VN’s public debt may increase by VND20 trillion due to exchange-rate fluctuations
VN’s public debt may increase by VND20 trillion due to exchange-rate fluctuations
Vietnam’s public debt based on Vietnam dong (VND) may increase by VND15-VND20 trillion after the recent exchange rate fluctuations.
In August 2015, after the Central Bank of China changed the exchange rate mechanism, the State Bank of Vietnam (SBV) adjusted the USD/VND exchange rate to 2% (12/8/2015), then to 3% and also increased the average interbank rate by 1% (19/8/2015).
The VN dong has been devalued by 3% compared to the time before China changed its policy, and 5.1% so far this year.
According to the World Bank, by the end of 2014, total public debt of Vietnam was estimated at $110 billion, equivalent to 59.6% of GDP.
A report from the Vietnam Dragon Securities Corporation (VDSC) says that in the structure of debt, Vietnam’s foreign debt is stable at around 27-28% of GDP, accounting for about one half of the country’s total public debt.
In recent years, the rate of domestic debt has increased rapidly, but the rate of foreign debt has slowed down, at an average rate of 5%.
According to VDSC, Vietnam’s debt in US dollars and JPY accounts for about 30-35% of the total foreign debt each and the loans in euro make up for 6-7% of the total debt structure.
VDSC said, based on the movement of exchange rates this year, the principal repayment obligations with local currency may increase by VND15-VND20 trillion after the recent fluctuations of exchange rates. However, this effect will be allocated over time based on the repayment period.
In short, in 2015 Vietnam will have to pay about $1.5 billion of principal and interest on foreign debt. However, its spending on foreign debt this year may increase by VND1 trillion after the recent exchange rate adjustments.
In 2016, Vietnam’s payment of debt and original debt is estimated at $2.5 billion. Risks in exchange rates will continue to create greater pressure on the budget in 2016 if Vietnam does not take measures to find additional funding.
Based on the report of the National Assembly Economic Committee and the UNDP on Vietnam’s public debt and sustainability, VDSC estimated that with the primary fiscal deficit/GDP in 2015 at 2%, in a good scenario, the public debt of Vietnam would reach a threshold of 65% in 2019.
"Simulation of public debt/exchange rate shows that each 1% of the local currency devaluation will increase the public debt ratio by 0.8%. Thus, after the recent exchange rate adjustment, the risk of public debt crisis may come one year sooner," VDSC report said.
Dr. Nguyen Duc Thanh, Director of the Vietnam Economic Research and Policy Institute, said if exchange rate adjustment helps the economy further develop and export, this means that the ability of debt payment will increase.
However, Dr. Nguyen Mai said the exchange rate adjustment only benefits some exporters while Vietnam’s imports increase.
At a Government meeting held on August 25, Governor of the State Bank of Vietnam Nguyen Van Binh said there was no reason to further devalue the Vietnam dong. He also said that the central bank was ready to provide liquidity to the market to stabilize the exchange rate if necessary.
