VIETNAM INFRASTRUCTURE LTD VinaCapital Economic Report
July 2015 VIETNAM'S FISCAL SITUATION: AN ASSESSMENT
We note that in recent years much emphasis has been given to the achievement of economic stability by Vietnam. Many examples of improvement have been cited: inflation reduced from
20% (2011) to 1% (mid 2015), VND depreciation declining from 8% (2011) to 2% (2015). These are mainly the achievements of monetary policy. They are well known to the public and well covered in the media (domestic and foreign). However, the area of fiscal policy does not get equal attention.
A review of fiscal policy in Vietnam revealed a number of noteworthy features.
The ratio of public debt to GDP has risen steadily since 2010 and is now asymptotically approaching the legal limit as allowed by law.
Government borrowing needs are still substantial while liquidity in the banking system is being stretched thin. For 2015 the state bond-issuance program (reflecting the PSBR
- public sector's borrowing requirement) is unlikely to be achieved, due to its
competition with a rising borrowing need from private enterprises.
The National Assembly may have made an error in stipulating that starting in 2015 only
5 year-and-longer bonds can be issued. The purpose of this legislation is laudable: avoiding a timing crunch in the roll-over of government debt. But this policy is at variance with thelocation preference behavior of commercial banks when they purchase fixed-income securities. Most of their customer deposits tend to be of short- duration which drives their preference for the short end of bond yield curves. Banks are the major players on this market accounting for 80% of purchasing volume. Insurance companies have a need for long term bonds as dictated by their investment requirements. But their purchasing power is quite limited. The imbalance between revenues and expenditures(as evidenced by the annual budget deficit) has been increasing since 2011 to now, and will likely remain significant (in the range of 5 - 5.5% of GDP) for the near future.
A comparison of Vietnam's fiscal performancewith neighboring Asean countries showed that:
Its ratio of (budget revenues/GDP) % has been declining versus an uptrend in other countries.
Its ratio of (annual budget deficit/GDP) % has been rising versus a downtrend in other neighbors.
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II.DATA AND ANALYSIS
In May 2015, the Prime Minister communicated to the NA his latest figures on the country's fiscal situation. It was a long and detailed message but some numbers stand out. Vietnam's (public debt/GDP) ratio reached 60.3% in 2015 and projected to be 64.9% in 2016, but then will gradually decline to 60.2% in 2020.
These numbers take on more significance when one bears in mind that public debt cannot exceed 65% of GDP according to a law approved by the National Assembly.
1.The rising public debt
As seen in table 1, the public debt picture has worsened in recent years. As a percent of GDP it rose from 50.8% (2012 to 60.3 % (2015) and 64.9%E (2016). The obvious question is how the debt ratio gets close to the 65% legal limit in 2016, and then declines steadily to 60.2% by
2020. No numbers were offered for the intermediate years from 2017 to 2019.
66%
64%
Public debt
64.0%
64.9%
62%
60%
60.3%
60.2%
58%
56%
54%
52%
56.3%
54.9%
50.8%
54.2%
50%
2010 2011 2012 2013 2014 2015 2016 … 2020
Table 1: The ratio of [Public Debt/GDP]% GDP | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | … | 2020 |
Public debt | 56.3% | 54.9% | 50.8% | 54.2% | 60.3% | 64% | 64.90% | ... | 60.20% |
Source: Ministry of Finance
2.An increasing annual budget deficit
Contributing significantly to public debt is the state borrowing to finance the budget deficit. As seen in Table 2 and Graph 2, the annual budget deficit has increased from 4.9% GDP in 2008 to
5.3% GDP in 2014.
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Revenue Expenditure Deficit
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2009 2010 2011 2012 2013 2014
Table 2: The annual budget deficit as percent of GDP% GDP | 2009 2010 2011 2012 2013 2014 |
Revenue Expenditure Deficit | 26.3 26.7 29.6 22.7 22.9 20.1 32.4 32.2 34.5 28.0 28.4 25.4 6.90 5.51 4.90 5.36 5.45 5.31 |
Source: Ministry of Finance
3.A declining ability to collect budget revenues
Revenue collection in a developing country, especially in a cash-based economy like Vietnam, has always been a challenge. Tax leakages can happen on a substantial scale when business record keepings are not thorough and transparent. While government expenditures (both current and investment categories) have kept increasing, thestate ability to raise budget revenues has shown a steady decline, due mainly to: Tax reductions in support of businesses with the CIT falling from 25% to 22% in 2014 and further to 20% in 2016.
With the sharp decline in world oil price the government's tax revenues from crude oil
exports have suffered a 40% decline.
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31.0
Fiscal revenue
29.0
27.0
25.0
23.0
21.0
19.0
2009 2010 2011 2012 2013 2014
Table 3: Vietnam's budget revenues as percent of GDP% GDP | 2009 2010 2011 2012 2013 2014 |
Fiscal rev. | 26.3 26.7 29.6 22.7 22.9 20.4 |
Source: SBV
4. Co mp ari n g Vietn am's f i scal p er for man ce to A sean n ei gh b our s
A. A regional comparison (as shown in Graph 4 and Table 4 below) indicated that Vietnam has managed its fiscal less well than neighbouring countries, as evidenced byits larger annual budget deficit, especially when compared to Thailand and the Philippines. Graph 4: Budget deficit as % of GDP for Vietnam and other countriesVietnam
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2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
Philippines
Thailand
Indonesia
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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Table 4: Budget deficit as % of GDP% GDP | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
Vietnam | -1.21 | 0.26 | -2.01 | -0.49 | -6.90 | -5.51 | -4.90 | -5.36 | -5.45 | -5.31 |
Philippines | -1.69 | -0.05 | -0.30 | 0.01 | -2.68 | -2.37 | -0.40 | -0.64 | -0.13 | 0.54 |
Thailand | 1.50 | 2.18 | 0.24 | 0.13 | -3.18 | -0.80 | -0.59 | -1.80 | -0.20 | -1.83 |
Indonesia | 0.42 | 0.37 | -0.95 | 0.06 | -1.65 | -1.25 | -0.60 | -1.59 | -2.00 | -2.16 |
Sources: Ministry of Finance, IMF, WEO
B. In another important respect(i.e. the government's ability to raise budget revenues) Vietnam is lagging behind regional peers. Its fiscal revenues as percent of GDP declined from
26.3% in 2009 to 20.1% in 2014 while the ratio increased for Thailand and the Philippines.
Vietnam Thailand Philippines
30
25
20
15
10
2009 2010 2011 2012 2013 2014
Sources: Ministry of Finance, IMF
5.Domestic borrowing is rising faster than foreign borrowing
In terms of total public debt, the domestic component (as represented by VGB issuance) has been growing more quickly than the foreign one.
70%
Domestic External
60%
50%
40%
30%
20%
10%
0%
2010 2011 2012 2013 2014
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Table 5: Pubic debt breakdown% GDP | 2010 2011 2012 2013 2014 |
Public debt Domestic External | 56.3% 54.9% 50.8% 54.2% 60.3% 25.0% 26.3% 23.1% 26.8% 31.1% 31.3% 28.6% 27.7% 27.4% 28.5% |
Source: Ministry of Finance
ODA obligations take up about 70% of all off-shore debt and carry concessional terms (low interest, long maturity). The WB-IMF debt-sustainability analysis concluded that Vietnam can service its external debt without difficulty.
6.The law banning the issuance of short-term bonds may backfireIn Vietnam, major banks are primary players on the bond market. For risk control and portfolio management purpose, they prefer holding short term securities (1, 2, 3 years). With such short maturities, the roll-over pressures on expiring GVN debt can be severe. In 2014, as a solution, the National Assembly passed a law requiring that, henceforth, all VGB's must be issued with maturities of 5 years or longer. The law has an unintended consequence of depressing the amount of short term bonds that can be sold. The MOF may not be able to fulfill its borrowing target for the current fiscal year.
III.IMPLICATIONS
The whole configuration of domestic interest rates (lending, depositing, government borrowing) istrending up led by the bond yield curves whichtraditionally serves as a benchmark for other rates in the economy.With both demand for credit from businesses and borrowing requirement from government on the increase bond purchasers (primarily commercial banks) are asking for higher bond yields mainly due to:
Banks are moving fundsfrom the bond market to the loan market as evidenced by a strong credit growth of 6.1% by end June 2015. This is a distinct improvement compared to the rate of 3.5% recorded over the same period of 2014.
Inflation is inchingup causing investors to demand higher nominal yields in order to ensure positive real returns. The CPI in June rose 0.35% M/M reflecting the highest monthly inflation rate so far in 2015.
With liquidity being stretchedbetween private and public needs, resulting in rising interest rates which can have negative impact on the markets, especially for sectors that rely on bank financing (housing, construction, infrastructures).
The SBV is probably mindfulof this tension when it recently raised the credit ceiling for a number of commercial banks. The ultimate policy step may be a lifting of the economy-wide credit growth target from 15% to 17% for 2015.
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