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28ECONOMIC SCIENCES
EVALUATION OF EFFECTIVENESS OF PUBLIC DEBT MANAGEMENT IN VIETNAM
Dao Van Hung
Assoc. Prof., PhD. Academy of Policy and Development, Hanoi - Vietnam
ABSTRACT
Public debt is currently topical issue in Vietnam by the issues related to the effectiveness of public financial management, national financial security, public debt calculation, corruption and waste... This article summarizes and assesses the nature of public debt, its actual situation in Vietnam today on the basis of comparison with international practices and lessons learned from the European debt crisis in order to clarify the present issues and recommend some solutions to debt problems in Vietnam.
Keywords: public debt, public debt crisis, the state budget deficit, policies, GDP, NPV.
1. Introduction
"Public debt" in Vietnam is now a term received the utmost care from the whole society, not only bitterly debated in the Parliament, but also hotly debated anywhere by the professionals, businesses, media, even the common people. This shows that public debt in Vietnam is now a topical issue and makes the society worry about. It is easy to understand and the public have reasons to worry. One of the reasons is that people still seemed shocked to think of the global financial crisis and economic recession in 2008 not long ago, which sparked a public debt crisis in the EU Member States, seriously affected the political, economic and social situation of EU countries and its consequences still last until now and there is no sign to be completely controlled. The crisis originated from Greece and then accompanied by a series of member countries such as Ireland, Portugal, Spain, Italy and Cyprus. The leading economies of Europe such as the UK, France and Germany have also been severely affected with high public debt of approximately 100% GDP; budget deficit was 3-4 times as high as the allowed ceiling. Public debt threatened the survival of the European Monetary Union.
For Vietnam, when it has far-reaching integration into the world economy, its economic and political relationships have become more diverse, complex and it is necessary for socio-economic management and administration to catch up with this trend. However, it seems that Vietnam's reforms do not keep up with this pace, so the defects of the economy related to management and administration have been revealed with increasingly complex issues such as: equitization for state-owned enterprises, bad debt problems, effective management of funds from the state budget, increase of public debt, sustainability of the financial market, corruption and budget waste... This poses a question that Vietnam needs to study on socioeconomic administration learned from both theoretical and practical lessons across the world; take drastic measures for sustainable economic development, in which the effective public debt management is
considered as an urgent task than ever, because it affects many macroeconomic variables.
2. Nature of public debt
When it comes to public debt many people often think of the debt burden of the country and its negative impacts on the economic and social activities. However, public debt should be viewed in two aspects: positive and negative ones. Specifically:
- Positive aspect: public debt within the limit allowed will bring huge positive effects for the country, especially for developing countries like Vietnam which is in need of mobilizing large amounts of capital for socio-economic development including infrastructure, science and technology, social security... and the negative impacts in this situation are negligible. The positive impacts are: meeting the need of investment capital, ensuring social security, contributing to raising capital to offset the state budget deficit; creating debt instruments to manage the monetary policy and financial market regulation; actively contributing to the promotion of economic integration process.
- Negative aspect: if public debt is too high, it will cause huge losses to the country; the positive effects in this situation are minimal. The negative impacts are: impact on economic growth and a stable macroeconomic environment; increase of interest rates, risk of rising inflation; impact on the exchange rate and trade deficit; potential public debt causing the debt crisis; decline of public confidence in the ability of the State's economic governance, thereby potentially destabilizing national security and politics.
Thus, public debt is not necessarily all bad, but not really good. According to the International Monetary Fund (IMF), that a country pays off the debt is not necessarily a good practice1. It is important for the government to know how to use public debt on the socio-economic development in a flexible manner. So the issue of effective public debt management is posed. Economic theory shows that effective public
1 How public debt is enough and safe?. URL:
http://cafef.vn/no-cong-den-muc-nao-la-du-la-an-toan-201605270855 07671.chn
debt management can bring great significance for the economy and society of a nation, including: contribution to ensuring economic stability; reducing the costs and risks of public debt; avoiding some shocks to the economy; enhancement of effective use of loans; creating a foundation to build a reasonable and effective debt market.
In order to effectively manage public debt and curb rising public debt, the Governments have to
Indicator of safe 1
perform and purify revenues and expenditures, as well as ensure the efficiency of public finance. In the public debt management process, it is necessary to carry out the evaluation of public debt sustainability and determine the thresholds for evaluating, possibly through common indicators to be applied in the world such as: NPV (Net present value) of debt/ GDP; NPV of debt/ exports; NPV of debt/ revenues of the state budget...
