Vietnam public debt could get out of hand: house committee

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A villager collects bushwood for cooking walking past a poster featuring the Dung Quat oil refinery in the central province of Quang Ngai

The National Assembly's Economic Committee warns Vietnam is at high risk of a public debt crisis even as the government seeks to raise the debt ceiling saying it is well within safety limits.

In a report published early this week, the parliamentary committee said that Vietnam needs to manage SOEs and their debts better, as ineffective businesses with bad debt pose a serious threat to the country's financial security.

It quoted the Ministry of Finance as saying Vietnam's public debt accounted for 40 percent its GDP in 2007, increased to 54.9 percent in 2011 and was estimated at 55.4 percent in 2012.

Given that international organizations like the World Bank and the International Monetary Fund (IMF) maintain 60 percent as safe, Vietnam's national debt is still within safe limits, it can be argued. However, the figures do not "truly" reflect the country's situation, the committee said.

It said Vietnam's regulations exclude SOEs' debts from the public debt, except for those which are guaranteed by the government, while under international norms, a country's national debt must include all debts of SOEs.

In fact, the country's national debt is at risk of going out of hand, especially because of the unguaranteed SOE debts that are not accounted for, the committee said.

It said debts of SOEs could have brought Vietnam's debt-to-GDP ratio to the alarming level of 95 percent.

It noted that SOEs have always received incentives and other support from the government whenever they are in trouble, like having their capital increased, and debts cleared or deferred.

Such support will increase the pressure on the state budget, and given the current budget deficit, the government will end up issuing bonds to increase its income, further increasing public debt.

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Vietnam's budget deficit accounted for 1.3 percent of GDP in 2003-2007, and almost doubled to 2.7 percent in 2008-2012, the committee said, citing the Finance Ministry's statistics. 

It also pointed to the Vietnam Development Bank, which lends money to SOEs at preferential interest rates, to show that the threat of SOEs' bad debts, even those not guaranteed by the government, will affect the national debt.

The bank's funding mainly comes from official development assistance loans and through repos (72.4 percent in 2009).

Therefore, the bad debts of SOEs will affect the bank's debts, and the government will have to pay the bank's debts eventually, the committee said.

It is estimated that the bank's overdue and delayed long- and middle-term debts accounted for 8.9 percent of its total debt in 2007 and 12.05 percent in late 2010.

Another example cited by the committee is that of shipbuilder Vinashin, which teetered on the edge of bankruptcy in 2010 with debts totaling US$4.5 billion.

The committee said the group still exists because the government has not only delayed its debt repayment and transferred part of it to other state-owned groups, but also increased its chartered capital from VND9 trillion ($422.33 million) to VND14.65 trillion ($687.47 million).

Furthermore, many SOE debts that are guaranteed by the government are likely to turn bad, the committee said.

One of the latest examples is the loan of $45 million that the Construction Machinery Corporation took from the Australia and New Zealand Banking Group (ANZ) with the Finance Ministry as guarantor.

The loan was for building the Dong Banh Cement Plant in the northern province of Lang Son. The plant began operations in late 2010, but has failed to generate enough income to pay back the debt which became due in 2011. In the end, the ministry had to pay it.

The committee also quoted a report by the Ministry of Finance as saying that SOEs' foreign debt with government's guarantees was over $4.64 billion in 2010.

It was a "considerable increase" from $1.03 billion in 2006, it said.

Speaking to the press on the sidelines of the National Assembly meeting on May 25, Deputy Prime Minister Vu Van Ninh said since Vietnam's public debt is still at a safe level, the parliament needs to consider increasing the debt ceiling so more funds can be mobilized for supporting the economy in face of the ongoing slump.

Vietnam's public debt ceiling is 65 percent of GDP.

More concerns

According to the committee, just like the public debt, Vietnam's budget deficit is not truly reflected in official reports put out by government agencies.

Expenditures on many educational and health projects, for example, were not included, it said.

Moreover, the agencies presented different figures on state budget balance, and even the Ministry of Finance in its annual report presents two different figures of budget expenditure one including principal payments, and the other without.

The ministry reported that Vietnam's budget deficit, excluding principal payments, accounted for 3.7 percent of GDP in 2009. But, the Asian Development Bank and the IMF said that it was 3.9 percent and 7.2 percent, respectively.

Between 2009 and 2011, Vietnam's budget deficit was some 3.7 percent of GDP on average, three times that of Indonesia, more than two times that of China, and nearly 1.5 times that of Thailand, the committee said.

It said the budget deficit had risen to such proportions despite Vietnam having a "very high" tax revenue to GDP ratio compared to other Southeast Asian countries. It was 26.2 percent on average during the 2006-2010 period, as against 21.4 percent in Thailand, 15.3 percent in the Philippines and 18.9 percent in Indonesia.

The committee said the high tax revenue to GDP ratio has discouraged investment in development and encouraged manipulations by businesses to evade taxes.

It also pointed out that a problem with Vietnam's public spending is that capital expenditure is increasing from 51.9 percent of overall expenditures in 2003 to 67.2 percent in 2011.

On the other hand, expenditure on development decreased from 30.2 percent in 2003 to 22 percent in 2011.

This "partly" shows that the government system is cumbersome and operating with low cost efficiency, the committee said in its report.

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