Debt servicing under control

Following are the excerpts:

Reporter: Vietnam’s public debt had amounted, according to the WB, to around US$110 billion by the end of last year. How was the debt calculated?

Mr Sandeep Mahajan: The amount includes the debt of the Government and the debt that the Government explicitly guarantees. So it includes debts of all government entities and public entities guaranteed by the central Government.

Reporter: Is the calculation based on WB or International Monetary Fund (IMF) criteria?

Mr Sandeep Mahajan: I think our approach would be a little bit different. It varies from country to country. This one isn’t exactly the Government’s own definition of debts. I think that some part of it we would not count as part of this figure. There is a little bit of double counting in some cases. So our estimate of public and publicly guaranteed debts may come out a little bit lower than these numbers.

Reporter: Why are the debts of State-owned enterprises (SOEs) excluded?

Mr Sandeep Mahajan: Well, the debts of SOEs are debts of SOEs and are not the debts of the Government. SOEs are supposed to repay the debts from their own balance sheets but part of the debts is guaranteed by the Government. And I think that that is included in the public and publicly guaranteed debts.

Sandeep Mahajan, lead economist of the World Bank in Vietnam

And this shows that there is an additional risk that SOEs balance sheets can pose to the Government in case that they are unable to service the debts that are not explicitly guaranteed by the Government.

I think our analysis at this point shows that public debt is sustainable, but the fiscal deficit position is not sustainable for the long term in the sense that if the Government consolidates the fiscal position and over the medium term – you’re not going to reduce the debt tomorrow, reduces fiscal deficit then the debt ratio is sustainable.

But if this level of debt continues, then mathematically it starts reaching numbers which will take you into difficult territory of debt servicing for the long term.

Reporter: The debt payment percentage in comparison with the budget spending is 26% according to the World Bank but 31% according to the National Assembly. Do you think the percentage is too high?

Mr Sandeep Mahajan: I think you need to see what numbers you are looking at. The debt servicing part that is relevant here is the interest payment. And the interest payments on the debt of the Government right now are fairly manageable. They are about less than 10% of total Government expenditures. But debt servicing cost is really what matters in the end because when your debts mature you can always go to revolve it.

Again, debt servicing at this point is under control. But again the margins that you have are not as high as before.

I think you’re reaching a point where if the debts keep increasing then debt servicing cost will start eating into other development expenditures. That is more immediate worry that debt servicing is eating into what we call fiscal space.

And when it starts eating into government fiscal space, once debt servicing costs increase you have to start decreasing at the same time other development expenditures. That is the more immediate worry.

And then it is obviously this debt stance is therefore a long time you start worry about sustainability. But we are not worrying about sustainability right now as much. It is more about the fiscal space for the short and medium term. Over the next 3-5 years, yes, I think the sustainability also becomes questionable.

Reporter: Is the debt payment proportion accounting for 7.2% of budget spending too high?

Mr Sandeep Mahajan: Well, it is too big compared to the past, but it is not too big compared to many other countries. So, I think you have to see the reasons why public spending is going up. I think part of the reason is actually legitimate. The Government has been running a counter cyclical fiscal policy.

You see that the private sector demand side was very weak, so the Government stepped up by increasing its deficit to offset that to support economic growth. I think to some extend it has been successful.

If the Government hadn’t done that, then I don’t know the situation would be any better because there would be no economic growth, then the debt servicing ability actually shrinks. That is part of why the problem in Greece that the country has some difficulty servicing the debt because economic growth is collapse, which has taken away the government’s capacity to repay.

I think maintaining economic growth is an important part of the fiscal policy, but it should not be for the long term. You can use it for the short term temporary counter cyclical measure. The private sector demand has picked up. The Government debt level has reached a level of concern for everyone. And it is a good time for the Government to start with letting go with this counter cyclical fiscal policy.

Reporter: The Government debt increases but public investment goes down. What’s your comment?

Mr Sandeep Mahajan: There are many reasons why the Government’s debt can go up. One is public investment; one is non-investment expenditures which are current expenditures that have been going up. And the other one is revenues that are falling. So, the Government is collecting fewer revenues but spending more. At the same time it has consolidated capital expenditures. All add up to a bigger deficit. So, the decrease in revenues but increase in expenditures is more than the consolidation in capital expenditures, which decrease public investment.

So, again, if you want to decrease fiscal deficit to consolidate your fiscal situation you have to work both on the revenue side and getting back on current spending because that’s where it is going up.

Reporter: The Government has never been slow in paying back loans to international donors. Is it a good sign of the Government’s ability to pay back loans?

Mr Sandeep Mahajan: Yes. You know, so far most of Vietnam’s external debts are concessional. It is on favorable interest and maturity terms, and Vietnam has done well in servicing all that on time. But you know there are very few countries in the world which default on concessional debts. So the real test for Vietnam is going to be when it starts accumulating commercial debts. And you have to make sure that that debt is accumulated in the pace it does not result in the exchange rate risk and I hope that the same record also continues for concessional debts.

You know as Vietnam gets richer the size of concessional debts is going to shrink as you have already seen and it is going to be replaced by commercial debts. So the same record has to be shown for commercial debts. Commercial debts are much more sensitive to these things.

Reporter: What is your main message by raising the public debt issue in the World Bank report?

Mr Sandeep Mahajan: Again, we recognized the reasons why the debts have increased, and that the counter cyclical fiscal policy is a big part of it. The more worry some part probably where the Government-guaranteed debts increase. But now we have reached the point where it is good time to start medium term fiscal consolidation both by looking at the revenue side, to expand revenue and looking on the Government spending to bring the current spending down.

I think that way you can bring the fiscal deficit to a more sustainable level. That will free up more sources for other development expenditure, investment and current expenditures and definitely make sure that your fiscal and debt situation are sustainable which is very important thing to maintain because concessional lending is decreasing and this fiscal and debt sustainability can bring foreign sources of commercial lending.