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UNITED NATIONS DEVELOPMENT PROGRAMME PROJECT OF THE GOVERNMENT OF VIETNAM VIE 01/010 CAPACITY DEVELOPMENT FOR EFFECTIVE AND SUSTAINABLE EXTERNAL DEBT MANAGEMENT PRELIMINARY EXTERNAL DEBT SUSTAINABILITY ANALYSIS REPORT February 2005 Crown Agents Oversea Government and Administration Ltd St Nicholas House, St Nicholas Road, Surrey, Sutton, SM1 1EL, UK were responsible for producing this report under a contract with United Nations Development Programme for the Project VIE/01/010: Capacity Development for Effective & Sustainable External Debt Management This project is funded by the UNDP and the Governments of Australia and Switzerland with counterpart funding from the Government of the Socialist Republic of Viet Nam This report was drafted by Michel Vaugeois and Dr Sanga Sangarabalan of Crown Agents and approved for submission by Colin Seelig, Director, Institutional Development Group, Crown Agents Contract Reference: VIE/01/010 Prospector: T16196 TABLE OF CONTENTS Table of Contents (i) List of Annexes (i) List of Acronyms and Abbreviations (i) SECTION PAGE INTRODUCTION EXTERNAL DEBT STRUCTURE (END 2003) 2.1 2.2 2.3 2.4 EXTERNAL DEBT STRUCTURE – NOMINAL VALUE EXTERNAL DEBT STRUCTURE – PRESENT VALUE CURRENCY COMPOSITION INTEREST RATE STRUCTURE EXTERNAL DEBT RESTRUCTURING AND NEW FINANCING STRATEGIES 3.1 3.2 EXTERNAL DEBT RESTRUCTURING STRATEGIES NEW FINANCING STRATEGY MACROECONOMIC SCENARIOS 4.1 4.2 4.3 4.4 RECENT ECONOMIC TRENDS ( 2000-2004) SCENARIO 1: BASE CASE 11 SCENARIO 2: PESSIMISTIC 14 RESULTS OF THE MACROECONOMIC SCENARIOS 15 FINANCIAL ANALYSIS 17 5.1 5.2 EXTERNAL DEBT SUSTAINABILITY ANALYSIS 17 SENSITIVITY ANALYSIS 19 CONCLUSIONS 21 LIST OF ANNEXES ANNEX A Vietnam – Nominal and NPV Debt Outstanding – End 2003 ANNEX B Vietnam – Debt Renegotiations ANNEX C Discount and Exchange Rate Assumptions ANNEX D Results of the Simulations ANNEX E Balance of Payments Projections ACRONYMS AND ABBREVIATIONS ADB BOP CIRR DAF DBR DMFAS DSA DSM+ FDI GDP HIPC IBRD IDA Asian Development Bank Balance of Payments Commercial Interest Rates of Reference Development Assistance Fund Domestic Budget Revenue Debt Management Financial Analysis System Debt Sustainability Analysis Debt Sustainability Model Plus Foreign Direct Investment Gross Domestic Product Highly Indebted Poor Countries International Bank for Reconstruction and Development International Development Assistance (i) ACRONYMS AND ABBREVIATIONS IMF LIBOR MOF MPI NFS NPV ODA PRSP SBV SDR SOCB SOE TDS UNCTAD VAT WTO International Monetary Fund London Inter Bank Offered Rate Ministry of Finance Ministry of Planning and Investment Non Factor Services Net Present Value Official Development Assistance Poverty Reduction Strategy Paper State Bank of Vietnam Special Drawing Rights State Owned Commercial Bank State Owned Enterprise Total Debt Service United Nations Conference on Trade and Development Value Added Tax World Trade Organization (ii) UNITED NATIONS DEVELOPMENT PROGRAMME PRELIMINARY EXTERNAL DEBT SUSTAINABILITY REPORT CAPACITY BUILDING FOR SUSTAINABLE EXTERNAL DEBT MANAGEMENT REFERENCE NO: VIE 01/010 INTRODUCTION Since 1993, the Socialist Republic of Vietnam has pursued a policy of restructuring its external debt in order to reduce its debt burden In 2002, the Bretton Woods institutions prepared a debt sustainability analysis that concluded that the country was not eligible for the Enhanced Highly Indebted Poor Country (HIPC) Initiative Furthermore, in 2003, the Vietnamese authorities approved a debt strategy for the period of 2001-2010 formulated by the Ministry of Planning and Investment (MPI) This debt strategy provides the overall objectives of the country’s borrowing objectives and volumes over the next decade Staff from the Ministry of Finance (MOF), the Ministry of Planning and Investment (MPI), and the State Bank of Vietnam (SBV) participated in a National Workshop on External Debt Sustainability They were assisted by consultants from Crown Agents and UNCTAD, and it was financed under the project VIE/01/010 This document presents the results of their work The paper is structured as follows: Chapter II reviews the public and publicly guaranteed external debt structure of the Socialist Republic of Vietnam at end 2003, while Chapter III details the debt restructuring and