Vietnam's public debt/GDP ratio is among the highest in ASEAN.

State budget discipline is one of the prominent macroeconomic issues, according to the macroeconomic report for the first quarter of 2016 chaired by Dr. Nguyen Dinh Cung - Director of the Central Institute for Economic Management (CIEM), recently published.

Citing data from the International Monetary Fund (IMF), the authors emphasized that Vietnam has a public debt/GDP level much higher than other ASEAN countries, twice as high as many countries and one and a half times higher than Thailand, the country with the public debt/GDP level behind Vietnam.

Worry about public debt obligations

The first observation made in this section is that after the Government implemented the stimulus package in 2009, the State budget deficit in recent years has been increasing.

In absolute terms, the report stated that the deficit increased from VND65.8 trillion in 2011 to VND263.2 trillion in 2015. Compared to GDP, the deficit increased from 4.4% of GDP in 2011 to 6.1% of GDP in 2015, higher than the 5% limit prescribed by the National Public Debt and Foreign Debt Strategy for the 2011-2020 period and vision to 2030.

According to the report, due to the high budget deficit, public debt also increased rapidly in the period 2011-2015, from 50.1% of GDP to 62.2% of GDP, approaching the limit of 65% as prescribed by the Law on Public Debt Management. 2015 was also the year when the Government debt balance reached 50.3%, higher than the prescribed limit of 50%.

If calculated according to international practice, Vietnam's public debt would be much higher, because it does not take into account the debt of state-owned enterprises and other public organizations, the report added.

Citing data from the International Monetary Fund (IMF), the authors emphasized that Vietnam has a public debt/GDP level much higher than other ASEAN countries, twice as high as many countries and one and a half times higher than Thailand, the country with the public debt/GDP level behind Vietnam.

More importantly, according to IMF forecasts, in this group of countries, Vietnam is the only country whose public debt/GDP continues to increase to nearly 68% of GDP in 2020.

What is worrying is that public debt obligations are increasing rapidly. The Government's direct debt obligations increased from VND185.8 trillion in 2013 to VND296.2 trillion in 2015.

If including government-guaranteed debt and local government debt, the debt obligation figure is much larger, estimated to be 418.4 trillion VND in 2015.

The next concern raised is that due to the rapid increase in debt obligations, the debt obligation to budget revenue ratio is also increasing rapidly. If only counting the direct debt obligations of the Government, this ratio was 22.4% in 2013, increasing to 29.9% in 2015.

The reason for the above situation, according to the research team, is that in the period 2010-2012, the Government borrowed a lot of short-term debt, mainly in 1-2 year term bonds.

And, this will be a huge pressure on budget expenditure, if the issuance of government bonds does not reach the set target. However, with a young and unstable financial market, issuing long-term bonds is not easy.

Most investors who buy government bonds are commercial banks and they usually have short-term capital mainly because the people's money has a short term. Other financial institutions such as insurance or investment banks in Vietnam are not yet large enough to meet the demand for issuing long-term government bonds.

“Thus, maturity risks and temporary insolvency may occur. That may be the reason why the Ministry of Finance had to borrow VND30,000 billion from the State Bank and issue USD1 billion in separate bonds for Vietcombank in 2015,” the group of authors analyzed.

Borrowing to cover increased expenses

Dr. Nguyen Dinh Cung and the authors of the report also pointed out a noteworthy point in the Government's budget management in recent years, which is that investment expenditures are decreasing, while regular and other expenditures are increasing.

During the period 2007-2013, investment expenditure accounted for an average proportion of total expenditure of 27.7%. However, in the two years 2014-2015, investment expenditure was only 16.3% and 15.6% of GDP.

“As a lower middle-income economy, public investment is very important to create an economic and technical foundation for the economy. Therefore, such a low investment expenditure ratio is a concern even though total social investment in 2015 still reached 32.6%, up 12% compared to 2014, due to increased FDI and domestic private investment,” the report stated.

Compared with current law, the authors said that the Debt Management Law stipulates that the Government borrows first for development investment, then to cover temporary deficits and other purposes.

However, budget figures in recent years show that borrowing to cover regular expenditures is increasing.

During the period 2007-2011, the deficit was much lower than the investment expenditure, meaning that budget revenue was greater than regular expenditure, debt repayment and a part for investment. Since 2012, the gap between deficit and investment expenditure has been getting smaller and smaller, and by 2015 the deficit had far exceeded investment expenditure, meaning that the Government had to borrow about 60 trillion VND to cover regular expenditure and debt repayment.

This goes against the provisions of the 2015 State Budget Law, which stipulates that "in case of deficit, the deficit must be smaller than the development investment expenditure, moving towards balancing the State budget's revenue and expenditure," the report's author argued.

According to VNeconomy