Exchange rate adjustment raises concerns about public debt

15:22 | 14/05/2015 Economy

The latest dong one-percent devaluation on May 7, though described as “unavoidable”, has raised controversy, because this will lead to a heavier public debt burden.

Exchange rate adjustment raises concerns about public debt

Nguyen Quoc Anh from the Ministry of Planning and Investment, and Tran Van, deputy chair of the National Assembly’s Finance & Budget Committee, said once the dong loses one percent of its value against the dollar, the public debt would be VND10 trillion dong higher because 80% of Vietnam’s foreign debts are in US dollars.

After two dong devaluations this year in January and May, Vietnam’s public debts automatically increased by VND20 trillion, or US$1 billion.

The international public debt clock in The Economist on May 4 showed Vietnam’s public debts had reached US$89.08 billion, equal to 46.6% of Vietnam’s GDP. This represents a 10% increase compared with the same period last year.

As such, every Vietnamese bears a public debt of US$979.77, higher than the figure reported one year ago at US$896.

An analyst commented that the State Bank of Vietnam might have to think carefully before making the devaluation, because it understands that the public debt has been increasing very rapidly.

A report showed that the ratio of public debt on GDP has increased from 54.9% in 2011 to 64% in 2015.

Van said the rapid public debt increase has been worrying National Assembly’s Deputies, especially when the public debt increase is higher than the state budget revenue increase and the GDP growth rate.

National Assembly Deputies have many times expressed their worries about the anticipated state budget deficit this year. The budget deficit is expected to reach VND226 trillion, a record high, equal to 5% of GDP.

The figures, plus the government’s plan to borrow money from the national foreign exchange reserves, show the state budget is seriously short.

Meanwhile, Tran Dinh Thien, head of the Economics Institute, said this would not be a big threat as was thought.

Thien said the inflation rate is expected to be low this year, and it would “not be really worrying” if the dong loses value.

Regarding the public debt, Thien said the exchange rate adjustment would have “certain influences” on the public debt situation, while denying that the public debt would soar.

He said that the exchange rate adjustment and exchange rate risk are not a “danger” at this moment because Vietnam’s foreign exchange reserves remain abundant, estimated to reach US$35 billion by the end of 2014. 

Some analysts believe that the dong will lose more than 2% of its value in 2015 as projected by the State Bank.