Vietnam's External Debts Considered a Double-Edged Sword

The project, co-funded by the United Nations Development Programme (UNDP), the Australian and Swiss Governments, was recently completed after four years’ implementation. This project’s report was released in February 2006 with the participation of Dr Sanga Sangarabalan, UNCTAD debt data advisor Rula Katerg, and the work group on debt portfolio assessment.

Over the past two years, the group of experts have assessed debt status and debt payment expenses of Vietnam, analysed and proposed measures to improve debt portfolio in a manner of reducing costs and risks, reviewed and proposed measures on institutional improvement and report procedures and accountability.

 

Even though it is still incomplete, the project has contributed to the building and issuing of important legal documents, such as the Decree N⁰ 134/2005/ND-CP, and the Decision N⁰ 135/2005/QD-TTg, on external debt management, and the building of a roadmap for debt management in the future. In addition, the project helps the governmental agencies and external debt management cadres of centrally-run to locally-run agencies to access to modern debt management methods, thus developing skills for managing risky debts and restructuring debts.

Over the 1997-2001 period, the average disbursement of foreign debt was US$1.199billion per year, while the total expenses needed for repaying debt was US$1.120billion per year. Similarly, comparing disbursed ODA (official development assistance) capital and the US$2 billion needed for repaying debt every year, expenses for repaying debt outweigh the borrowed sums.

Present debtors include the Government, State-owned enterprises and foreign direct investment (FDI) enterprises. The Government’s debts consist of an amount borrowed by the Government and an amount borrowed by governmental agencies to lend directly to State-owned enterprises. Debts of State-owned enterprises consist of an amount borrowed directly by the enterprises and debts guaranteed by the Government.

 

Other debtors are FDI enterprises. Not all FDI enterprises have much capital for investment. The bellow chart shows that the Government is the biggest debtors, accounting for 65.4 per cent on average. It is closely followed by State-owned enterprises and FDI enterprises.

Authors of ‘Capability Development for Effective and Sustainable External Debt Management’ remarked: “In 2000 and 2001, Government debts increased stably to over 75 per cent. Debts of State-owned enterprises tended to fall, accounting for just 7.4 per cent. Debts of FDI enterprises tended to fall, accounting for just 27.2 per cent.

In fact, the issuance of international bonds to mobilise US$750 million for the Vietnam National Shipbuilding Corporation (Vinashin) in late 2005 has opened up a new capital mobilisation way but has added to Government debts.

 

There are various attitudes to the event. ‘Optimistic’ people, who are still unfamiliar to the financial market, say that the Vietnamese economy had gain a high growth rate and Vietnam’s prestige had improved, so foreign countries were willing to lend to Vietnam. Those who are familiar with the financial market, state that it was normal to borrow and to get loans when a country has not been named in a bad debt list, and in particular, debts are guaranteed by the State.

 

Those who are cautious question whether the project has been audited independently or not and whether the capacity of Vinashin has been evaluated correctly.

 

From the point of view of an ordinary person, who is not involved in Vinashin’s interests, a question on how much interest Vinashin will pay for its debts of US$750 million with an interest rate of 7.15 per cent per annum, after ten years. Time flies as fast as an arrow. By late March 2006, creditors in New York had made a profit of over US$26 million after just six months of investment. Vietnam will have to pay interest of US$536 million after ten years. 

 

Vietnam’s foreign debts have been kept in moderation and are controllable thanks to the nation’s strong economic performance in recent years with a high GDP growth rate, a low inflation rate and increased export turnover. However, it is necessary to notice an important reason that Vietnam’s external debts have been reduced and restructured for three times, so the country can borrow more external debts.

- In 1993, Viet Nam cleared its overdue loans to the IMF and rescheduled its external debt arrears with the official bilateral creditors in the Paris Club with a comprehensive restructuring of arrears on medium and long-term debt. Total debts reduced were put at US$745 million, accounting for 60 per cent of total debts.

- In 1997, a debt rescheduling agreement with the commercial creditors in the London Club was reached. As a result, Vietnam’s debt obligation was cut by 53 per cent, equal to US$445 million. Vietnam converted US$542 million of debts of creditors in the London Club into the Brady bonds with duration of between 15 and 30 years. On September 30, 2002, Vietnam bought refunded Brady bonds US$160 million.

- A debt rescheduling agreement was reached in the Russian Federation. This was Vietnam’s biggest debt in the past. After eight rounds of negotiation between 1994 and 2000, the two sides reached an agreement that 85 per cent of total debts, equal to US$9.3 billion would be cut. The remainder would be paid over 23 years with ten per cent in cash and 90 per cent in exported goods.

 

Recently, conflicts have occurred between Vietnamese governmental agencies and creditors. The agencies complain that procedures are extremely complicated, leading to a slow disbursement. In the meantime, creditors require tougher calculations for projects.

 

As a result, there the Vietnam Harmonisation Action Plan has come into effect. This year, creditors have put their funds into budget and funded concrete fields and targets. At the same time, international organisations warn that the budget should be announced publicly for easier evaluation and control. However, external debts have not been announced publicly yet.

 

Vietnam will have to pay US$2 billion of debt every year from now to 2010. Is the figure high or not? Some people state that it is normal when debts account for between 25 and 30 per cent of GDP, or even 35 per cent at present. However, the per capita amount, which is calculated with 44 million people of the working age, will be US$45. From this point of view, the figure will be a major problem as there are still 20 million people living below the poverty line.