Bond issuance by provinces, cities needs to be carefully monitored

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Construction of an overpass in progress in Hanoi. Vietnam has some 40,000 public-invested projects requiring hundreds of trillions of dong.

The locality bond issuance should be carefully conducted, while management over it should be strengthened to reduce risks, economist Le Dang Doanh told Vietweek in an interview.

Vietweek: What do you think about the fact that some cities and provinces like Hanoi, Da Nang and Bac Ninh plan to issue bonds?

 Le Dang Doanh: 2012 is the first year that the government's revenues fell. Localities' budgets were cut because collection of land tax and corporate income tax was sharply down in the context that the property market had been frozen, and more than 100,000 businesses had shut down. The lower revenues are also attributed to tax cuts, so localities want to issue bonds to raise funds for their development.


The country now has some 40,000 public-invested projects requiring hundreds of trillions of dong, many by localities.


But criteria for localities to issue bonds, the repayment mechanism, and the responsibility of the borrowers have not yet been spelt out. If the issuance is not strictly regulated, leaders of localities would not have to take responsibility for their decisions to issue the bonds because the debts would be repayable in the next five to 10 years, when they are already retired.


We should learn from China, which has allowed localities to issue bonds and get bank loans. The debts Chinese localities owe to banks and bond buyers are very big and cause economic instability. So I think we should be very careful in allowing localities to issue bonds, and have comprehensive regulations on bond repayment, source of funds for repaying the debt, and borrowers' responsibilities. We should prevent a situation where localities can freely issue bonds and invest the proceeds in ineffective projects. It will be very dangerous if that happens.


Are regulations on borrowing by localities not comprehensive enough?


Yes. They are not clear or detailed enough, so they should be carefully considered to limit risks caused by issuing bonds. In addition, the economic restructuring plan, which focuses on restructuring public investment, should be submitted soon to the National Assembly for approval to ensure that the effectiveness of public investment is improved.



 [Local Governments] have outstanding infrastructure construction debts of VND91 trillion. They have not paid enterprises that have invested in the infrastructure. this has forced many firms to shut down.


Should we limit the bond issuance of localities?


Localities should be allowed to mobilize enough money to achieve their economic growth targets. The government should draft comprehensive regulations for their bond issues and repayment responsibilities. Then they will carefully consider their capital needs. However, the Ministry of Finance and the National Assembly should ensure that the regulations are scrupulously followed.


Should we ban localities with large debts from issuing bonds?


There are rich localities like Ho Chi Minh City, so they could have big debts. Absolute figures are meaningless. The Ministry of Finance should stipulate a ratio between localities' income and debts. If the rate is too high, and exceeds the regulated limit, localities should not be allowed to issue bonds.


What will happen if the bond issues are not closely monitored?


The effectiveness of public spending should have been reviewed and assessed before allowing localities to issue bonds. Localities have outstanding infrastructure construction debts of VND91 trillion ($4.3 billion). They have not paid enterprises that have invested in the infrastructure. This has forced many firms to shut down.


Thus, there could be bad effects if localities continue to borrow without careful oversight. When they get funds easily, localities could sink the money in too many projects, including wasteful ones. This is very dangerous. If localities go insolvent, the central government will have to repay the money raised through bonds, increasing the burden of public debt. 


We saw a dangerous situation a few years ago when public investment was poured into too many projects. So it is necessary to spell out the responsibilities of borrowers, projects' effectiveness, as well as debt repayment mechanism.


The value of bonds issued by a locality will not be too big. However, it will be a problem if the debt has to be repaid using money contributed by people and enterprises through taxes.


Will the availability of credit to the private sector be hit when both the government and localities issue bonds?


Banks find it hard to boost credit growth now, so they are ready to buy government bonds. However, it is not sure that they will buy localities' bonds.


The issue of bonds by localities, done concurrently with issue of government bonds, could affect credit availability for the private sector because funds [are] limited. So private firms will find it hard to get loans at reasonable interest rates.


Former governor of the State Bank of Vietnam, Cao Sy Kiem, said bond issuance by localities would increase liquidity in the economy. If the funds raised through bonds by localities was invested in ineffective projects, it would cause inflation and other adverse effects on the economy.


The government, therefore, should not allow all localities to issue bonds. Those that want to issue bonds should meet certain criteria to preclude a situation where money was sunk into too many projects, Kiem suggested


Oversight of bond issuance by localities should also be strengthened to avoid risks that could affect people's lives.


In case any local goverment could not recover its investment in ineffective projects to repay the debts, the central government should not do it on behalf of them. The local goverment should cut other spending to repay the debts.


Vietnam should also cap localities' debt levels to minimize likely risks, Kiem said.


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