CHAPTER 4: VIETNAM PUBLIC DEBT AND LESSON FROM LATIN AMERICAN PUBLIC DEBT CRISIS TO VIETNAM
4.3. Measures to apply lesson from the crisis in Vietnam’s context
Firstly, to avoid reckless and ineffective government borrowing, IMF’s harsh structure adjustment policies such as contractionary policy (reducing the budget to decrease budget deficit, adversely affecting public debt, maintaining the low credit growth and decreasing spending and inflation) is needed. The fiscal policy should be rigidly enforced according to a clear roadmap, by using revenues exceeding the yearly estimate to pay debts, and striving for the budget deficit to be maintained at 4% from now to 2020, maintained at 3% after 2020, etc.
To maintain the low credit growth, The State Bank of Vietnam (SBV) recently set a credit growth target for 2019 of 14 per cent, focusing on priority fields to ensure risk control and support economic growth. The SBV will also continue to set credit growth quotas for each bank, depending on its health, to regulate overall credit growth and support government targets.
In order to improve the effectiveness of the use of funds, especially with the sharp decrease of ODA sources and more dependence on commercial loans at higher interest rates in the short-term, it is essential to further modernize the State Budget system. The
first recommendation is to further strengthen State Budget transparency, to promote more public participation in the budget process at all levels of government and to improve accountability. For example, the State Budget submitted to the National Assembly and Local People’ Councils should be disclosed at the same time so that citizens can provide feedback. State Budget information should be communicated clearly and concisely to facilitate citizens’ understanding of and participation in budget discussions. Secondly, there is a need for more discipline in implementing approved spending plans. Actual spending has in recent years significantly exceeded planned spending. Such big changes affect the credibility and integrity of spending plans. To address this, we recommend that major changes to budget appropriations be approved through a supplemental budget. This should help to promote more efficient spending. The third recommendation is to introduce medium-term budgeting. A medium-term budget would provide projections of total revenue, spending and borrowing over the coming three to five years. This would enable the government and the public to estimate the cost and affordability of its development plans. The fourth recommendation is to consolidate reporting on all activities of the public sector so that the government, the National Assembly and citizens have a fuller picture of fiscal policy. This could be done through consolidated government financial statements with full information on revenue, expenditure, financial and non-financial assets, and liabilities. Like in other countries, the State Budget is not the only channel through which public services are delivered. In Vietnam there are for example extra budgetary funds and state enterprises. It is important to monitor risks to the State Budget emanating from these. As previous global crises have shown the biggest risks to the State Budget often come from extra budgetary public sector activities.
Secondly, in order to effectively control external borrowing. The sustainability of public debt depends not only on the level of debt of a country but also on the ability of the nation to continue borrowing, in which creditworthiness(IIR) plays a very important role, to avoid the liquidity crisis. Over the time, Vietnam's creditworthiness has gradually improved and is currently lower than the investment level by about 2-3 units according to
the rating of the world's leading credit rating agencies. Although there are no published figures on IIR ratings for Vietnam, credit ratings can be converted according to the rating of independent credit rating agencies. Accordingly, Vietnam belongs to a group of countries with limited access to international capital markets. Moreover, the State Bank of Vietnam needs to increase foreign reserves to use in case Vietnam’s government lose the ability to pay the debt. Besides, a sufficient foreign reserve is needed to stabilize exchange rate.
Vietnam's foreign exchange reserves have increased sharply recently after the State Bank of Vietnam focused on buying foreign currencies from banks.
Figures 4-13. Vietnam's foreign exchange reserves 2016-2019
However, total reserves (% of total external debt) in Vietnam reported since 2010 have been low, despite of slight increase.
Figures 4-14. Vietnam total reserve 2010-2018
Moreover, suitable capital account should be opened along with health improvement of the domestic finance – banking sector and simultaneously, a mechanism to monitor macro and micro finance is essential to effectively control the credit of private enterprises as well as private borrowing with government’s underwriting. .
Thirdly, to avoid risks from USD based – fixed exchange rate system, Vietnam should implement healthy and cautious macroeconomic policies to maintain suitable exchange rate system.
In 2016, the State Bank of Vietnam decided to change exchange rate system from fixed exchange rate system to floating exchange rate system, but under control of SBV.
Basically, Vietnam is still following fixed exchange rate system, but more flexible than before. At the end of 2015, statistical data showed that, with the corresponding exchange rate system, the value of VND was still under control; however, the SBV has made every effort and steadily with the goal of a stable exchange rate and flexibility in line with the movements of international financial markets, especially fluctuations of CNY or interest rates of the Fed. It is clear fact that, with the old exchange rate system, the value of VND was greatly affected by the appreciation of the USD when the Fed raised interest rates and
fluctuations of CNY - a major trading partner of Vietnam (in 2015, Vietnam had a trade deficit of about US $ 3.4 billion with China).