Vietnam seeks new loans to pay off mounting debt: BIDV

By    June 8, 2016 | 07:11 pm GMT+7

Vietnam is on the hunt for fresh credit to pay back existing debt after setting aside between 14 and 16 percent of total outstanding government loans and government-guaranteed loans to fulfil its debt obligations, said BIDV, one of the country’s largest lenders by assets, on Wednesday in a report.

The Vietnamese government reportedly used 14.2 percent of its outstanding loans to pay back debts which were due for repayment in 2014, according to the Finance Ministry.

The World Bank estimated that the figure jumped to 16 percent in 2015.

The fact that government is using new loans to pay back previous debt limits the funds that could have been channeled into development projects to meet rising demand of the growing economy, said the BIDV report.

Vietnam used to rely heavily on foreign loans, including official development assistance (ODA), which were offered at annual interest rates as low as 1 to 3 percent.

However, since Vietnam became an emerging middle-income country with a $154 billion economy and income per capita of around $1,700, according to World Bank statistics, the concession level among ODA loans for the Southeast Asian country has fallen sharply.

In recent years, Vietnam has borrowed more from local debt markets, and as a result, domestic debt rose from 40 percent in 2011 to 57.1 percent in 2015, according to BIDV.

In the face of falling external public debts, Vietnam has turned to domestic sources to meet its financing needs, of which bonds have been a key source of funds for government spending.

BIDV said sales of government-guaranteed bonds during the five-year period of 2011-2015 increased two and a half times as fast as the average pace of 2006 -2010.

Last year, in an attempt to reduce the pressure of debt repayments, Vietnamese lawmakers decided to set new rules on the trading volume of government bonds.

According to the new regulation, the State Treasury, which holds weekly bond auctions at the Hanoi Stock Exchange, has offered more long-term bonds and cut the trading volume of short-term bonds on the domestic debt market so that the proportion of bonds with tenures of five years or more will increase to 46 percent of the gross debt.

Vietnam’s public debt nearly doubled to VND2,608 trillion ($116 billion) in 2015 from VND1,393 trillion in 2011, according to official statistics.

Last year’s public debt was estimated to stand at 62.2 percent of gross domestic product (GDP), which was relatively close to the ceiling of 65 percent set by the National Assembly.

Vietnam remains at low risk of debt distress, according to the World Bank and IMF, however, these international institutions have urged Vietnam to tighten its belt in the face of sharp increases in public debt.

vietnam-seeks-new-loans-to-pay-off-mounting-debt-bidv

Vietnam will need to invest 10 – 12 percent of gross domestic product to boost infrastructure during 2015-2020 to meet rising demand as the economy expands. But with a budget deficit running at 6.1 percent of GDP last year, Vietnam hardly has enough funds for spending projects. Photo by Hai Dang

BIDV forecasts Vietnam will need to invest 10 – 12 percent of gross domestic product to boost infrastructure from 2015-2020, including transport and energy projects, to meet rising demand as the economy expands.

But with a budget deficit running at 6.1 percent of GDP last year, Vietnam will hardly have enough funds for spending projects, the bank added.

According to the Ministry of Planning and Investment, the debt service ratio- debt repayment expenditure as a percententage of state budget revenues- soared to 38 percent in 2014 and 45 percent in 2015. As a result, Vietnam had to seek new loans to meet its debt obligations, from VND80 trillion in 2014 to VND150 trillion in 2015.

Vietnam has set an annual economic growth target of 6.5 - 7 percent in the next four years, which, BIDV said, will put more pressure on public debt.

Hanoi-based lender BIDV suggested by 2018 the government keep the ratio of public debt to GDP under 63 percent, maintain the foreign debt to GDP ratio below 50 percent, sustain foreign exchange reserves for at least three months of imports and aim for a budget deficit under five percent of GDP.

 
 
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