Public debt set to rise on the back of Brexit turmoil

In the local market, the dong eased to 214.8 per yen on June 29, from 211.34 on June 23 when Britons voted to leave the EU.

“This would increase the pressure of paying debts to a country where a large part of its external loans are valued by the yen,” said economist Nguyen Tri Hieu.

A large part of the country’s external loans are valued by the dong and the yen. Up to 40% of the country’s public debts will have to be paid by the yen, 25% by the dollar, and 15% by euros.

According to a plan recently approved by Prime Minister Nguyen Xuan Phuc, Vietnam’s debt servicing costs are estimated at VND272.3 trillion (US$12.1 billion) this year, when the government will borrow VND452 trillion (US$20.5 billion) to make up for its budget deficit and refinance its existing debts.

Truong Hung Long, head of the Department of Debt Management and External Finance under the Ministry of Finance, said public debt was equal to 62.2% of the country’s GDP, the government’s debt was tantamount to 50.3% of GDP, and the external debt was equivalent to 43.1% of GDP, as of December 31, 2015.

According to Hieu, the situation can worsen as the Japanese yen continues rising in the coming months. Meanwhile, Vietnam, besides repaying the government’s debts, still has to repay loans borrowed by enterprises with the government’s guarantee if enterprises face losses and fail to repay the debts.

According to analysis by the securities firm Maybank Kim Eng, the yen can increase by a further 11.7% by the end of the year.

Pha Lai Thermal Power JSC (PPC) is one of the local companies affected most severely by the yen hike. According to the company’s 2015 financial report, the firm borrowed VND4.36 trillion (US$198.2 million) from the Japan Bank of International Cooperation as of December 31, 2015. The loan is valued on the yen.

The yen hike raised PPC’s loan by VND283.6 billion (US$12.9 million) last year. If the yen rose by 11.7% by the end of this year, the loan would rise by VND1 trillion (US$45.5 million), said experts.

The Airports Corporation of Vietnam (ACV) is also facing the same issue. According to the firm’s financial report, ACV borrowed VND13.3 trillion (US$604.5 million) from Japan to build terminals at the country’s two biggest airports, Noi Bai in Hanoi and Tan Son Nhat in Ho Chi Minh City.

The yen rise last year raised the firm’s yen-valued loans by VND638 billion (US$29 million).

Many electricity and cement enterprises will have to deal with increasing costs as they access yen-valued loans.

In addition to the yen, the dollar hike will also worsen Vietnam’s external borrowing situation. The dong dropped to 22,275 per dollar on June 29 from 22,270 per dollar on June 23, according to the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank).

The global dollar rise might continue, as many countries could devalue their currencies to boost exports, putting pressure on the dollar/dong exchange rate, Hieu said.

He warned of the risk of China’s strong yuan devaluation, which could severely affect Vietnam’s forex market. “The dong devaluation is inevitable,” he said.

To protect exports, and offset China’s yuan devaluation, Vietnam weakened the dong by around 3% in both the interbank and the unofficial markets in 2015.

However, if the devaluation takes place this year, it will not be as big as last year’s, due to earlier predictions of a vote in favour of Brexit, meaning some countries, including Vietnam, have been able to make necessary preparations for its aftermath.

In the short term, the exchange rate between the dollar and the dong would not see big fluctuations as the Brexit vote could prompt the US Federal Reserve to delay hiking interest rates amid predictions of a global slowdown following the UK’s exit from the EU, said economist Cao Van Luc.

Risks on exchange rates and pressure on debt payments would not cause too much concern as Vietnam’s loans are valued by various currencies, he added.

While the dollar and the yen rise, euros and sterling head downwards, cutting the loans valued by those currencies.

The British pound fell to a 31-year low against the US dollar on June 27 on anxiety over the aftermath of Britain’s decision to quit the EU, with analysts anticipating an even steeper drop in the coming months, while the euro also suffered from the decision.

Sterling hit US$1.3122, its lowest level since mid-1985 and marking a 11.7% fall from the currency’s closing level on June 23, according to Reuters.

Meanwhile, the euro also remained weak, most recently down 0.9% at US$1.1011 after hitting a session low of US$1.0971.