Vietnam Economic Analysis

Low public debt as recipe for Vietnam’s success and repositioning

In the 5-year period between 2016 and 2020, Vietnam's public debt has decreased significantly. While in 2016, Vietnam's public debt was at a very high level of 63.7% of GDP, it has decreased to about 55.0% of GDP by the end of 2020. This sound fiscal policy - together with prudent monetary policy - makes Vietnam fit for the post-Covid 19 crisis era. This paves the way for the country's powerful repositioning.

Achievements and efforts of Vietnam in recent years

The numbers speak for themselves: At the end of 2020, Vietnam's public debt is estimated by 56.8-57.4% of GDP. For 2021, it is not yet sure whether the public debt could rise as economic growth and state budget revenues are negatively affected by the impact of the pandemic. However it is absolutely unlikely, that will not reach the upper limit of 65% of GDP set by the National Assembly.

For an observer from outside the country, it seems that Vietnam's debt policy so far has been characterised by a sense of proportion. In international comparison, Vietnam's debt is manageable. The situation is completely different in many other countries: In Greece, the public debt ratio in 2020 reached around 192%, in Italy 157%, and in Germany 74% of GDP. Compared to these countries, Vietnam’s figure is still very good. However, since the situation is different, and should be looked at in more detail elsewhere. To be fair, Vietnam's GNP has grown strongly in recent years, which makes it easier - so even with a slight increase in expenditure (below the economic growth rate) – to reduce the public debt.

Vietnam’s fiscal "buffer”

Contrary to the global Keynesian trend, Vietnam has clearly reduced the public debt gap in the last four years. Consequently, the government has accumulated a considerable amount of cash reserves. In view of the economic crisis triggered by the Covid19 shock, Vietnam is benefiting from this careful fiscal policy now. There is enough space to counter the crisis. Together with the fiscal policy, another decisive positive factor was, that after a short period of lockdown and intervention, the Vietnamese economy is still running well.

In order to assess whether public debt is a concern or not, it is also necessary to look at the public debt figure in the specific context that is Vietnam's economic growth. Vietnam's economic growth is influenced by Covid-19, but has so far maintained a positive growth rate of 2.91% - a figure that very few countries in the world have achieved. Thus, in the current context, we have no reason to worry. The public debt to GDP is not the best figure, but has not yet reached the 65% ceiling on public debt allowed by the National Assembly.

To put it in a nutshell: Vietnam was well prepared for the crisis, managed it in an exemplary manner, and has a good chance of repositioning itself better than neighbouring countries after the crisis due to its prudent policies.

Debt structure: Reducing the dependency from outside the country.

Along with the sharp decrease in public debt, the debt structure has also changed positively. The proportion of domestic debt increased gradually, while the proportion of external debt gradually decreased. Domestic debt gradually increased from 60,1% in 2016 to 65.5% in 2020, while external debt gradually decreases from 39.9% in 2016 to 34.5% in 2020. At the same time, the structure of domestic/foreign loans was adjusted towards a more sustainable direction.

In addition to the total amount of a country's public debt, its composition also plays an essential role. As a matter of fact, a high level of public debt abroad makes a country dependent on decisions from abroad. In addition, there is considerable currency risk. Vietnam is taking the right path hereby reducing the share of foreign debt from 39.9% in 2016 to 34.5% in 2020.  Incidentally, Japan, with its depressingly high public debt, is also mostly domestically indebted. Such high indebtedness is a drag on growth. But at least there is no intervention by foreign creditors.

Recommendations for Vietnam’s public debt management

Public debt can serve as a lever, if used well, will be beneficial to boost the country's economy. But this should only be applied in times of a severe crisis because public spending is too often used ineffectively because it is not following the market. This easily leads to an increase in public debt. Far too often, increasing public spending causes an ever-upward spiral of expenditure. Politicians tend to promise and spend more and more money, especially when they want to make a name for themselves in front of their voters. Their focus is too often on the next election and not on the long-term well-being of an economy. It is difficult to break out of this vicious circle of spending.

Unlike the adherents of Modern Monetary Theory, for whom money printing is not a problem, the national debt, one day the national debt has to be paid back. Possible ways are (i) accepting an increase in inflation, (ii) the insolvency of the country, or (iii) a substantial tax increase. All of these options are affecting the economy in the long run. Citizens will have to contribute more and will not be able to spend on expanding production and business.

The pandemic has caused the government to spend more to overcome negative consequences and support the economy. In the short term, there would be room for a slight increase of public debt in Vietnam as long as it is below the 65% ceiling set by the National Assembly. But it would be better not to start this spiral of public spending. Anyway, Government debt is linked to economic growth. Thus with a booming Vietnamese, the amount of public spending could be increased without an increase in the public spending ratio.

Public spending to increase competitiveness, improve infrastructure, boost investment or improve education can make sense in this context. Emergency aid of the cause, too. Spending to increase consumption, as we see in some Western countries, is only a flash in the pan. They will not have a long-term positive impact. Vietnam should also be warned against letting its spending increase more than its own economic growth.