Loans secure sustainable growth

Nguyen Thanh Do

Nguyen Thanh Do, head of the Debt Management and External Finance Department at the Ministry of Finance, sheds some light on Vietnam’s public debt situation.

Many National Assembly deputies assumed Vietnam’s current public debt was fairly high. Is that the case?

The ‘safe public debt rate’ concept varies worldwide. The EU regulates public debt levels under 60 per cent of gross domestic product (GDP) are safe; for Japan, safe means lower than 200 per cent of GDP, and for South American countries this figure ranges from 40–50 per cent of GDP. The US and some other countries, meanwhile, do not regulate a public debt rate over GDP, but have regulations on ceiling public debt rate.

Though the future ceiling public debt rate for Vietnam has not yet been defined, the prime minister has set the ceiling for government and foreign debt at 50 per cent of GDP. This means Vietnam’s debt rate is still safe as of late 2011 government debt is tantamount to 45.3 per cent of the GDP only and foreign debt is 42.8 per cent of GDP.

But wouldn’t Vietnam’s public debt be extremely high if the debts of country’s state-owned enterprises (SOEs) were factored in?

The Law on Public Debt Management says Vietnam’s public debt consists of government debts, debts where the government acts as underwriter and debts of local governments. We do not include SOE debts in public debt as is case in Thailand, France and some other countries because, like private equity and foreign-invested enterprises, state firms take on loans on the principle that they will repay what they borrow.

Also, from July 1, 2010 SOES of all sorts started to operate under the Enterprise Law. The state has granted equity to these firms and those firms are responsible for their debts within the scope of the equity capital they were granted.

Vietnam’s GDP growth averaged 7 per cent a year from 2006–2010, however, our foreign debt doubled in the period. Does this reflect Vietnam’s inefficient usage of foreign loans?

Asian Development Bank figures show that ASEAN member countries posted average economic growth of 5.6 per cent per year over the past five years. Specifically, Thailand’s economy expanded 3.6 per cent per year, Malaysia’s grew 4.5 per cent annually, Indonesia’s 5.7 per cent per year, that of the Philippines expanded 4.9 per cent, Singapore’s 6.5 per cent and Vietnam’s around 7 per cent per year. This positive figure comes from the fact we made effective use of local and foreign loans for social and economic infrastructure development.

The amount of debt rose sharply compared to actual economic growth. Is this a big issue?

I think it is unreasonable to compare economic growth with debt growth since our 2011 GDP was worth an estimated $106 billion, or three times the foreign debt amount. When local financial sources remain finite, sourcing foreign loans for investment development is nothing out of the usual. Many countries worldwide are making use of long-term foreign loans with preferred interest rates for infrastructure development, and this is what Vietnam is doing.

When will foreign debts stop stacking up?

When investment projects are up and running and we can recoup investment to repay debts then foreign debts will start to slide.

In addition, after a period of economic growth the economy has accumulated wealth. It is time for us to become less reliant on foreign loans and focus more on loans from internal sources to minimise risks – and particularly those related to the dong–dollar exchange rate. Borrowing orientations in the coming period include the use of external capital while locally sourced capital will play a decisive role to ensure development on a sustainable footing.