Table 1.
Threshold (%) Evaluation of institutional strengths and policy quality
Weak CPIA<2.9 Average 2.9<CPIA<3.6 Strong CPIA>3.6
NPV debt/ GDP 30 45 60
NPV debt/ export turnover 100 200 300
NPV debt/ revenues of the state budget excluding aid 200 275 350
Repayment obligations/ GDP 15 25 35
Repayment obligations/ revenues of the state budget excluding aid 20 30 40
(Source: IFM)
IMF's research shows that 20-30% countries with the debt situation within intervals in table 1 starts facing difficulties in payment of debt, this means these countries are prone to fall in the debt crisis when the adverse developments from macroeconomic environment at home and abroad. According to IMF's research by Reinhart and et al2, GDP per capita growth is slower than that in the countries with public debt ratio of more than 90%. However, because of different ways of public debt statistics in countries and different potential between the economies, so it is impossible to generally apply the best rate for all countries. Therefore, when considering the recommendation thresholds, it is required to set them in the macroeconomic context of each country and the market development conditions in order to consider and accept the safe debt threshold. Another important note according to the author is that the effective public debt management requires a greater political determination, in which the institutions have to be willing to remove the group benefits and reasonably reconcile political goals with negative impacts on the long-term situation of public debt. The prerequisite for effective implementation is that the Government should legislate requirements on transparency, monitoring and handling mechanism.
3. Actual situation of public debt and some issues raised in the public debt management in Vietnam
According to official figures from the Ministry of Finance of Vietnam, the ratio of public debt in Vietnam has stood at over 50% of GDP since 2010 (table 2), despite a decrease in the period from 2011-
2012 at a level of 50.8%. However, it began to increase from 54.5% in 2013 to 58.0% in 2014 and 62.2% in 2015; currently accounts for 65% and makes a sign of continuing beyond 65% of GDP threshold under regulations of the National Assembly of Vietnam. It should be noted that, because Vietnam's public debt calculation is not synchronized with the world standards, so there are significant differences between the figures published by the Government and the calculation of the independent institutions. According to the Government reports3, the cause of public debt increased in recent years is because of difficult budget revenues while more increasing spending needs; in order to ensure the balance of the state budget, we had to maintain the budget deficit at a high level, specifically: 2011: 4.4% of GDP; 2012: 5.4% of GDP; 2013: 6.6% of GDP; 2014: 5.3% of GDP; 2015: 5% of GDP. However, from 2011 to 2015 public debt has increased by about 7% of GDP due to requirements of increased borrowing for investment in socio-economic infrastructure.
2 Reinhart C.M., Reinhart V.R. and Rogoff K.S. (2012). Public debt over-hangs: advanced-economy episodes since 1800, Journal of Economic Perspectives, No26(3), 69-86.
3 Socialist Republic of Vietnam. Government portal. URL: http://vpcp.chinh phu.vn/Home/Thu-tuong-tra-loi-chat-van-ve-no- cong/201512/ 17788.vgp
Table 2:
_Indicators of public debt and external debt of Vietnam___
Indicator 2010 2011 2012 2013 2014
Public debt to gross domestic product (GDP) ratio (%) 56.3 54.9 50.8 54.5 58.0
The country's foreign debt to GDP ratio (%) 42.2 41.5 37.4 37.3 38.3
National foreign debt repayment obligations in medium and long term to total export turnover of goods and services (%) 3.4 3.5 3.5 4.3 4.1
Government outstanding balance to GDP (%) 44.6 43.2 39.4 42.6 46.4
Government outstanding balance to the revenues of the state budget (%) 157.9 162.0 172.0 184.4 211.5
Debt obligations of the government to the revenues of the state budget (%) 17.6 15.6 14.6 12.6 13.8
Reserve debt to the revenues (%) 5.5 6.7 9.8 9.7 8.5
Foreign trade loan limit and guarantee for foreign loans by the Government (US $ million) 2000 3500 3500 1800 2800
(Source: Ministry of Finance. Public Debt - No. 4)
According to IMF's forecast, Vietnam is the only country that its public debt/ GDP continues to rise by nearly 68% in 2020 and it is much higher than other countries in the ASEAN region. Notably, this ratio has tended to decrease or fairly stable in other countries since 2006, while in Vietnam it has sharply increased, especially in the period from 2009 to the present. Figure 1 shows that most countries are maintaining the size of public debt at 40-50% of GDP, particularly
Indonesia has very low public debt ratio, approximately 25% of GDP. Although Vietnam's public debt ratio is still below the threshold of 90% as calculated by Reinhart C.M. et al (2012), this threshold is calculated for countries with highly developed financial markets; respect to developing countries like Vietnam, the optimum rate may be at much lower level.
