Budget deficit higher than expected

If total public debt increases by VND385,375 billion, Vietnam's total public debt by the end of 2016 will reach VND2,993,335 billion, equal to 64.4% of GDP.

Illustration photo. Source Internet

Budget deficit higher than expected

At the end of July 2016, the National Assembly approved the 2014 state budget settlement with total state budget revenue of VND 1,130,609 billion, total budget expenditure of VND 1,339,489 billion, and a deficit of VND 249,362 billion. Compared to the estimate, this deficit is 11% higher. Notably, the 2013 settlement data shows that the actual budget deficit is much higher than the estimate, up to 46%.

Most recently, the second budget update in April 2016 by the Ministry of Finance also showed that the 2015 budget deficit is expected to be 13% higher than estimated.

Vietnam's budget deficit/GDP ratio was 6.6% in 2013; 6.3% in 2014; 6.1% in 2015 and is estimated to be 5.5% in 2016. This ratio may not be consistent with international practice as it includes Vietnam's principal debt repayment. However, BVSC believes that even if the principal debt repayment is excluded, Vietnam's deficit is still very high, from 4.2 to 5% of GDP, much higher than the International Monetary Fund's (IMF) warning limit of 3%.

According to calculations by Bao Viet Securities Company (BVSC), the pressure to increase public debt in 2016 could reach VND385,375 billion and not only come from the budget deficit. According to Decision No. 1011/QD-TTg of the Prime Minister on the Government's debt repayment plan and debt limits in 2016, the total debt plan of the Government is VND452,000 billion. Of which, the debt repayment plan is VND95,000 billion, the total guarantee plan is VND85,025 billion.

In fact, in addition to the part arising from the budget deficit, the pressure to increase public debt can also come from the government's direct investment bonds, the government's borrowings for re-lending, and government guarantees. The forecast for 2016 shows that the net pressure to increase public debt from the budget deficit is VND 197,350 billion, accounting for 51% of the total net pressure to increase public debt in the year.

The remaining pressure on public debt increases comes from investment bonds, re-lending and government guarantees. Accordingly, the total pressure on public debt increases in the year is VND 385,375 billion. This total pressure on public debt increases can be understood as the maximum level of net increase in public debt in 2016 according to the plan, assuming that investment bonds, re-lending and guarantees are completely new and accumulated in the previous year.

Government's borrowing and debt repayment plan in 2016 by purpose of use (unit: billion VND). Source: Decision 1011/QD-TTg of the Prime Minister and calculation of BVSC

By the end of July 2016, the Government had mobilized a total of VND207,379 billion through the Government bond channel, reaching 83% of the annual plan. Therefore, the Government can proactively manage the debt plan in 2016. However, BVSC believes that even if the source of mobilization from Government bonds reaches the plan, according to Decision 1011, the Government still needs to mobilize a total of VND86,000 billion from the social insurance fund and the State Capital Investment Corporation (SCIC).

However, the public debt/GDP ratio at the end of 2016 may be lower than the above forecast if growth improves, but the pressure to increase the budget deficit will in fact be the biggest challenge for the Government in public debt management. At the regular meeting of the Government in July 2016, the Government assessed that GDP growth could reach 6.3% or 6.5% in 2016. If this estimate comes true, the public debt/GDP ratio may be lower, at 64.1% (with 6.3% growth) or 63.9% (with 6.5% growth) by the end of 2016.

However, according to the pattern of previous years, if the actual budget deficit is assumed to be 10% higher than the estimate, the public debt/GDP ratio could increase to 64.9% according to BVSC's cautious growth scenario; or 64.6% and 64.5% according to the Government's two growth scenarios.

According to Investment