new financing strategies, and Chapter IV, the macroeconomic scenarios Chapter V analyzes the external debt sustainability of the country and Chapter VI presents the various conclusions EXTERNAL DEBT STRUCTURE (END 2003) 2.1 EXTERNAL DEBT STRUCTURE – NOMINAL VALUE At end 2003, the public and publicly guaranteed external debt of the Socialist Republic of Vietnam stood at USD 11.16 billion of which 322 million was in arrears, a rise of percent or USD 975.9 million, from the previous year (USD 10.18 billion at end 2002) This was due to positive net flows (disbursements minus principal repayments) of USD 982.9 million and the variation of the exchange rates (depreciation of the US dollar) that cause an additional increase of USD 677 million of the external debt stock1 However, debt buyback operations conducted during that year helped offset this increase At the end of 2003, bilateral creditors were the largest creditor category with a debt stock of USD 5944 million (or a share of about 54%) while multilateral creditors with a debt stock of USD 3858 million represented about 38% of the total external debt Commercial creditors (commercial banks and Brady bonds) accounted for the remaining 8% (USD 898.6 million) as shown in Graph below (details are shown in Annex A) Within the bilateral creditor category, Paris Club creditors account for 90% (or USD 5.4 billion) of the total bilateral debt whereas non-Paris Club creditors represent the remaining 10% (or USD 622 million) Japan with a share of 66% (or USD 3.6 billion) of the total Paris Club debt is the largest creditor, followed by Russia (12% or USD 636 / The public and publicly guaranteed external debt stock would amount to USD 10.482 billion when computed using the exchange rates at end 2002 CROWN AGENTS OH/C:\WORK\OLIVER HAYWOOD\#DSA VIETNAM REPORT.DOC/18/02/2005/LOG # T16196 / R0120 PAGE UNITED NATIONS DEVELOPMENT PROGRAMME PRELIMINARY EXTERNAL DEBT SUSTAINABILITY REPORT CAPACITY BUILDING FOR SUSTAINABLE EXTERNAL DEBT MANAGEMENT REFERENCE NO: VIE 01/010 million), and France (9% or USD 489 million) This reflects the fact that Japan has been the largest provider of financial resources to Vietnam over the last decade Algeria is the largest non-Paris Club creditor, representing 28% (or USD 171 million) of the total non-Paris Club debt followed by South Korea (19% or USD 118.5 million) and China (10% or 60.5 million) Graph - External Debt Structure - Nominal Value 3% 5% 38% 54% MultilateraL Bilateral Commercial Bonds IDA is the largest multilateral creditor with a share of 55% (USD 2346 million) of the total multilateral debt, followed by the Asian Development Bank (ADB) with 31% (USD 1314.7 million) as these creditors are two of the largest sources of external financing over the past decade The IMF with a debt outstanding of USD 394 million accounts for 9% of this total and the other multilateral creditors the remaining 5% 2.2 EXTERNAL DEBT STRUCTURE – PRESENT VALUE At end 2003, the present value of the external debt stood at USD 9.24 billion, implying a grant element of 17% that would indicate that Vietnam’s portfolio is not concessional as it is lower than the threshold of 35%, using the IMF methodology This is primarily due to the variation of the parameters (discount and exchange rate) used to compute the present value The decrease of the CIRRs rates in 2003 that are used to discount the debt service payment flows, and the depreciation of the USD vis vis the other foreign currencies, have contributed to the increase of the present value A lower discount rate means that the present value of the external debt rises, while the depreciation of the US dollar against the other currencies has the same effect when the present value is denominated in this currency However, as defined in Regulation on the Management and Utilization of Official Development Assistance published by MOF2, a loan is considered concessional if the grant element is 25% or more, using a fixed discount rate of 10% Using this methodology, the present value of Vietnam’s external debt would amount to USD 5420.8 million The country’s portfolio would then be considered concessional as the grant element would be equal to 51% / See Regulation on the Management and Utilization of Official Development Assistance, External Finance Department, Ministry of Finance, Hanoi, 