December 10, 2019 19:00

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Public debt decreased: Signals of national credit rating

13:45 | 13/11/2019

VCN- It is forecasted that by the end of 2020, the public debt to GDP ratio will remain within the safety thresholds permitted by the National Assembly and continue on a downtrend. This shows the sustainability of the state budget and the effectiveness of the management work over a long period. This is also an important criterion to improve Vietnam's credit rating in the international arena.  

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The loan term for 2012 - 2013 period is on average for more than 3 years (domestic loan); up to the present period is over 13 years.

Still within safety threshold

According to the Ministry of Finance's report, due to the great demand, the budget still has to overspend and borrow but the loan growth rate for the period of 2016 - 2019 is just over 8 percent compared to the period of 2011 – 2015, which is 18.6 percent. So far, the growth rate of public debt has decreased sharply. Therefore, the ratio of public debt to GDP in recent years has reached the plan and dropped deeply. In 2016, the public debt ratio was 63.3 percent of GDP, but by 2019 it is expected to be 56.1 percent of GDP and by 2020 it is estimated to be 54.3 percent of GDP.

It is worth mentioning that the recent period, along with the development of the financial market, the finance sector has made great efforts in restructuring public debt. Public debt is mainly government bonds borrowed domestically.In the previous period, foreign loans accounted for more than 60 percent, but in this period, foreign loans were 39 percent and domestic loans were 61 percent. The loan term for 2012-2013 period is on average for more than 3 years (domestic loan), until now, it is over 13 years. The list of government bond debt, it used to be over 2 years on average, it is now approximately 7 years, so the pressure to borrow debt has dropped sharply. In particular, interest rates have fallen deeply. If in the years 2011 - 2013, there were 12-13 percent / year loans, the 3-year loan term, then by 2017-2019, the average loan amounted up to 12-13 years and also had to pay interest of 4.6 - 4.7 percent.

Besides, bond investors are more diverse and have the right to choose investors and investment capital flows. In the previous period, borrowing from commercial banks accounted for 78-80 percent, so far only it is about 40 percent, the rest is other investors such as Insurance Companies, Investment Funds, Vietnam Social Insurance to share investment, and it means to attract capital from many sources. Many investors will compete and lower interest rates, ensuring the stability of the Government bond market and the long-term loan market of the commercial banking system.

In this context, according to the provisions of the Law on Public Debt Management, the total loans approved by the National Assembly has two loans, the loan to offset the deficit and the loan to repay. In fact, in the past, our borrowing to repay debts has done much better with longer tenors, lower interest rates, and contributing to restructuring the quality of public debt.

Reporting to the National Assembly at the 8th session, Minister of Finance Dinh Tien Dung said that with the current situation of borrowing, repayment and debt limits, as of the end of 2019, public debt in 56.1 percent of GDP, Government debt is 49.2 percent of GDP; the Government's direct debt payment to State budget revenue is about 19.5 percent; national external debt is about 45.8% of GDP. Thus, it can be said that the ratio of debt to GDP maintained within the safety thresholds allowed by the National Assembly and continued the downtrend of 2018.

Remain 54.3 percent of GDP by the end of 2020

Regarding the situation in 2020, the debt indicators against GDP are likely to continue to decrease under the Government supposed that by the end of 2020, public debt will be about 54.3 percent of GDP;while Government debt is about 48.5percent of GDP, the country's external debt is about 45.5 percent of GDP.

In the context that international capital market conditions are forecast to be tighter in the near future, the Government's obligation to repay foreign debts will increase accordingly. However, in general, the average interest rate of foreign loans of the Government remained low (2.0percent / year as of December 31, 2019) because over 96% of foreign loans are conditional on ODA loans and concessional loans. This factor plays an important role in maintaining the debt repayment ratio on the State budget within a safe level (at the end of 2019, at 19.5-20.5 percent compared to the threshold allowed by the National Assembly of 25 percent, compared to the level of 15.9 percent approved by the National Assembly at the end of 2018) and was positively evaluated by the International Monetary Fund and credit rating agencies when analyzing the debt portfolio sustainability of Vietnam. It is expected that the Government's direct duty to pay debts against state budget revenue in 2020 is about 23 percent, close to the threshold of 25 percent allowed by the National Assembly in 2016-2020.

Despite many positive signs, it cannot be denied that many problems exist. Thereis the slow progress of disbursement of public investment, especially foreign capital. In addition, although the size of the Government debt portfolio by the end of 2019 is well controlled at 49.2 percent of GDP (compared to 52.7 percent in 2016 and 50.0 percent in 2018), along with the effect of Vietnam graduating from IDA (concessional loans of the World Bank) since 2017, the cost-risk ratios of Government debt portfolios tend to be less favorable than before. The risk of refinancing focuses on the domestic debts of the Government for high repayment obligations which focus on a number of years (10.3 percent of the Government's domestic debt portfolio is due in 2020), which is full of liquidity risk for the state budget. Interest rate risk of external debt portfolio tends to increase because of the increase in the proportion of loans with floating interest rates.

Another factor is that although the ratio of VND loans has increased (from 55 percent at the end of 2015 to 62.3 percent of Government debt by the end of 2019), the Government's external debt portfolio still focused on 3 major currencies including USD, JPY and EUR, which have been highly volatile in recent times.

Overall, the management of public debt has implemented the goal of organizing capital mobilization with low costs associated with a reasonable level of risk for development investment. The debt ratios are strictly controlled and within limits of the National Assembly's resolutions, making an important contribution to the continuation of Vietnam's national credit rating.

At this point, the Government will continue to strengthen financial - budgetary discipline; accelerate implementation, disbursement and improve the efficiency of public investment; thoroughly save regular expenditures; ensure publicity and transparency. Strictly control budget deficit, effective management and use of public debt and public assets. The foreign borrowing must continue to be strictly controlled and promote the efficiency of capital.

With these achievements, it is expected that in the future, public debt will continue to decrease, structure will be more sustainable, making an important contribution to ensuring national financial security and raising Vietnam's reputation in the national arena.

By HồngVân/Bui Diep