IMF gives warning of debt distress in Vietnam's future

In its report on Vietnam’s 2016 economy released in late July, the International Monetary Fund (IMF) stated that ‘Public debt has risen sharply, and the risk of debt distress has climbed’.

The ratio of public and publicly-guaranteed (PPG) debt to GDP is projected to increase to 62% in 2016, up over 16 percentage points in the past five years, ‘reflecting persistently high budget deficits’.

Under the IMF’s baseline projection, PPG debt would rise toward 70% of GDP, elevating the risk of debt distress.

According to the World Bank, Vietnam’s total public debt has been rising rapidly in recent years. The government has recently reported that by the end of 2015, Vietnam’s total outstanding public debt (government, publicly-guaranteed and local government) was estimated at 62.2% of GDP-nearly 11 percentage points higher than the level in 2010, and inching quickly toward the legally-mandated ceiling of 65% of GDP.

‘For 2015, the direct debt service was tantamount to 8.4%  of the state budget. If the principal debt service is concluded, the rate is over 26%, Prime Minister Nguyen Xuan Phuc said.

‘The debt service for the 2011-2015 period has been 1.86 times higher than that in the 2006-2010 period. It is forecasted that the debt service will continue rising higher in 2016, 2017, and 2018’, he added.

According to the IMF, the main driver of the rise in public debt is a large and persistent fiscal deficit. A budget deficit of at least 6.05% of GDP was projected for 2016, higher than the 5.9% rate of last year.

In this year’s first 7 months, the budget deficit totalled US$4.7 billion, higher than the US$4.5 billion of last year’s corresponding period.

The long-lasting budget deficit was largely due to an improper spending structure. During the 2006-2010 and 2011-2015 periods, development expenditure fell from 28% to 23.4% of total budget spending, while recurrent expenditure rose from 55%-65% of total spending.

‘Notably, a large part of the recurrent expenditure is used for paying the salaries of the over 11 million people working in state-owned organisations’, said Tran Hoang Ngan, a National Assembly deputy representing Ho Chi Minh City.

‘The state budget currently has to feed a cumbersome administrative apparatus’.

The prime minister also attributed the rising budget deficit and public debt to ineffective usage of state funds.

‘The management and usage of state assets and capital remain too lax’.

There are many examples of this ineffective investment. In the northern province of Ninh Binh, the US$545.4 million Ninh Binh Nitrogenous Fertilizer Plant has annually suffered losses averaging US$91 million since it began operation four years ago.

Some investments have been complete losses. The US$325 million Dinh Vu Polyester Fibre Plant in the northeastern city of Haiphong has suspended operations since October 2015, and the US$100 million Dung Quat Bio-Ethanol Plant in the south-central province of Quang Ngai has also stopped operations.

In another notable case, the US$363.63 million expansion of Thai Nguyen Steel Factory in the northern province of Thai Nguyen has yet to become operational, after 10 years of construction.

According to the IMF, corporate performance in Vietnam has deteriorated in recent years, particularly in state-owned enterprises.

‘Corporations’ profitability has declined and leverage has increased. This combination has significantly reduced corporations’ debt service capacity and is reflected in an increasing share of firms whose debt is at risk, meaning with an interest coverage ratio below one’, said the IMF report.

Worried about the national financial security, Prime Minister Phuc has ordered stringent management of the state coffers. He said that the government would ‘strengthen financial disciplines with tough solutions to curb revenue losses for the state budget, and to prevent transfer pricing and tax arrears’.

He ordered that recurrent expenditure ‘,must be radically saved’, especially in spending for meetings, purchasing state-funded cars, and officials going away on business overseas.

‘We must be responsible for every penny’s worth of tax paid by the public’.