Public debt still in safe zone

Deputy Chairman of the National Assembly’s Economic Committee Nguyen Duc Kien
illustration photo

Vietnam’s sovereign debts have risen from 54.9 per cent of GDP in 2011 to 55.7 per cent in 2012 and 56.2 per cent in 2013. Deputy Chairman of the National Assembly’s Economic Committee Nguyen Duc Kien explains why these increases have not put Vietnam in the danger zone.

Many economic experts and National Assembly members are worried about the constant rise in sovereign debts. What is your view on this?

Determining whether sovereign debts are still in the safe zone depends on how one looks at the issue. There is more than just the ratio of debt to GDP. There are indicators such as repayment obligations against total budget collections, foreign debt payments compared to total export value, and government debt against total budget collections.

The prime minister recently approved a series of moves for the year including debt repayments of VND208 trillion ($9.9 billion), borrowing VND367 trillion ($17.4 billion) from domestic sources and borrowing $4.5 billion from external sources. These make sense from a statistical point of view but other factors will also determine the safety of sovereign debt ratios.

For example, looking at the rest of the world, countries like Japan or the US have sovereign debt ratios equaling or exceeding GDP; and no international financial organisations have said these nations are in the danger zone.

International rating organisations have, in fact, put great confidence in the ratios of the US and Japanese government and numerous countries throughout Europe in similar situations.

So this means it really comes down to the repayment ability of the borrower, right?

Yes. The safe zone for sovereign debt or the debts of businesses and individuals comes down to how effective the money is used, whether it has gone toward the state purpose, and if they have the ability to pay it back.

For instance, a credit entity looking at lending tens of thousands of dollars to a borrower would not be pleased if the borrowed funds went toward something other than what they said in their application or if they found the borrower had a financial problem.

But on the other hand, a credit institution might be eager to lend a customer even bigger funds if they went into an effective project and the firm had strong finances.

As an economic expert, do you think Vietnam’s current sovereign debt ratio is in the safe zone or not?

Theoretically, the World Bank and International Monetary Fund have stated that for countries of the same development level and scope as Vietnam, sovereign debt should not exceed 65 per cent of GDP and foreign debts should not surpass 50 per cent of GDP. Compared to these benchmarks, Vietnam is still in the safe zone as our foreign debt as of last year actually went down to 39.5 per cent of GDP, against 41.1 per cent in 2012 and 41.5 per cent in 2011.

Our sovereign debt against GDP, despite rising consistently over the last three years, has still stayed below the warning level of 65 per cent.

More importantly, we have effectively used foreign loans which have reciprocated in increased budget collections sufficient enough to repay the loans while at the same time export value has risen considerably. As of this time, state budget finalisation reports approved by the National Assembly show that Vietnam has always performed its payment obligations fully and on time.