown any breakthroughs. n

Next week VIR will analyse the new driving force to boost Vietnam’s economy, with signs that the new government may consider the establishment of special economic zones to stimulate growth and also improve connectivity.