Without effective investments, Vietnam has no reliable resources with which to repay its growing public debt, Do Thien Anh Tuan, a lecturer at the Fulbright Economics Teaching Program, told Thanh Nien newspaper.
On Sunday, the Global Debt Clock maintained by The Economist magazine described Vietnam’s public debt as nearly US$81.5 billion or 47.8 percent of the gross domestic product (GDP).
The debt increases by 11 percent every year.
Tuan said the state's annual income, mainly drawn from taxes and fees, represents one of its main resources for paying the debt.
But the income has been falling.
According to a recent report published on the website of Vietnam's Customs Department, the state's revenues were equivalent to just 27.3 percent of its GDP in 2010 and only 22.9 percent of last year's GDP. This year, that figure is expected to be just 18.5 percent.
In fact, Vietnam always operates in a deficit as its revenues are never enough to cover its spending. Every year, the government sets a ceiling for its expected annual debt.
Last year, the ceiling was 4.8 percent of GDP; this year it rose to 5.3 percent.
Spending part of the state's reduced income paying off its debts will cut into other expenses, like investments, Tuan said.
If the situation continues, the debt and its interest will eventually “eat up” the state's revenues, he said.
The economist quoted a debt statement issued by the Ministry of Finance last October as saying that in 2012, Vietnam paid nearly $2.7 billion in interest and over $4 billion on original debts, making the total debt payment equivalent to nearly 16 percent of the state’s 2012 revenues.
That rate increased to over 20 percent this year after the government planned to spend nearly VND208.9 trillion ($9.88 billion) on debt and interest payments, he said.
On the other hand, the government has had to increasingly borrow to pay off its maturing short-term loans.
This year, for instance, it plans to borrow VND367 trillion ($17.36 billion), of which some VND70 trillion ($3.31 billion) will be spent paying debts that are currently due.
However, Tuan said, Vietnam cannot continue to do so, because the “golden rule” is that the government should invest borrowed money, not spend it.
“Investments create new income to pay off debt. But, in our case, investments are not effective.”
He further explained that the method of “taking on new loans to pay old debts” seems to leave the scale of the debt virtually unchanged and shows that Vietnam's creditworthiness is decreasing.
Naturally, the country's lenders are demanding increased interest rates on its current loans as “financial distress costs.”
As Vietnam’s public debt rises due to the government’s continued failure to reform its administrative system and public sector, the costs are going up as well, Tuan said.
“The public debt's burden is on the government, but in reality it weighs us all down, and it is getting heavier.”
According the Global Debt Clock, with the 90.6-million-strong population, Vietnam’s public debt per person has hit $901.05, four times higher than it was 10 years ago.
During a legislative session last week, many lawmakers urged the government to submit detailed reports on public debt, including how loans (particularly official development assistance) have been allocated and how the government plans to pay them off.
They also expressed their concern about Vietnam’s public debt levels.
The government has repeatedly affirmed that its debts remain well within the safety range of 65 percent of its GDP; but, many local economists argue that it would far exceed that limit if Vietnam followed international accounting standards.
Foreign debt woes
Tuan said that in terms of domestic debt, the government can never go bankrupt. “Theoretically,” it can always increase taxes to generate income and print more cash, although both solutions pose threats to the economy.
But, in order to pay external debt, the government has to accumulate foreign currency, leaving its capacity to pay off its debts dependent on its foreign currency reserves, he said.
The economist was not positive about the Vietnam's all-time high of $35 billion in foreign currency, which Governor Nguyen Van Binh of the State Bank of Vietnam, announced at the end of last month.
“It is actually a kind of debt,” Tuan said.
He explained that Vietnam's trade deficit helps bring in more foreign currencies but also increases foreign debt.
In the short-term, Vietnam can pay its external debt with its foreign currency reserves.
That option will prove impossible in the long term, however, so long as the trade deficit continues, he said.
Tuan said a country’s ability to pay foreign debt is determined by its capacity to make globally competitive products. Such products, increase imports and bring back foreign currency that the country actually owns and can use to pay its debts.
In an article published by the Ministry of Finance in February, Nguyen Thanh Do, director of the ministry’s Department for Debts and Foreign Finance Management, estimated that Vietnam’s external debts hit $69 billion at the end of 2013, or 39.5 percent of its GDP.
"With Vietnam's current [economic] situation, we cannot sleep [without worrying about debts]," Tuan said.