-Bangladesh -Indonesia -Philippines Thailand -Vietnam
Figure 1. Public debt to GDP ratio of Vietnam compared to some countries
in the region (Source: WB, IMF)
The share of domestic debt tends to increase and the share of external debt tends to decrease, from 42.2% in 2010 to 38.3% in 2014 (table 2). Domestic debt primarily due to the issuance of government bonds, the number of bonds to be issued in the period of 2011-2015 has increased 2.5 times over the period of 2006-2010; in which short term bonds (1-3 years) account for about 77% of the volume. If the figures released by the Government are reliable, then the risks of public debt crisis in Vietnam are not at dangerous level though the public debt/GDP ratio is at a relatively high level. In addition, foreign loans of Vietnam are mainly through ODA channel with long term, low interest rates and more favorable repayment pressure than foreign currency bond issuance. However, domestic debt also has certain negative effects on the economy, such as increasing the interest
rates, narrowing the funding for the private sector and putting pressure on inflation. Moreover, the trend of public debt structure in Vietnam can be reversed in the near future when the credit demand is recovered, making the issuance of domestic bonds become less attractive. It is more important to understand that the potential risks could erupt from the accumulation due to loose fiscal policy and ineffective public investment spending.
According to Vietnam Institute for Economic and Policy Research4, public debt ceiling in Vietnam should be considered from the perspective of a hard
4 Vietnam Institute for Economic and Policy Research. The characteristics of public debt in Vietnam. URL: http://vepr.org.vn/upload/ 533/20151113/CS%2010.pdf
constraint to improve the effectiveness of fiscal policy, in addition to be the safety threshold to prevent a public debt crisis that may occur in the future. Therefore, to maintain a fixed public debt ceiling is essential in controlling the macroeconomic risks in the medium term. Instead of extending the public debt ceiling, it is necessary to take tough measures to put and maintain the public debt within allowed threshold.
Regarding the forecast of Vietnam's public debt in 2016-2020 period, according to the research by BVSC: direct borrowing needs of the Government will increase steadily over the period of 2016-2020. The Government can steadily increase outstanding balance every year up to 55% of GDP threshold in
2020. Accordingly, total direct outstanding balance of the Government will be around 4.3 million billion in 2020, twice as high as the total outstanding balance at the end of 2015. In the structure of the government's total outstanding balance, government bonds will increase from 32.5% in 2015 to 40% in 2020, equivalent to 22% of GDP; Official Development Assistance loans will decline from 40.7% in 2015 to 32.7% in 2020; government bonds issued internationally will increase from 9.3% in 2015 to 12.7% in 2020; and other domestic loans (treasury bills) will decrease from 17.5% in 2015 to 14.5% in 2020.
I Government bonds O Other loans (Domestic) □ ODA O Government bonds (Domestic) (External)
Figure 2. Forecast of outstanding balance of the Government loans (Source: Bao Viet Securities Joint Stock Company. URL: http://www. bvsc. com. vn/)
BVSC also indicated that, the total interest payable by the Government each year will increase up to 236 trillion in 2020, twice as high as the interest payment obligations of 115 trillion in 2015. The interest payment pressure came mainly from government bonds, accounting for more than 50% in 2020.
In the context that domestic and international situation is more and more complicated and unstable in terms of economy, politics and society, it is difficult for Vietnam to increase the revenues of state budget in the coming time, while the state budget spending needs have to increase in order to pay the due debts, invest in infrastructure, ensure the national defense and security, social security, thus the balance of state budget in the coming period will continue overspending; however, it is required to absolutely comply with the safety threshold for investment and development.
