Who will lose out when Vietnam's government increases borrowing?

By Thanh Nien Staff, Thanh Nien News

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A staff member arranges stacks of money at a bank in Hanoi. Photo: Ngoc Thang A staff member arranges stacks of money at a bank in Hanoi. Photo: Ngoc Thang

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Financing has always been one of the biggest issues for businesses in Vietnam, but economists now warn that it can be even much harder for the private sector to secure bank loans in the months ahead because of a major cash-thirsty competitor: the government. 
Speaking to Thanh Nien, economist Pham Chi Lan said when the government issues more bonds, it will absorb a large part of the country's lending capacity.
Banks and other organizations will spend a lot of money buying them, and in the end have no money left for businesses, she said. 
As a large borrower, the government can easily compete with businesses in taking out loans by offering higher interest rates, she said.
When businesses cannot borrow money, they will struggle and have no money to pay taxes, which means state revenue will fall and the government will have to borrow more, repeating that cycle, according to Lan.
Cao Si Kiem, a former governor of the central bank, seemed to share the same view.
He said businesses are the ones who need bank loans the most. It is not good for the economy when banks spend their resources on government bonds, Kiem said. 
The government sold more than VND87 trillion (US$3.9 billion) worth of bonds, mostly with maturities between three and five years in the first quarter, up 24.4 percent year on year, according to official figures. Vietnam plans to issue VND220 trillion ($9.86 billion) worth of government bonds this year.
Some media reports suggested local banks are holding around 70 percent of government bonds. 
Foreign funding sources, especially cheap ones, are becoming harder to access now that Vietnam has been recognized as a middle-income economy. 
The economists voiced their concerns after the World Bank said in a report early this week that Vietnam is struggling with weak revenue and increased current and capital spending, given its state budget deficit equivalent to 6.5 percent of gross domestic product at the end of last year.
A report released by the Hanoi-based Vietnam Institute for Economic and Policy Research on Tuesday also said the state budget deficit could be equivalent to 6.34 percent of GDP last year, local media reported. 
That was much higher than the target of 5 percent set by the National Assembly, reflecting "loose fiscal discipline," an issue that has happened for many years, according to the report.
Lacking money, the government has been borrowing more to pay debt, which has increased public debt, economist Vu Dinh Anh was quoted as saying at a meeting to discuss the new report. 
Latest figures released by the government last month showed Vietnam's public debt was equivalent to 62.2 percent of GDP.
It will rise to 63.8 percent at the end of this year, and then 64.7 percent in 2018, or slightly lower than the threshold of 65 percent, according to the World Bank's forecast.
Interest rate hike
Economist Vu Dinh Anh said when the government offers higher rates and shorter terms to attract bank loans, borrowing costs will increase.
Interest rates will see much bigger hikes, he said, adding that local banks have already rushed to attract deposits in recent months. 
Local media reported that deposit rates have reached 8 percent, the highest since 2014. Lending rates, on the other hand, averaged 9.55 percent, up from 9.40 percent from the beginning of this year. 
In another attempt to offset its budget deficit, the government will likely continue to increase tax revenues by stepping up inspection to collect arrears, according to the economists.
Since the government cannot raise import tariffs due to commitments under free trade agreements, and cannot revise corporate tax and value added tax without amending laws, it is possible to see higher taxes on local products, they said. 
While the government has announced lower value-added tax rates on some agricultural products, it will levy higher luxury taxes on some car models this July and also plan more collections from fuel traders in the form of an environmental tax. 
Economist Truong Dinh Tuyen said that the government may also make some tweaks in its tax policy that will remove some deductibles and increase the taxable amount. 
"The burden of taxes and fees will become heavier, and in the end will have negative impacts on the economy," economist Pham Chi Lan said.
Tax offices around the country are set to inspect 18 percent of businesses this year in a hope to collect more than VND10 trillion ($442.9 million), according to a plan recently announced by the finance ministry's General Department of Taxation.
Last year the department inspected nearly 79,300 businesses and collected more than VND12.35 trillion ($545 million), according to official figures.

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