The Electricity of Vietnam (EVN) – the country's sole power distributor – has borrowed billions of dollars from foreign lenders through the Vietnamese government’s guarantees over the past years, burdening the country’s public debt, the World Bank has said. 

A national power grid. 

EVN’s debt is split into two categories, namely direct loans from a variety of domestic and international commercial banks (backed by the Ministry of Finance (MOF) and on-lending loans which the MOF had borrowed from international financial institutions (IFIs).  

Both categories of borrowing are included in Vietnam's public debt. 

During the period 2010–2015, up to 96% of EVN’s capital expenditure was financed by debt, leading to a total debt of US$9 billion in 2016.  

Some US$8.1 billion of this debt is de facto backed by the MOF, including US$4.2 billion on-lent by the MOF, and US$3.9 billion directly borrowed from domestic and international commercial banks. 

Total EVN borrowing in 2010-2017 (US$ billion)

Over the period 2010–17, EVN’s total borrowings were US$25.5 billion. Total foreign commercial borrowing was US$6.4 billion, domestic commercial borrowing US$9 billion, and borrowing of US$10.1 billion from IFIs and development partners (DPs). 

Fragile forex rates and high interest rates  

As much as 70% EVN's loans are denominated in foreign currencies, leaving the company heavily exposed to foreign exchange risks, the World Bank warned.  

EVN’s borrowing, which is denominated primarily in US dollar and Japanese yen, is typically on non-concessional terms and often of short maturity. 

The majority of EVN’s loans are short term, yet the debt has been used to acquire long-term assets of up to 25 years, thus causing a mismatch between its assets and liabilities. 

Planned energy lending volume of 5 major international lenders. Source: World Bank

In terms of interest rate, the power producer bore the average interest rate of 9.6% on all loans in 2011, and about 6.1% in 2015. 

The high rate was partly resulted from on-lending fee of 0.25% from the government. More clearly, the bulk of EVN’s foreign currency loans are not provided at fully concessional financing terms, even when they originate with IFIs.  

In fact, the loans are typically channeled through the government and a financial institution that bears credit risk, which on-lends them to EVN, adding an on-lending fee and foreign exchange premium.  

Domestic lending regulations force EVN to seek overseas borrowing  

Domestic commercial and development banks provide local currency debt to power projects on a corporate basis rather than a nonrecourse project finance basis.  

The single borrower limit of 15% of a bank’s equity capital constrains lending for many banks. Moreover, lending is further constrained by sector concentration limits set by banks for prudential purposes.  

Domestic banks’ current outstanding loans to the energy sector amount US$10 billion. Some major banks providing loans to power projects are Vietcombank, Vietinbank, BIDV, Techcombank, and SHB.

Interest rates on local currency deposits by duration. Source: World Bank

Vietnamese dong lending rates to prioritized sectors, including power, are currently set at 6–9% annually for short-term loans, and 8–10% annually for long-term loans, compared with 7–10% and 9-12%, respectively, to other sectors.  

Given the narrow differential between short-term and long-term borrowing rates, there is little incentive for banks to lend long-term, which is an issue for investors, such as EVN. 

Solutions  

There is a pressing need to strengthen the domestic commercial banking sector, while deepening and broadening domestic capital markets.  

Both project finance and corporate finance structures will benefit from greater availability of long-term fixed-interest local currency finance through the domestic debt and capital markets.  

Local-currency financing is attractive as it avoids the additional risks associated with exchange rate variations and currency convertibility. 

Estimated current sources of financing for the energy sector (US$ billion) 

Source: World Bank 

Therefore, it needs to deepen and broaden Vietnam’s capital markets, particularly the domestic corporate bond market as a promising alternative channel for long-term finance. 

It will be important to also mobilize financing from offshore investors and lenders, while ensuring that such financing is raised on a sustainable basis and that the contingent liabilities are appropriately monitored and managed, the World Bank said. 

Hanoitimes