Public Debt: Different Assessments

Vietnam has used a different method to calculate public debt to GDP ratio from international financial institutions for years. In 2009 Vietnam announced its public debt to GDP ratio at 41 percent but the World Bank (WB) affirmed the ratio of 47 percent. Vietnam persists with its calculating method. Most recently, Mr Nguyen Thanh Do, Director of Foreign Debt and Financial Management Department, Ministry of Finance, said: Vietnam’s public debt structure is constituted by government debt (80 percent), government-underwritten debt (19 percent) and local debt (1 percent). In relation to GDP, public debt to GDP ratio was 57.3 percent, government debt was 45 percent, government-underwritten debt was 13 percent, and local government debt was 3 percent in 2010. In 2011, public debt, including foreign and domestic loans, will be about 58.7 percent of the country’s GDP.

Since the Law on Public Debt Management took effect in 2009, the structure of Vietnam's public debt consists of government debt, government-guaranteed corporate debt, and local government debt. However, Vietnam has not found out a criterion referred as the safety threshold of public debt. At present, there are only annualised public debt threshold, decided by the lawmaking National Assembly.

 

Meanwhile, according to international practices, Vietnam's public debt is much higher. The difference is resulted from calculating methods. With international calculating practice, Standard & Poor's Ratings Services (S&P) lowered its local currency long-term sovereign credit rating on Vietnam to 'BB-' from 'BB' after revising its methodology and assumptions for rating sovereign governments in August. This was the lowest rating in Southeast Asia by this agency. International rating agency Fitch Ratings retained Vietnam's long-term debt rating at ‘B+’ - the same standing as Mongolia and Venezuela but lower than the Philippines and Indonesia. Vietnam’s public debt exceeds 50 percent of its GDP, higher than the average 37 percent for Grade B rating.

 

Although the Government asserted that Vietnam’s public debt is in the safe zone, given lower than the debt to GDP ratio of 60 percent used by international practices. However, the recent public debt ratio announced recently raised concerns over economic administration and economic health. In National Assembly’s meetings, some deputies expressed their worries over the growth of Vietnam’s sovereign debt. In 2010, Vietnam’s foreign debt equalled 42.2 percent of GDP while the rate in 2009 was just 39 percent. This was the biggest growth since 2006. From 2007 to the end of 2011, Vietnam's public debt increased by 25 percent (average of 5 percent a year). Basing on maturity, Vietnam will have to pay nearly US$1.5 billion of interest and principals in 2015 and the value will reach US$2.4 billion in 2020. This is a serious problem for the economy because it has not passed difficulties as inflation fighting measures have not fully worked out.

 

Debt risks to the economy have been repeatedly warned by domestic economic experts. Firstly, Vietnam will have to use foreign currency reserves to pay debts and, according to the Ministry of Finance, the source is modest. Secondly, Vietnamese dong tends to lose its value to hard foreign currencies, leading to the larger size of real debts, while debts are foreign currency-denominated. Thirdly, Vietnam will not enjoy preferential interest rates after it become a middle-income country although its GDP per capital is now among the lowest in Asia.

 

Besides, Vietnam is endangered by intrinsic macroeconomic instability like high inflation, poor capital utility and corruption.