Vietnam should focus on decreasing the current account deficit and approaching foreign exchange rate fluctuation with caution, economist Tran Du Lich told Thanh Nien Weekly in an interview.
Thanh Nien Weekly: Foreign debt accounted for 42.2 percent of Vietnam's GDP in 2010, up from 39 percent in 2009. The figure is the highest foreign debt ratio since 2006, according to a recent report by the Ministry of Finance. Is the level safe?
Tran Du Lich: We have no foundation on which to say the level of debt is safe or not. We have to consider several criteria when assessing debts.
First, the safety of a country's foreign debt is related to the balance of foreign currency supply and demand. Vietnam is now facing a big current account deficit. Thus, we have to consider the ability to balance international payments each year to guarantee debt payments plus the demand for foreign currencies for imports.
Second, there are debts that increase in value by themselves. For example, the dong devaluation has raised the cost of Japanese yen or euro debts. The bigger the dong devaluation is, the higher the debt increase. This is a forex-related risk.
Third, we have to review the effectiveness of our loan use. We have not yet had transparent information about this issue.
Obviously, in a developing economy, it is necessary to borrow from other countries. The issue is not whether we should take foreign loans or not. The issue is the effectiveness of capital use, and the criteria that I have just mentioned.
We should have a long-term transparent national finance strategy on government debts.
So is the foreign debt to GDP ratio high?
The ratio between foreign debt and GDP is not high. However, this is not the sole criterion on which to assess the debt's safety. We need to consider other criteria as I have just mentioned. If the ratio is low, but the current account deficit is big, the situation may be different. We also have to consider the dong devaluation in accessing a debt, as the debt is in foreign currencies, not in the dong.
Vietnam spent US$1.67 billion paying back overseas loans and interest last year. The figure may reach a peak of $2.4 billion by 2020. Is it putting pressure on the state budget?
If our current account deficit declines, it will not be a big problem. Thus, we need to reduce the current account deficit, and the strain on the payment balance. For example, we could not say a debt payment of $4-5 billion is big or small, as it depends on the balance of payments. If exports increase, the trade deficit narrows, and foreign investment soars, the figures will not be too big.
We are always facing large trade deficits. Is this worrying in terms of debt payment?
We face a trade deficit. However, we still have many sources of revenue, such as foreign direct investment, overseas remittances, and other financial earnings, to balance our payments.
The economy's investment efficiency is still low, and the Incremental Capital-Output Ratio (ICOR) is high. Is the debt a waste?
It is right for the government to get official development assistance (ODA) loans for infrastructure development. Without foreign aid, we could not develop a metro system in Ho Chi Minh City. We can't say that because our ICOR is high, our debt is unsafe. However, we should review the effectiveness of the ODA use, to avoid ineffective investment.
The interest rates on foreign debts may rise when we become a middle-income country. How should we deal with this issue?
The issue happens to normal loans, but we have not yet taken many of those loans. We are now mainly accessing ODA.
Interest rates are not really high now. Meanwhile, most of our loans are medium and long-term ones. Long term debts may have a grace period of 20-30 years. Thus,
I don't think that there will be a big problem for Vietnam in the next one to two years. Vietnam will not face insolvency in the next few years. However, we should consider the debt issue for the long term.
We should carefully consider the risk of foreign exchange rate fluctuation. Most of our ODA loans are in Japanese yen, which has been rising against the US dollar and the dong. There are loans in Japanese yen whose values have risen sharply as Japanese yen has increased to 80-90 yen per dollar from 120-130 yen per dollar.
Should we borrow from domestic sources?
The domestic capital source is too thin for government borrowing. Government bonds are mainly bought by banks. The government cannot borrow on the domestic market as local investors also need capital for their investments. Moreover, the government cannot accept high interest rates on domestic loans with terms of only two or three years.
The issue is whether we can access ODA or not. It is very good if we can obtain ODA loans and use them effectively.
What lessons could Vietnam learn from the debt crisis in EU and the US?
In Vietnam, this kind of crisis will not happen in the near future. However, I suggest that we should have at least a 10-year strategy on loan borrowing, loan payment and loan use.