Though the Vietnamese government has affirmed that its public debt is within a safe area, there are some signs showing the increasing “heat” of public debt in qualitative and quantitative analysis, with some notable features as follow.

 Firstly, the scale of public debt quickly grows, exceeding anticipation.

 According to the Finance Ministry’s report on public debt, by December 31, 2009, Vietnam’s public debt was VND27.929 billion, including over $23.9 billion of foreign debt.  By December 31, 2010, Vietnam’s total public debt reached more than $32.5 billion, accounting for 42.2 percent of the country’s gross domestic product (GDP), compared to the government’s anticipated level of 38.8 percent in late 2010, a growth of $4.6 billion over 2009. This was the highest number since 2005.

 Of the number, 62 percent was the government’s foreign debt and 38 percent was foreign debt of businesses. For the government’s foreign debt, 93 percent was ODA and soft loans. These were long-term, with low interest rate loans (1-2.99 percent per annum).

 Facing the worry of many congressmen on public debt, Minister of Finance Vuong Dinh Hue said that by December 31, 2010, the government’s debt was equivalent to 45.7 percent of GDP, foreign debt was equivalent to 42.2 percent and public debt 57.3 percent of GDP.

 In the government’s plan, which was submitted to the National Assembly, by December 31, 2011, it is estimated that public debt was equivalent to 54.6 percent of GDP. The ratio will reach 58.5 percent by December 31, 2012. The ratio is calculated based on the expected growth rate of 6 percent. If Vietnam’s growth rate in 2012 is over 6 percent, the ratio will be lower.

 Vietnam’s calculation methodology of public debt is different from developed countries, which is based on the value of their currency. Vietnam uses the nominal value methodology. If Vietnam estimates its public debt based on the value of its currency, the ratio of public debt/GDP will be lower.

 However, the Vietnamese government considers that this structure has changed and will change when ODA and soft loans are reducing and commercial loans are rising when Vietnam is listed as a country of middle income.

 On November 8, 2011, the National Assembly approved the increase of Vietnam’s public debt to less than 65 percent by 2015.

 Secondly, the conditions for loans are stricter.

 According to Finance Minister Vuong Dinh Hue, in Vietnam’s total debt, ODA accounts for 75 percent, other soft loans 19 percent and commercial loans 7 percent. ODA loans have long-terms and soft interest rates.

 Vietnam’s structure of public debt is different that of developed countries and the countries that overcome the poverty threshold, which have high rate of commercial loans.

 Most of foreign debts of Vietnam have low interest rates. In late 2009, ODA loans made up 74.67 percent of the total, other soft loans 5.41 percent and commercial loans 19.92 percent.

 In 2010, debts with low interest rates of 1-2.99 percent/year accounted for 65.5 percent. Loans with high interest rates of 6-10 percent/year reached $1.89 billion, doubling that of 2009. Vietnam’s major creditors are Japan, France, the Asian Development Bank (ADB) and the World Bank (WB). These lenders held Vietnamese government bonds worth more than $2 billion in 2010, compared to over $1 billion in 2009.

 The interest rates for Vietnam’s foreign debts are increasing after Vietnam joined the group of countries with average income and its national credit has felt (from BB+ to BB, according to some credit rating agencies) owing to concerns of macro-economic instability and the scandal related to the State-owned Vietnam Ship Building Industry Group (Vinashin).

 Thirdly, the debt service ratio rapidly increases while debt safety ratio reduces.

 According to the Finance Ministry’s report on foreign debt, Vietnam’s foreign debt service in 2010 was $1.67 billion, including more than $616 million of interest money and fees, up by nearly 30 percent compared to $1.29 billion of 2009.

 National Assembly deputy Tran Du Lich, who is also a senior economist, said that Vietnam’s current overseas debt is equivalent to $50 billion, three times higher than its foreign currency reserves ($14-15 billion).

 Last year, Vietnam paid debts of VND86 trillion ($4.3 billion), accounting for 12.5 percent of the total budget revenues. This year, the country will have to pay debts worth VND100 trillion ($5 billion), making up 13.5 percent of total budget revenue. This is a rather high number. Thailand’s public debt is only 44 percent of GDP while its foreign currency reserves are $176 billion. Public debt of Indonesia and Malaysia accounts for only 26.9 percent of GDP and that of the Philippines is equivalent to 47.3 percent of GDP.

 Finance Minister Vuong Dinh Hue said that the government’s total debt service (paying both principle debt and interest money) accounts for 14-16 percent of the total budget revenues. Meanwhile, according to international routine, the safe debt service ratio is under 30 percent of the total budget revenues.

 The Ministry of Finance has warned that Vietnam’s foreign currency reserves in 2010 was equivalent to 187 percent of its short-term debt balance, sharply dropping from 290 percent and 280.8 percent of 2009 and 2008 while the World Bank’s recommended rate is over 200 percent.

 In early 2011, Vietnam bought an additional $4.7 billion, which partly helped improve its debt safety ratio/foreign currency reserves. However, the purchase is not a sustainable measure in terms of anti-inflation.

 In addition, Vietnam’s debt-payment ability may be more difficult when the expected revenues for 2011 was not bright. The revenue from taxes paid by the foreign-invested sector in the second quarter of 2011 declined by 83 percent in comparison with the first quarter and it is estimated to fall by 40 percent in the third quarter compared to the first half of 2011, with up to 50 percent of FDI businesses declared losses.

 The Ministry of Planning and Investment also reported that the number of private firms that were dissolved and went bankrupt in 2011 was equivalent to the number of newly-established firms in the year.

 

VNN