Vietnam debt obligations rising rapidly

The report on quarter-one macroeconomic performance says the Government’s debt obligations soared from VND185.8 trillion in 2013 to VND296.2 trillion last year. If the loans guaranteed by the Government and taken out by cities and provinces are included, the amount would be far bigger.

Due to surging debt obligations, the ratio of debt payment to budget revenue has picked up.  With direct debt obligations of the Government alone, the ratio was 22.4% in 2013 but soared to 29.9% in 2015 as the Government borrowed a lot of short-term loans, mainly by issuing bonds of one to two years between 2010 and 2012.

Rising debt payments will pile pressure on the State budget if the issuance of G-bonds does not go as well as planned, according to the report.

With a young, volatile financial market, it is tough to issue long-term bonds. Most G-bond buyers are commercial banks which normally have much short-term capital.

Therefore, insolvency risks are high. This was possibly one of the reasons why the Ministry of Finance borrowed VND30 trillion from the central bank and issued US$1 billion worth of bonds for Vietcombank last year.

The ratio of budget deficit to gross domestic product (GDP) in Vietnam is higher than that of other regional countries.

In particular, according to data of the IMF World Economic Outlook (WEO), Vietnam’s budget deficit in 2015 made up 6.9% of GDP while the respective ratios of Thailand, Indonesia, the Philippines and Cambodia were 1.2%, 2.3%, 0.12% and 2%.

According to WEO, the budget deficit of Vietnam tends to skid in the coming years, but it will remain higher than other ASEAN countries by 2020.

Vietnam’s public debt to GDP is also higher than Indonesia, the Philippines, Thailand and Cambodia, and is projected to climb to nearly 68% in 2020.

Another concern is that investments have decreased, from 27.7% of total spending in the 2007-2013 period to 16.3% in 2014 and 15.6% in 2015. Meanwhile, regular and other expenditures have gone up.

As a lower-middle-income economy like Vietnam, public investments are vital to create solid foundations for economic growth. As a result, the low ratio of investments is cause for concern though last year’s total investments did pick up.