Vietnam will have to reduce its budget deficit in an “ambitious” way to stabilize the economy, says the Asia Development Outlook (ADO 2017) report released in Hanoi on April 10 by the Asian Development Bank (ADB).

Mounting public debt pressure has prompted the Government to set ambitious targets for the budget deficit, 3.5% of GDP in 2017 and about 4% next year.

However, ADB believes most of the reduction in the fiscal deficit would be due to higher receipts from the sale of equity in State-owned enterprises, which the Government treats as revenue.

“Excluding those receipts, fiscal deficit reduction will be much more modest,” the ADB report states.

ADB Country Director in Vietnam Eric Sidgwick said at the launch of ADO 2017 that “the sale of State capital helps offset the budget deficit but not permanently since it is sold only once. For the long run, more radical measures are needed.”

The Government needs to secure the revenue side by boosting growth, tackling the budget deficit and cutting down on spending in the long run to reduce public debt, he explained.

On the expenditure side, the Government plans to cut recurrent expenditures by 6% while raising capital expenditure by 36%. 

Achieving fiscal consolidation over the medium term will be challenging and require deeper tax reform, better revenue administration, and much more efficient public expenditure, ADB says.

Last year, efforts to rein in the fiscal deficit yielded limited success, says the bank in its report. 

Although government revenue grew by 12% to reach the equivalent of 23.1% of GDP, it was outstripped by expenditure growth, resulting in an on-budget deficit equaling to 4.4% of GDP, significantly higher than the 2015 figure of 4%.

This is a matter of concern as public debt including government-guaranteed debt is now estimated to exceed 63% of GDP, nearing the 65% limit set by the National Assembly.

Bad debt is still high

ADB comments that vulnerability in the financial sector poses a risk to the outlook. The restructuring of banks and the settlement of non-performing loans (NPL) have made less-than-expected progress, leaving banks exposed to large contingent liabilities.

As the central bank targets credit growth at 18% in 2017, the rise of domestic lending at a faster rate than deposit growth also challenges the maintenance of adequate liquidity at banks.

The capital adequacy ratio was reported at an estimated 12.8% at the end of 2016, comfortably above

the regulatory minimum of 9%, but it was not calculated according to international Basel II standards.

With the Government planning to have all banks meeting Basel II capital standards by 2020, they will likely need capital injections from foreign investors. This will require significant legal changes including the lifting of limits on foreign ownership at banks.

In addition, ADB describes progress in reforming the financial sector as elusive. Although the officially reported NPL rate in 2015 and 2016 remained low, at about 2.5% of outstanding loans, this largely reflected the transfer of US$12.7 billion in NPLs from banks to Vietnam Asset Management Company (VAMC).

By the end of 2016, the company had settled only 18% of the NPLs purchased from banks. The settlement of NPLs would thus depend on how fast it can deal with assets used as collateral.

Moreover, progress in consolidating the banking system continues to languish, with no mergers or acquisitions completed in 2016.

SGT