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Saturday, October 8, 2022

An insight into Vietnam’s indebtedness

By Vu Quang Viet

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National debt, or foreign debt, when reaching an excessive level, often leads to an economic crisis. Given debt crises in multiple countries, especially poor ones, it is worthwhile to look into Vietnam’s debt which comes with four types: foreign debt, public debt, debt owed by non-financial companies, and debt by households.

Public debt excludes debt owed by State-owned enterprises, and is limited to Government-guaranteed debt only. For debt owed by enterprises, only liabilities by non-financial companies are considered, while debt of financial institutions which borrow for on-lending is not taken into account to avoid overlapping. This article skips debt owed by households due to the unavailability of data. All figures are rounded up.

Foreign debt

Vietnam’s foreign debt in 2020 was US$130 billion, which rose to an estimated US$139 billion in 2021, equivalent to 47-48% of GDP, far higher than the 38% recorded in 2014. The General Statistics Office (GSO) has recently revised up GDP by 26-29% after a review of data, which in effect reduces the ratio of foreign debt to GDP.

The new GDP calculation method, though more accurate, is of little analytical value, because continuum data from many years on end since 1975 is required for evaluation, while the new method has been applied since 2017 only. Therefore, the calculation of GDP using the new method has not been approved of by many international organizations. However, no matter whether the new or old method is referenced, the proportion of foreign debt is still alarming. The foreign debt at 48% of GDP (or nearly 38% under the new method) is higher than the average of middle-income countries at 28% of GDP, and is also higher than that of other Southeast Asian countries except Laos, which is struggling with a high debt ratio of 90%.

Vietnam’s foreign debt is all the more concerning as much of it is owed by companies. In 2021, the principal payable totaled US$118 billion, higher than the national foreign reserves at US$109 billion. There could be two reasons: the proportion of foreign debt owed by businesses is rising, accounting for 66%, or much of it is short-term debt that is falling due.

Currently, the interest rate on the Government’s foreign debt is very low, at only some 2.1%, but in the coming time, due to many countries hiking interest rates to curb inflation, interest rates are poised to rise, making it more difficult for Vietnam to service debt, especially short-term one. The housing mortgage rate in the U.S. has risen from 3% to 5.3%, which is an issue of concern for Vietnam. That is not to mention the unpredictable aftermath of Covid-19 or the impact of the U.S. dollar’s appreciation when the demand to pay debt edges up further.

Public debt

Public debt comprises the Government’s debt and corporate debt guaranteed by the Government. Vietnam’s public debt amounted to US$153 billion in 2020, or 56% of GDP, lower than the ratio of 64% in 2016, and far lower than in developed countries such as Japan, the U.S. and Singapore, but far higher than China’s. A noteworthy point is the proportion of the State budget set aside annually to pay public debt. This proportion is sizable, hovering around 20% after falling from a previous peak of 25%.

The State budget earmarked for public investment is also huge, at 31% in 2020; public investment as a proportion of overall investment in the economy is also high, at over 30%.

In recent years, investment from the State budget has been rising, while savings as a percentage of GDP have been falling, from the peak of 40% in 2007 to some 27% now. The fall in savings is due to a sharp fall of investment by the business community, from 32% of GDP in 2007 to 18% now.

A major question is whether the role of State-owned enterprises has been fading as their investment is less efficient due to corruption. Equity of State-owned enterprises has also tumbled, from 40% of the business circle’s total during 2011-2014 to 22% now (according to data in the White Paper on Vietnamese Enterprises issued by the GSO).

However, a fall in savings as a percentage of GDP should not be the reason behind the low GDP growth in recent years. It is possible that a fall in savings in the economy mirrors a change of policy, from upholding the role of State-owned enterprises as the mainstay of the economy to highlighting the State sector as the pillar in replacement. An analysis of statistical data shows little correlation between the GDP growth rate and the investment to GDP ratio.

Regrettably, the White Paper does not classify State-owned enterprises as financial and non-financial ones to allow for an in-depth analysis, because non-financial companies utilize debt to scale up production, while financial ones use debt for onlending.

Debt owed by non-financial companies

The debt owed by non-financial companies in Vietnam is worrisome, so to say, as their debt as of 2019 exceeded 305% of the old-method GDP, far higher than that in highly-indebted countries like China (153%), Japan (118%), and the U.S. (81%) – which rely on high debt to stabilize the economy as is the case of Japan or the U.S., or to achieve high GDP growth like China. Is the increase of such debt, especially debt owed by SOEs, meant to boost GDP growth (data available fails to categorize non-financial companies into SOEs, foreign-invested enterprises and domestic private companies) or to lower the corporate income tax payable? The debt-to-equity ratio at non-financial companies in Vietnam now stands at 1.5 (by analyzing data from the White Paper). This ratio is also very high compared to the average of just 0.8 in the U.S. This ratio varies from industry to industry stateside, which may be as high as 2 to 3 for the auto industry, nearly 2 for telecom businesses, or over 2 for construction corporations.

This comparison sheds light on the indebtedness. A high debt ratio is not necessarily bad as it might reflect the cash flow required for development, but if it is excessively high, especially when interest rates surge, high debt may lead to an economic crisis. This is an issue of concern for Vietnam when interest rates are rising in the world. Given a debt-to-GDP ratio at 2, for instance, and supposed the interest rate is 3%, then the GDP must grow by 6% just to have enough money to service debt.

Debt owed by non-financial companies is probably the biggest headache for Vietnam as interest rates are leaping worldwide. Data from the White Paper is not sufficient to look into the problems faced by SOEs, foreign-invested firms or domestic private firms. It is advised the GSO provide clear-cut data of non-financial and financial companies in each sector.

It can be concluded that national debt, especially debt owed by non-financial companies in Vietnam, is extremely high compared to China, but the growth of per capita income in Vietnam is lagging far behind. Vietnam’s per capita income in 1971-1976 outpaced China’s, at US$335 against US$322 on the base year of 2015. Now, Vietnam’s per capita income is equal to just one quarter of China’s, at US$2,700 versus US$10,000.

According to data from the UN, China attained high GDP growth due to the high investment-to-GDP ratio, at over 40% or sometimes nearly 50%, while keeping inflation low. In 2004-2011, Vietnam also boasted a high investment-to-GDP ratio, at over 30% and sometimes nearly 40%, but inflation stayed high then. But Vietnam’s GDP growth rate was not high, meaning low cost-effectiveness.

It is apparent Vietnam must enhance investment efficiency, especially in infrastructure development. Some issues that Vietnam needs to address include improving the leadership’s capacity, boosting R&D and upskilling the workforce, and cutting cost in international transport.

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