VietNamNet Bridge – A public debt crisis would hit Vietnam by 2020 if the present way of public spending did not change, according to a report by the Economic Committee of the National Assembly (NA).

The “Public debt and sustainability of Vietnam” report presents three economic scenarios from now to 2020 for debt analysis.

In the optimistic scenario, Vietnam would successfully regain economic growth momentum and curb inflation at a reasonable level after carrying out reforms aimed at improving the performance of the economy. As such, the fall of Vietnamese dong and the interest rate on new public debt could be kept at low levels.

As for the pessimistic scenario, the country would fail to get back on the high and sustainable growth path, with inflation shooting up and the local currency weakening further.

The neutral scenario paints a picture that is in between the above two extremes.

If the State budget deficit was maintained at 1% of gross domestic product (GDP) a year, the ratio of public debt to GDP would rise to nearly 58%, 63% and 69% in 2020 under the optimistic, neutral and pessimistic scenarios respectively.

If the State budget deficit stood at 2% of GDP, the respective debt-to-GDP ratios would be over 66%, nearly 72% and 78% in 2020.

If the State budget deficit widened to 3% of GDP, public debt would reach nearly 75%, 81% and 88% of GDP respectively.

“In this case, there is great chance of a public debt crisis happening under any of the three scenarios,” the report warns.

The above results are conjectured based on two assumptions, says the report.

The first assumption is that all public debt had been factored in the debt-to-GDP ratio of 54.9% in end-2011. The second one is all bad debt incurred by State-owned enterprises (SOEs) that the Government might have to pay in the future had been eliminated.

The assumptions used to construct the three economic scenarios seem too rosy compared to the actual situation at the moment.

The State budget deficit has always exceeded 3% of GDP. In 2009, State budget overspending, excluding payments of principals, stood at 3.7% of GDP, according to the Ministry of Finance, whereas the Asian Development Bank (ADB) and the International Monetary Fund (IMF) gave much higher ratios, 3.9% and 7.2% respectively.

Besides, the debt-to-GDP ratio of 54.9% is calculated using the own method of Vietnam.

Public debt in Vietnam is defined as the total sum of internal and external debt owed by the public sector, including central and local authorities, but excluding that owed by SOEs and government bonds. Only SOEs’ debt guaranteed by the Government is counted as public debt.

Meanwhile, public debt is internationally understood as the total sum owed by central and local authorities and SOEs, plus the bonds they issue.

The report says the external debt of the non-public sector, mainly SOEs, which are not guaranteed by the Government stand at 10.6% of GDP. Debt that SOEs owe to the local banking system equals 16.5% of GDP.

If debt of the State corporate sector and domestic bonds not guaranteed by the Government were factored in, public debt in Vietnam would reach 95% of GDP, far exceeding the safe level of 60% set by the World Bank and IMF.

Source: SGT