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Vietnam Today

New public debt ceiling recommended

Released at: 09:13, 19/11/2014

New public debt ceiling recommended

The research arm of the Ministry of Planning & Investment has suggested the public debt ceiling be increased to 68 per cent of GDP.

by Thong Dat

The Academy of Policy & Development at the Ministry of Planning and Investment (MPI) has proposed raising the public debt ceiling to 68 per cent of GDP from the existing 65 per cent.

Public debt rose to 54.2 per cent of GDP in 2013 and is expected to rise further to 60.3 per cent this year, according to a Ministry of Finance report. It may head towards 65 per cent of GDP next year, which has triggered concern among NA deputies and economists.

Analyzing the relationship between public debt and economic growth from 1995 to 2013, the research team at the Academy believes that with a public debt/GDP ratio of 68 per cent or lower, public debt will have a positive impact on economic growth and the sustainability of fiscal policy. "However, when the ratio exceeds 68 per cent then public debt will dampen investment and economic growth and will also hit the country's solvency and public debt safety limit," the report states.

Deputy Minister of Planning and Investment Bui Quang Thu said that the Academy report aims to build scientific foundations and collect international experience on public debt, to recommend a safe public debt level for Vietnam.

The report states that "the insolvency risk is low, but there are many latent risks, which indicates that it could be unsustainable." The research team cited several reasons in explaining the low risk of insolvency.

Firstly, domestic debt is larger than foreign debt and accounts for 50.99 per cent of total public debt, and has tended to increase. The majority of domestic debt is short term and solvency is within reach.

Secondly, foreign debt is on the decline, while having a very low risk compared with the safety standards set by the International Monetary Policy (IMF) and the World Bank.

Thirdly, the ratio of public debt to GDP, if calculated in accordance with the Public Debt Management Law, was 54.2 per cent in 2013 and is estimated at 59.9 per cent in 2014. If calculated in accordance with the principles suggested by the research team, the figures would be 61.28 per cent in 2013 and 65.2 per cent in 2014. All are within the safety limits drawn up by the government, of 65 per cent of GDP.

Lastly, credit ratings agencies such as Fitch Ratings, Moody's and S&P have rated Vietnam's foreign and local currency issuer default ratings at BB- and B1 with a stable outlook, meaning that Vietnam has yet to fall into a public debt crisis.

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