Easing the burden of public debt

Wednesday, 2015-12-30 17:00:38
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NDO - After keeping interest rates close to zero for nearly a decade, the US Federal Reserve has recently decided to raise rates by 0.25 percentage point, with a number of gradual small rises expected to follow in 2016 so as to prevent a shock to the US economy.

Many economists say although the Fed rate rise will not exert a major negative impact on the world economy in the short term, it will certainly push interest rates in Europe higher over the long term. This raises concerns over the interest rate burden of Vietnam’s public debt, especially in regards to foreign loans.

Experts from Vietnam’s National Financial Supervisory Commission say the impact of the Fed rate rise on Vietnam’s foreign loans is not significant because half of Vietnam’s public debt is denominated in Vietnamese dong while loans in the form of the US dollar account for just one fourth. When the greenback rises, other foreign currencies will fall, and so the impact will be negligible.

However, the main issue causing concern is if the US dollar continues to rise, the amount of debt is bound to go up as Vietnam’s debt structure is strongly related to the US dollar. In addition, there will be an increase in the proportion of projects funded by foreign loans with less preferential interest rates. Given this is an expensive source of capital, borrowers need to make a sensible choice. For preferential loans, only one kind of currency is used while in the case of less preferential loans, borrowers must wisely select one from a basket of currencies so that the interest rate risk is minimal. Moreover, terms on less concessional loans are shorter so borrowers must consider spending them on projects where they can pay back the loans in due time. For that reason, the question here is not the interest rise of loans in foreign currencies but how to use them effectively.

As public debt is growing, the government has sent a clear message calling for the effective use of foreign loans. To speed up the project life cycle, at least on schedule with the initial plan, Vietnam needs to have a new approach and new funding model, including the re-allocation of loans and on-lending loans. This is considered a fundamental and decisive solution to over-diversification and project renewal, which is a key reason behind larger interest payments, especially in the case of an exchange rate risk.

Therefore, it is necessary to loosen policy and allow commercial banks to re-borrow foreign loans, so that they can then arrange counterpart funds by themselves and accept credit risks (such as in rural finance projects, renewable energy projects, and lending programmes to small and medium-sized enterprises).

Many experts have considered this the most feasible solution to ease pressure on counterpart funding, exchange rate risks and public debt while still there is still adequate capital to achieve socio-economic development goals.