Sharp teeth to bite into public debt

Vietnam needs to draw up a rock-solid debt management strategy and develop its domestic bond market if it wants to rein in soaring public debts.

According to Ministry of Finance (MoF) figures, Vietnam’s public debt at the end of 2010 stood at 57.3 per cent of gross domestic product (GDP), government debt was 45.7 percent, and external debt 42.2 per cent.

Vietnam’s public debt surged 25 per cent from 2007 to 2011, or an average five per cent annually.

And despite the government’s affirmations that Vietnam’s public debt indexes were still within the safety zone, many experts have voiced concerns that Vietnam’s ratio of public debt/GDP could hit 70 per cent by 2015. They said this was entirely possible because of slowing GDP growth and high investment demand, especially for infrastructure investment.

“It is hard to reduce the ratio of public debt/GDP in the coming years, unless there is economic recovery or a reduction in public investment [in proportion to GDP)],” said Nguyen Xuan Thanh, director of Public Policy Department of Fullbright Economics Teaching Program. Thanh said the challenge for Vietnam over the next few years was to ensure the country’s ability to repay public debt used for financing investment projects and to replace public debt funding by other financial sources.

Suhas Joshi, International Monetary Fund (IMF) regional advisor, said Vietnam needed a sophisticated strategy to meet challenges for 2010-2020. “It is necessary to manage risks in a systematic and strategic fashion to ensure we meet financial obligations, that is [we need to] reduce liquidity risks and ensure [there is] fiscal space available to absorb impact of other shocks such as natural disasters, [as well as] reduce volatility of debt servicing costs,” said Joshi.
Prime Minister Nguyen Tan Dung last week said the public debt/GDP ratio could reach 60-65 per cent by 2015

The MoF’s Debt Management and External Finance Department said the ministry was submitting a draft public debt and national external debt strategy for 2011 to 2020 and with the vision to 2030 to relevant authorities for approval. This includes an assessment of Vietnam’s current public debt situation, objectives and directions for fund mobilisation and usage, and debt management policies.

The MoF has already developed the 2010-2012 medium-term debt management programme. After the National Assembly approves this project, the 2012-2014 medium-term debt management programme will be updated.

Experts, meanwhile, offered up their own views on how to tackle Vietnam’s growing debt problem.
Together with a debt strategy, developing the domestic bond market as a sustainable source of funding was one efficient way to solving the public debt problem, said Ranee Itarat, director of Thailand Policy and Planning Bureau’s public debt policy research division. Itarat said many Asian countries had a high savings ratio and this had not been taken advantage of.

“It is necessary to develop the domestic bond market so the country will not have to depend on foreign loans which should be replaced by domestic capital mobilisation in the bond market,” she added. Meanwhile, economist Nguyen Quang A said the first step towards reducing public debt was to improve the efficiency of public investment projects. “The only way to raise public investment efficiency is through transparency in investment and loans through the supply of regular information,” he said.

According to a 2010 Ministry of Planning and Investment report, 65 per cent of Vietnam’s GDP growth relies on investment capital from citizens while labour productivity only contributes 25 per cent.

Source VIR

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial