Flexible method of borrowing and paying public debt to minimize risks

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After 2009, Vietnam could only borrow at 2% interest rate with a term of 25 years and 5-year grace period. Photo: ST.

Many challenges still remain

Basically, Vietnam's public debt structure has been changing positively. Under the drastic management of the Government, the management, mobilization and use of loans and payment of public debts, the government debt has achieved many positive results, sticking to the objectives and tasks of debt management according to the Resolution No. 07-NQ/TU of the Politburo as well as the resolutions of the National Assembly that have been set by the Government.

The public debt, government debt is strictly controlled within the allowed limits. The public debt ratio is expected to be 61.4% of GDP by the end of 2018, (down 63.7% compared to the end of 2016, the ceiling is less than 65%), the government debt is expected to be 52.1% of GDP (the ceiling is less than 54%). Initially, the increase of public debt was controlled from 18.4%/year in 2011-2015 to about 10%/year from 2016 to now.

Debt payment is carried out strictly and timely as committed, keeping the Government’s prestige. For government guarantees, tighten the conditions and limit the issuance of new government guarantees for loans as much as possible. At the same time, intensify the appraisal and implement measures to supervise and manage the use of the re-borrowed capital and loan capital that are guaranteed by the Government to minimize the risk of contingent liabilities to the state budget.

Despite being in the right direction, public debt management is facing a huge challenge. That is, from the beginning of 2019, Vietnam will no longer receive preferential loans from foreign financial institutions, only loans with market conditions, floating interest rates and short loan term. In the past, to cope with this situation, the restructuring of the public debt portfolio focusing on mobilizing in the domestic market, prolonging the term, reducing short-term debt repayment and borrowing costs have been set up and achieved many positive results.

The structure of public debt has changed dramatically. Previously, the government's foreign debt accounted for about 60%, the domestic debt accounted for 40%, so far, this structure has reversed. This change is an important step in the current period when Vietnam has “graduated” from IDA (World Bank's preferential loan) since July 2017 and no longer has ODA (The Asian Development Bank has ended since January 2019), Vietnam has to borrow preferential loans, market loans, or close-to-the-market loans with floating interest rates ...

Talking more about this issue, Mr. Truong Hung Long, director of the Department of Debt Management and External Finance, Ministry of Finance stated: The change in domestic borrowing costs is also remarkable. In 2011, Vietnam issued Government Bonds (VGBs) at interest rates of 12.3%/year, but this figure fell from 7.43% to 8.9%/year in 2013. In particular, at the time of 2013, 84% of loans were under 3 years. Up to now, loans are being restructured and implemented to develop the domestic market, control the situation and the cost of borrowing. Specifically, the average issuance rate is 4.7% to 4.8%/year now. In 2018, the proportion of issuing VGBs of 10– 30-year terms accounts for more than 70%.

Assessing the impact, Mr. Truong Hung Long said: Before 2009, Vietnam was able to borrow at 0.75% interest rate with the term of 40 years and 10-year grace period. After 2009, Vietnam could only borrow at 2% interest rate with a term of 25 years and 5-year grace period. "The loan conditions are being tightened, being close to the market conditions, using floating interest rates, the margin is added, especially the loan term is not long. For some countries that we borrow from that are without a strong currency, borrowing at floating rates,... it is a huge risk. That is the reason why over the years, we have had to restructure our debts to increase the portfolio of domestic debt and to reduce foreign debt,” said the representative of the Ministry of Finance.

However, according to Mr. Long, the foreign debt is still controlled well from the stage of negotiation to get the best loan conditions, to the stage of choosing the loan interest, loans in accordance with the nature of capital and use new tools for analyzing debt as well as taking risk measures.

Tightening from the negotiation stage

Referring to the debt model to reduce the risk, it can be seen that there are many different forms in the world nowadays such as bilateral loans, multilateral loans, international loans, domestic loans, foreign loans,... depending on the nature of use. In addition, each donor, each loan, each form of borrowing requires different conditions.

For example, an officer who frequently joins the Ministry of Finance's negotiating delegations said: Before the negotiation, there must be a scenario that calculates the efficiency and factors related to the loan. When the plan is completed, the negotiation process will start. In the past, there was no analysis tool so we calculated it based on our experiences, or conducted manual calculations. The Ministry of Finance now uses "debt sustainability analysis models" (DSA), “medium-term debt management model” developed by the World Bank and the International Monetary Fund, which has been widely used by nearly 80 countries around the world. These models use a variety of macroeconomic statistics, forecast the macro economy, analyze shock scenarios, and then determine plan and method to borrow. Along with other factors such as incentives, financial and non-financial costs among loans, this is the basis for determining which loans should be borrowed and should not be borrowed.

That is the borrowing process. For debt payments, the DSA models and medium-term debt management models are also considered good ones. Through these models, management agencies are able to analyze the current debt portfolio, current debt structure, currency risks, exchange rates or interest rates, etc. Thus, we see the current situation, the debt structure at present as well as in the future. For example, for the debt structure, if borrowing in the past causes too much debt, at some point in the future it will be repaid. Through this tool, management agencies can foresee and actively use measures and tools to handle and adjust the debt ceiling at a later time in order to balance the debt.

In general, according to leaders of the Department of Debt Management and External Finance, in the coming time, to ensure public debt safety, management agencies will actively use different tools to strictly control the debt safety criteria, raising the management of mobilizing capital for the state budget and for development investment; Conduct borrowing loans within the scope of annual plans that are approved by competent authorities; strictly control the borrowings on re-lending and Government guarantees. In addition, it is necessary to continuously restructure the public debt portfolio through active debt management activities, stretch the debt concentration over several years; intensify the mobilization of domestic resources to meet the Government's demand for loans and development of domestic capital markets.

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"Along with the above solutions, we also have to strictly control local loans and foreign borrowing activities of enterprises and credit institutions in the form of self-borrowing, self-paying. The public debt management and restructuring from now to the end of 2020 and the next 5-year period should be continued in line with the implementation of the objectives and measures to restructure the economy, reform of the growth model, enhancement of competitiveness, including the restructuring of the state budget, public investment, SOE sector, the system of commercial banks and credit institutions," said Mr. Truong Hung Long.