Vietnam may see a high level of public debt at up to 60 percent of gross domestic product as the state's budget deficit is expected to expand amid limited collection, according to the Asian Development Bank.
Fiscal policy looks set to remain expansionary in light of a planned budget deficit of 5 percent of GDP in 2015, and a similar deficit likely in 2016, ADB economist Dominic Mellor said at the launching ceremony the Asian Development Outlook 2015 on Tuesday.
Vietnam's budget priorities include greater emphasis on capital expenditure on assets, which is slated to rise by nearly 20 percent after two years of declines.
Meanwhile current expenditure is expected to rise at a more modest rate of 10 percent, including increases of 11 percent for health care and 5 percent for education, according to the ADB.
The government may struggle to meet its revenue target, Mellor said, adding that reductions in corporate income tax rates, the removal of tariffs and exemptions for favored firms have eroded the tax base.
From 2010 to 2014, central government revenue and grants fell from 27.6 percent of GDP to an estimated 21.5 percent.
“If revenue is weaker than anticipated, the authorities will opt for a moderately wider budget deficit rather than significant cuts in expenditure,” said Dominic Mellor.
Under this scenario, public debt may remain high. This prospect highlights the importance of correcting fiscal imbalances over the medium term to avoid running up unsustainable debt or jeopardizing investor confidence, he said.
Vietnam's debt-to-GDP ratio was projected at 60.3 percent in 2014, up from 54.2 percent in 2013, Prime Minister Nguyen Tan Dung said at a government meeting late last year.
Public debt will rise to 64.9 percent of the GDP in 2016, but will drop to 60.2 percent in 2020, he said.
Vietnam's economy is expected to expand by 6.1 percent this, and 6.2 percent in 2016, with FDI an important driver, according to the ADB report.
The economy grew 6 percent last year, the strongest pace since 2011.
Inflation is projected to average 2.5 percent this year, and jump to 4 percent in 2016 as domestic demand and global oil prices rise, said the report.
The Manila-based bank assumes the government will maintain expansionary monetary policies in a low-inflation environment.
Over the longer term, achieving higher rates of economic growth depends on Vietnam’s ability to undertake deeper structural and corporate governance reform, and to facilitate local firms’ integration into global value chains, it said.
Only 36 percent of all Vietnamese firms are integrated into export-oriented production networks, compared with nearly 60 percent in Malaysia and Thailand.
Just 21 percent of Vietnamese small and medium-sized enterprises participate in global supply chains, and their contribution to exports from Vietnam is significantly less than in other countries, according to the report.