According to the WB, rapidly increasing public debt while foreign exchange reserves are low and on a downward trend is a cause for concern for Vietnam's economy.

The World Bank (WB) has just released a report updating the economic situation in the East Asia and Pacific region. In it, WB assessed that rapidly increasing public debt while foreign exchange reserves are low (and tending to decrease) are reasons for concern for the Vietnamese economy.

Public debt increases rapidly

Up to this point, the WB assesses that Vietnam's macroeconomic stability and sustainability have been basically maintained, however, the rapidly increasing public debt while foreign exchange reserves are low (and tending to decrease) is a cause for concern.

WB predicts that Vietnam's debt-to-GDP ratio in 2016 will be at 63.8%

Analyzing this assessment further, the WB expert said: CPI decreased by 1% compared to 2015 and reached the lowest level since 2001. The exchange rate against the USD was adjusted regularly in 2015 to respond to fluctuations in the global financial market.

Recently, in January 2016, the State Bank of Vietnam adopted a more flexible exchange rate management policy, including a daily reference rate. However, total foreign exchange reserves have fallen to two months of imports, making the economy more vulnerable to external shocks.

The fiscal deficit reached 6.5% of GDP in 2015 as a result of reduced revenue and increased capital investment and recurrent expenditure. This factor has increased fiscal pressure. It is estimated that public debt and state-guaranteed debt (according to regulations of the Ministry of Finance) reached 62.5% of GDP in 2015, while in 2014 this figure was 59.6%.

As a result, these debts may quickly reach the statutory debt ceiling of 65%. Vietnam’s debt-to-GDP ratio in 2016, according to the World Bank, will be at 63.8% before rising to 64.4% in 2017 and 64.7% in 2018. The fiscal deficit will narrow to 5.9% of GDP from 6.5% in 2015 and is forecast to be 5.7% in 2017 and 5.5% in 2018.

Therefore, the WB recommends that the Government should take appropriate measures to strengthen the medium-term fiscal situation (on the revenue or expenditure side).

Equitization of state-owned enterprises is too slow.

The WB also assessed that improvements in the business environment in Vietnam have made progress, while reforms in banking and state-owned enterprises have been slow. The result is that the equitization of state-owned enterprises accelerated in 2015, but the overall pace is still too slow (far from the target set by the Government for the 2011-2015 period). "This result shows that market conditions are still weak and the Government is hesitant to sell well-performing state-owned enterprises," the WB emphasized.

The consolidation of the banking sector has made some progress, with some mergers and acquisitions taking place, but it is still unlikely to achieve the target of reducing the number of banks to 15-17 by 2017 from the current 34. The sector-wide bad debt has reportedly fallen to 3% of total loans. This reduction in bad debt has been achieved mainly due to credit growth and the transfer of bad debts to the Vietnam Asset Management Company (VAMC). Although banks are required to gradually set aside provisions for assets transferred to VAMC, the credit and related risks that damage capital sources have not been completely eliminated.

From this reality, the WB sees: The baseline outlook for 2016 is positive but negative risks still dominate. Growth is forecast to decline to 6.2% due to slowing personal consumption and investment growth, with GDP forecast to increase by 6.3% in 2017 and 2018. Inflation is also slowing due to the gloomy global situation and falling global energy and food prices (the WB forecasts CPI in 2016 at 3.5%, 2017 and 2018 at 3.8% and 4.0%, respectively). The fiscal deficit is expected to begin to decline to reduce the risk of increasing public debt. The trade deficit will increase, causing a slight deficit in the current account (the current account is forecast to be negative 0.6% of GDP in 2016, negative 0.5% of GDP in 2017 and positive 0.2% of GDP in 2018)./.

According to VOV