Based on the analysis above, the author believes Vietnam has encountered some problems in the public debt management in Vietnam as follows:
1) The definition of public debt in Vietnam is too much different from the international rules, making the data approach unreliable and leading to misunderstandings on the public debt situation in Vietnam. Currently, the definition of public debt in the world has not yet been agreed; it was mainly built on the basis of debt management practice of each country. According to the World Bank (WB), public debt is the entire government debt and government guaranteed debt. In particular, (1) the government debt includes the entire domestic debt and external debt of the Government and its debt collection agencies; debt of the provinces, cities; or debt of political organizations under the Government and their agents; debt of state-owned enterprises; (2) the government guaranteed debt is the entire repayment obligations for domestic and external debt of the private sector, guaranteed by the government (table 3).
Notes: * Debt of autonomous public entities shall be included in the public debt; Debt of the organizations is approved by the Government; The Government owns more than 50%, or more than 50% of members of Board of Directors are the Government's representatives; In case of failure to repay the debt, the Government must be responsible for the enterprises' debt. ** Special purpose entity.
(Source: The author summarized on the basis of the reports on public debt from WB (2013) and IMF (2013))
Table 3.
Comparison of the scope of Vietnam's public debt with IMF, WB, and OECD _
No. Component Vietnam IMF World Bank OECD
1 Government debt Yes Yes Yes Yes
2 Government-guaranteed debt Yes Yes Yes Yes
3 Local government debt Yes Yes Yes Yes
4 Central bank debt No Yes Yes Yes
5 Debt of public deposit-taking entities, excluding the Central bank No Yes Yes with the condition (*) No
6 Debt of non-financial public enterprises No Yes Yes with the condition (*) No
7 Debt of social security institutions No Yes Yes No
8 Debt of other special organizations No SPE (**) SPE No
According to the IMF, public debt includes debt of financial public sector and non-financial public sector. For Vietnam, public debt is stipulated in the Law on public debt management, including: government debt, government guaranteed debt and local government debt. Specifically: (1) government debt is debt which is signed and issued in the name of the state or government, debt which is signed, issued or authorized for issuance by the Ministry of Finance, but not including any debt issued by the State Bank of Vietnam to implement the monetary policy in each period; (2) government guaranteed debt is debt of enterprises and economic organizations borrowing at home and abroad, guaranteed by the state or the government; (3) local government debt is debt which is signed, issued or authorized for issuance by the People's Committee of provinces and centrally-run cities.
This provision of the Vietnam showed that the scope of Vietnam's public debt is now narrower than that of international institutions. Public debt does not include the debt of state-owned enterprises or the central bank. Therefore, the statistics on public debt released by the Government of Vietnam are often different compared to the statistics of international institutions. This has been repeatedly mentioned in studies or scientific seminars on specific topics. For example, under the international definition, in 2011
Vietnam's public debt was estimated to be 128,9 billion USD, equivalent to 106% of GDP; while as defined by Vietnam, it was only 66.8 billion USD, equivalent to 55% of GDP, i.e excluding 62,8 billion USD, equivalent to 51% of the GDP from state-owned enterprises. Therefore, the Government should review and submit to the National Assembly for amending and supplementing the Law on public debt management.
2) It is important to learn from the European experience, and always remember the lesson from the debt crisis in Europe: do not live beyond one's means. Table 4 with the causes of public debt crisis in some EU Member States, indicates some lessons as follows: (1) the lesson from Greece: Vietnam needs to manage its economy in an effective manner; narrow the public sector; increase revenues and reduce spending, particularly, reduce spending on social security within permitted limit; purify; promote production and export; and promote the economic growth; (2) the lesson from Ireland, Portugal, Greece: the government does not turn bad debt of enterprises and banks into the government debt; strongly reform the banking and financial system; strictly control public debt, government debt, local debt, corporate debt, government guaranteed debt; effectively use loans; avoid losses and waste.
Table 4.
Causes of the public debt crisis in some EU Member States
General causes
Particular causes of each country
Greece
Ireland
Portugal
There are a lot of causes, however, generally
including 6 main causes as follows:
1) Because of the integration into the EU, the countries have to abandon their own monetary policy;
2) The Eurozone member countries easily access to the sources of foreign investment, but poor management leads to serious budget deficit.
3) Low economic growth, low competitiveness, low labor productivity in some countries such as Portugal, Italy, Greece.
4) Impacts of the economic crisis.
5) High risks of public debt, external debt accounted for a large proportion.
6) Although the economies of countries are different, but they still have to ensure the social security services at a high level, causing the budget deficit to increase.
Besides these common causes, two following causes made Greece refer to the IMF and the EU for help:
1) Being too eager to join the EU results in a large amount of debt for economic development.
