State firms' loans should be considered public debt

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  An unusable floating dock belonging to state-owned shipping line Vinalines, which has been criticized for being inefficient. Economist Bui Kien Thanh says the government should stop providing loan guarantees to state companies. Photo: Reuters

Vietnam should treat loans to state-owned enterprises (SOEs) as public debts to ensure that the statistics correctly reflect the country's public debt situation, economist Bui Kien Thanh tells Vietweek in an exclusive interview.

Vietweek: Some say that Vietnam's debt statistics are unrealistic because debts owed by SOEs are not considered public debt. What do you think?

Bui Kien Thanh: The way statistics are done does not fully reflect Vietnam's public debt situation. According to international practice, debts of states and SOEs are reckoned separately, as SOEs have independent business accounts. However, there is something different in Vietnam, as the state participates in managing SOEs.

For instance, the state issued bonds worth US$750 million abroad to give troubled shipbuilder Vinashin (which nearly went bankrupt after piling up debts of $4.5 billion in 2010). Public debt has turned into the company's debt. However, the debt is really public, because it is the state, not the company, that issued the bonds.

Another example is that Vinashin borrowed some $600 million from commercial banks with a state guarantee. The banks lent to Vinashin because they believed in the state's guarantee. Thus, loans with a state guarantee may be considered public debts too.

The government should stop backing loans taken out by companies. In fact, other countries never guarantee enterprises that borrow from commercial banks. Loans with state guarantees should be considered public debts.

The International Monetary Fund and the World Bank have advised the Vietnamese government not to guarantee loans that are too large. The IMF has suggested Vietnam use a guarantee cap of $300 million for loans to SOEs and foreign-invested firms. Every year, IMF, as a creditor to Vietnam, negotiates with the Vietnamese government that ceiling. The state has to take responsibility for the loans guaranteed by it, although the loans are not borrowed by the state. The government should repay the loans it guaranteed if borrowers cannot.

So when the government will have to use the state budget to repay bad debts at SOEs, does this threaten the safety of public debts in the coming years?

Many public debts will mature between now and 2015. We should make sure our foreign currency reserves are enough to repay the loans. We have to carefully calculate this, not the total figure of public debts only. Vietnam's economy is now in a tough spot, and has a trade deficit. Thus, we cannot use foreign currencies from exports to repay loans.

Thanks to overseas remittances, we can repay public debts. Overseas remittances have made a large contribution to our foreign currency reserves. Last year, overseas remittances were estimated at $9 billion. However, overseas remittances, in the coming time, may reduce amid the tough economic situation. So we have to manage public debts to ensure that our foreign currency reserves are enough for payment.

It will be very dangerous if we lose the capacity to repay our overseas loans. The public debts are comprised of overseas loans and domestic ones. Now, our public debt is equal to some 60 percent of our GDP. If it rises to 100 percent of GDP, we could be listed as a country facing the risk of insolvency.

How safe is the public debt level in Vietnam compared to that of other countries?

Some experts said our public debts, at the current level, are not high, and still safe. However, it is groundless. The most important thing is the ability to repay the loans when they mature. It wouldn't be dangerous for us to borrow $100 billion if our foreign currency reserves were enough for us to repay the loans.

However, if overseas remittances do not meet our projections, we could face insolvency even if we only borrow $50 billion.

The ability to repay depends on the health of the economy. However, our economy now is very weak. The economy will continue to sink, and face risk of insolvency, unless the government adjusts monetary policy to help companies borrow at more reasonable interest rates.

Countries calculate their loan repayment capacity based on their foreign currency reserves, and their economic growth. So the debt safety level is considered based on the situation of each country. There will not be a standard level applied for all countries.

Is the country capable of repaying the debts if the state budget deficit remains at 5 percent and continues to expand?

The government has to use the state budget to repay both overseas and domestic loans. If the budget is not enough, it could take out new loans to repay old ones. The state budget cannot increase in the current economic context.

To increase that state budget, the government has to increase taxes levied on companies. And the government can only make more money from taxes once firms develop and grow. However, tens of thousands of firms have shut down since early this year, so we cannot collect more taxes. We should facilitate improvements at companies to collect more taxes from them, helping to balance the state budget, and reduce overseas borrowing.

What should we do to manage public debts?

The government should borrow only when there is no other way to mobilize capital to develop infrastructure such as roads and bridges that private firms cannot or do not want to. It should not take out loans to develop fields that private firms can develop.

It is unreasonable for SOEs to use loans borrowed by the government to invest in such sectors as property. The government has set aside big money for SOEs, but they operate ineffectively. The Incremental Capital Output Ratio (ICOR) of SOEs is estimated at 8-14, which means very low productivity of capital, while that of private and foreign invested firms is only 5 or 6.

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