2004, page 66 and Annex This is based on the methodology of the OECD However, in the revised Decree 17/2001, concessional loan would be defined as having a grant element of 35% CROWN AGENTS OH/C:\WORK\OLIVER HAYWOOD\#DSA VIETNAM REPORT.DOC/18/02/2005/LOG # T16196 / R0120 PAGE UNITED NATIONS DEVELOPMENT PROGRAMME PRELIMINARY EXTERNAL DEBT SUSTAINABILITY REPORT CAPACITY BUILDING FOR SUSTAINABLE EXTERNAL DEBT MANAGEMENT REFERENCE NO: VIE 01/010 This analysis also helps explain the distribution of the debt burden among the creditor category The shares of bilateral and commercial creditors rise to 62% and 10% (see Graph below) on a present value basis, while the share of multilateral creditors declines to 28% reflecting the high degree of concessionality of the multilateral debt portfolio The composition of debt among bilateral creditors remains the same Paris Club creditors represent 90% (USD 5116.7 million) of the total bilateral debt while non-Paris Club bilateral creditors have a 10% share (or USD 581.5 million) Within the Paris Club, Japan is still the largest creditor on a present value basis, but its share increases to 69% (or USD 3545.8 million) indicating that the Japanese debt is not concessional using the IMF methodology for a DSA This is due to the relationship between the low interest rate (about 1.5%) extended by the creditor and the low yen CIRR rate (about 2.5%) used as the appropriate discount rate to compute the present value Russia follows with 17% of the Paris Club portfolio (or USD 660.3 million), while France represents 7% (or USD 357.6 million) of it Graph - External Debt Structure - Present Value 5% 6% 28% MultilateraL Bilateral Commercial Bonds 61% Regarding non-Paris Club, Algeria is the largest creditor with a present value of USD 171.1 million (or 30% of the total non-Paris Club debt on a present value basis), implying a grant element of 0% as it is fully in arrears The other non-Paris Club main creditors remain South Korea (USD 105.3 million or 18%) and China (USD 47.5 million or 8%) For multilateral institutions, the shares of IDA decline to 47.7% (USD 1245.7 million) while the proportion of ADB loans increased to 36.4% (USD 949.5 million) respectively of the total multilateral debt, as the loans extended by IDA have a higher grant element (about 65%) than the others With a present value of its debt amounting to USD 253.9 million, the share of the claims of the IMF increases to 9.7%, meaning that the IMF portfolio is less concessional 2.3 CURRENCY COMPOSITION As shown in the graph below, the four major currencies (Japanese yen, Euro, the Special Drawing Rights or SDR, and the US dollar) represent 97% of the total external debt of the country The Japanese yen and the US dollar have the largest shares of the portfolio CROWN AGENTS OH/C:\WORK\OLIVER HAYWOOD\#DSA VIETNAM REPORT.DOC/18/02/2005/LOG # T16196 / R0120 PAGE UNITED NATIONS DEVELOPMENT PROGRAMME PRELIMINARY EXTERNAL DEBT SUSTAINABILITY REPORT REFERENCE NO: VIE 01/010 CAPACITY BUILDING FOR SUSTAINABLE EXTERNAL DEBT MANAGEMENT with 35% and 28% respectively, closely followed by the SDR (26%), while the external debt denominated in Euro amounted to about 8% of the country’s portfolio Nevertheless, with 72% of Vietnam’s portfolio denominated in foreign currencies other than the US dollar, any depreciation of the latter currency will have an adverse effect on the external debt stock of the country, as both the nominal and present value of the non dollar denominated debt will rise, indicating that the country’s debt portfolio remains vulnerable to foreign exchange rate fluctuation Graph - Currency Composition 3% Japanese Yen US Dollar SDR EURO Others 8% 35% 26% 28% 2.4 INTEREST RATE STRUCTURE As Graph indicates, 94% of Vietnam’s external debt portfolio was contracted on fixed rate while the remaining was priced with variable rates, most of which are based on LIBOR terms Loans with interest rate below 3% represent 74% of total portfolio (mostly multilateral loans), while 12% of the loans contracted has interest rate between 3% and 6%, and the remaining 5% between 6% and 10% As a result of this policy, Vietnam does not face important interest rate risks Graph - Interest Rate Structure 2% 5% 16% 77% CROWN AGENTS OH/C:\WORK\OLIVER HAYWOOD\#DSA VIETNAM REPORT.DOC/18/02/2005/LOG # T16196 / R0120 Fixed