2) Lack of transparency; fraud in the provision of information make the government's reputation decline, investors lose confidence, leading to social unrest and massive withdrawal of capital from banks, this causes difficulties in mobilizing international capital
The Irish public debt crisis is very different from the crisis in Greece. Specifically:
1) An outbreak of the crisis in Ireland results in transforming private debt into public debt, starting with very high amount of bad debt from the banks. The Government fails to manage and monitor the banks which lend massively and lack responsibility.
2) Real estate bubble.
3) Tax policy is inappropriate. Ireland made a mistake in moving from personal income tax to the taxes related to the real estate sector as a major source of government revenue. Ireland used taxes to encourage investment in real estate and tax relief for mortgage interest payments. The government had to offset the lost taxes due to the reduction of personal income tax from other sources. Consequently, the budget deficit became increasingly serious._
The public debt crisis in Portugal is the combination of weak position of public finance and a large amount of private debt as well as external debt. The main causes include:
1) Less competitive, low economic growth (less than 1% / year during the first decade of the twenty-first century), but have to pay for people's welfare equivalent to the level of wealthy European countries with high growth rate.
2. Financial instability, budget and balance of payments with
interminable deficit; 70% of Portugal's debt is external debt, making the government
difficult to manage or delay when coming to the due date.
(Source: Synthesis of the author)
3) It is still necessary to maintain public debt in Vietnam in order to promote socio-economic development of the country; however, it is required to strictly comply with the criteria set out. In particular, in the 2016-2020 period and towards 2030, it should be determined that Vietnam will continue the state budget deficit due to the needs of investment and socio-economic development. According to the research by Dao Van Hung in a quantitative study on the relationship between public debt and economic growth in Vietnam5, when the public debt/ GDP ratio < 68%, public debt has positive impacts on economic growth and sustainability of fiscal policy. If this ratio is greater than 68%, public debt will reduce investment and development incentives, constrain the economic growth and reduce the repayment capacity as well as safety level of public debt. Therefore, the optimal public debt threshold of Vietnam is in the
5 Dao Van Hung. Public debt management in Vietnam: Access to international practices. Vietnam National University Publishing House, Hanoi, 2016. -pp. 246.
range of 68-70% of GDP; if plus or minus both margin and error of 10%, the optimal debt threshold is about 63-77%/GDP. However, according to data from the General Statistics Office of Vietnam, average GDP growth and inflation rate are 7% and 7.54%, respectively; and the government's target of average GDP growth and inflation rate until 2020 are 7% and 5%, respectively. In addition, the economic objectives in the 2016-2020 period of Vietnam are: stabilizing the macro economy, boosting growth, reducing the budget deficit... so the author proposes that the public debt of 68% GDP threshold for the 2016-2020 period is the optimal threshold for Vietnam's economy. Based on this criterion, the state budget deficit is at 4.8% of GDP, government outstanding balance does not exceed 55% of GDP and external debt of the country does not exceed 50% of GDP.
4) Improving the effective use of the government loans, decreasing the limit for issuance of government guarantee; the Government should review and eliminate inefficient projects; strictly control the government guarantees, local government debt, capital construction debt of the Ministries, central and local
agencies; manage and enhance the effective use of loans for on-lending and reduce the reserve debt obligations of the Government; promote mobilization of medium or long-term loans; effectively implement the management operations and risk treatment for the public debt portfolio; prioritize the debt repayment; prioritize issuing the government bonds in a long term from 5 years upwards. In addition, the Government should restructure the state budget in the coming time on the principle of reducing recurrent expenditure, strongly boosting the investment forms outside the state budget, downsizing, continuing to promote equitization of state-owned enterprises, reduce pressure on expenditure from the State bank of Vietnam....
4. Conclusions
For the current issues raised on public debt management, Vietnam needs to amend the Law on public debt management so as to match the international practices towards the scope of public debt calculation including: debt of the insurance and social security organizations; debt of Vietnam Bank for Social Policies and Vietnam Development Bank; debt accounted on the books under Vietnamese accounting standards of the central budget and local budget for enterprises, social and political organizations and private sector; unavoidable debt (implicit debt and contingent debt) covered by the state budget.
The issues raised on the public debt management in Vietnam set the task that it is time to perform a comprehensive financial reform to gradually balance the budget, ensure the sustainability of public debt, maintain the long-term stability to the economy of Vietnam and resist to potential and unpredictable socio-economic shocks in the future .
References
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