Vietnam shifts to domestic funding to finance public spending

July 19, 2016 | 07:51 am GMT+7

With the country hitting middle-income status, overseas credit is drying up.

In recent years, Vietnam has borrowed more from local creditors. As a percentage of the total outstanding government debt, domestic debt rose from 39 percent in 2011 to 57 percent in 2015, the government's online news portal cited Vo Huu Hien, deputy head of the Department of Debt Management and External Finance, as saying on Monday.

Hanoi-based partly privately-owned bank BIDV said sales of Vietnamese dong-denominated bonds from 2011-2015 increased two and a half times as fast as the average pace from 2006-2010.

Last year, in an attempt to mitigate the risks of debt repayments, Vietnamese lawmakers set new rules for the local debt market. The State Treasury, which holds weekly bond auctions at the Hanoi Stock Exchange, is offering more long-term bonds so that the proportion of bonds with tenures of five years or more will increase to 46 percent of the gross debt.

Statistics show that from 2011 to 2013, the Vietnamese government mainly sold bonds with terms of less than three years. It gradually extended those terms from three years in 2014 to 4.4 years in 2015 and to five years in the first half of 2016. Bond yields fell from 12 percent in 2011 to around six percent in 2015.

While shifting towards domestic sources to raise funds, Vietnam has placed less reliance on foreign creditors, cutting loans down to 43 percent in 2015 from 61 percent in 2011.

Official statistics show the Southeast Asian country has relied heavily on official development assistance (ODA), which currently accounts for 94 percent of the country’s total external debt with average maturity of 10 years and annual interest as low as 2 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 country will fall sharply in the years to come.

The World Bank forecasts that public debt will climb to 63.8 percent of the country’s gross domestic product in 2016, 64.4 percent in 2017 and 64.7 percent in 2018.

Vietnam has classified public debt in three main categories: government, government-guaranteed and local government debt.

Much of the rapid expansion in Vietnam’s public debt comes from government spending to boost the economy, said Vo Huu Hien, citing annual economic growth of 12.2 percent from 2011-2015 compared to just 9 percent over 2006-2010.

The country wants to rapidly develop infrastructure, including transport and energy projects, to meet rising demand as the economy expands at speed.

Total investments were reportedly at 39 percent of GDP from 2001-2005, then soared to 42.9 percent during 2006-2010 and edged down to 32 percent in the past five years.

“Due to unfavorable conditions from 2011-2015, [Vietnam] has adjusted its targeted annual economic growth rate to 6.5-7 percent from the previously estimated rate of 7-7.5 percent,” said Vo Huu Hien.

“The economy has slowed down, but [the government] cannot afford to reduce borrowing or cut spending as it still needs funds to boost, maintain and stabilize socio-economic development and ensure social welfare. As a result, the public debt-to-GDP ratio is on the rise,” he added.

vietnam-looks-to-internal-sources-to-solve-public-debt-problem-ed

Vietnam has increasingly turned to local debt markets to meet its financing needs, said Vo Huu Hien, deputy head of the Department of Debt Management and External Finance. Photo courtesy of the Ministry of Finance.

The country’s budget deficit is on the rise, reaching 6.6 percent of GDP last year, so Vietnam has been looking into ways to pursue its growth target without adding to its debt.

Shifting the debt burden

Vietnam has set a goal of bringing public debt down to 60 percent of GDP by 2020. In doing so, the government has laid out a series of measures, including cutting loan guarantees for state-owned firms.

State-owned enterprises (SOEs) make up nearly 40 percent of total investment in the country, but contribute only a third of Vietnam’s GDP, according to the World Bank.

The Vietnamese government will reduce its guarantee responsibility for repayments of debts that SOEs secure from foreign creditors. As a result, state-owned firms will rely less on state financial support, reducing the burden on the state budget.

The government usually offers guarantees to state-owned companies so they can have easy access to cheap credit due to the government’s high credit rating.

Vietnam had issued some $21 billion of government-guaranteed bonds as of the end of 2015, including $626 million bonds offered at the Singapore Stock Exchange to help state-owned shipbuilder Vinashin repay its foreign creditors, said the Ministry of Finance in a report on its website.

Along with the ongoing privatization of SOEs, this will prevent companies that used to be backed by the government like national carrier Vietnam Airlines and state utility EVN from accessing cheap government loans.

According to the Finance Ministry, if state-owned giants like oil and gas group PetroVietnam and EVN intend to secure more loans with government guarantees, they must ask the National Assembly for approval to ensure the nation’s financial security.

The Vietnamese government is trying to settle part of government-guaranteed debts by paying back $131.5 million, said the Finance Ministry.

In an effort to curb the budget deficit while boosting growth, the Vietnamese government has also cut 10,000 civil service jobs and asked state oil giant PetroVietnam to increase production following its falling budget contributions in the first half of 2016.

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