VietNamNet Bridge – No one knows how big the “underground”, or unregistered foreign debt is, while the official foreign debt has been found to be increasing steadily.

Unregistered debt unaccountable

Eighteen years ago, in 1996, Vietnam witnessed the beginning of a new trend: borrowing money from foreign sources through letters of credit (L/C).

At the time, Vietnamese businesses were rushing to import goods under a system of deferred payment, a type of borrowing that involved zero interest when repaid on time. Typical loans terms were for 9-12 months.

Both Vietnamese enterprises and banks were happy with this system, because they could mobilize huge capital for business.

However, they had to pay a heavy price for their wrong calculations, because they did not anticipate the both exchange rate fluctuations and the delays often incurred in collecting money from the sale of imports.

Some bank names, including Chau A-Thai Binh Duong, Viet Hoa and Dai Nam, then disappeared from the market, reportedly leaving behind debts in the hundreds of millions of dollars.

The State Bank of Vietnam, learning the “L/C lesson”, has tightened its control over foreign loans which, together with the heavily fluctuating dong/dollar exchange rate, applied some brakes to the trend.

Nevertheless, the trend has been kicked off again recently, especially with the State Bank tightening the monetary policy, thus making the dong interest rate jump to an annual 15-20 percent.

The CEO of a financial institution in HCM City said that the stable dong/dollar exchange rate over the last few years (the dong’s devaluation is no more than 1-2 percent per annum) has prompted businesses to seek foreign loans to enjoy their low interest rates.

The banker said some foreign investment funds are willing to lend to Vietnamese businesses at interest rates of only 2-3 percent, much lower than the current dong interest rates of 7-8 percent, if the loans are guaranteed by banks. He noted that the lending fits the demands of private businesses which need loans worth $10-15 million.

No one knows how big the total debt is because borrowers don’t have to report their short term (under one year) loans to the watchdog agency.

Government borrows more money to pay debts

Under the Prime Minister’s newly released Decision No. 477, the government plans to borrow $4.52 billion, or VND95.8 trillion, from foreign sources this year, and pay VND49.2 trillion in debt.

It’s still unclear how Vietnam will implement the plan on issuing government bonds in the international market. However, observers believe that the plan will kick off this year or 2015 at the latest, because the $750 million worth of international bonds Vietnam issued in 2005 at an annual interest rate of 7.125 percent are due in 2016.

Funds from the $750 million loan were allocated to the Vietnam Shipbuilding Industry Corporation (Vinashin), which has since been restructured and renamed to SBIC, to serve the plan to develop Vietnam’s shipbuilding industry.

However, as Vinashin clearly cannot pay the debt, the government must come forward with the funds.

The problem of a company defaulting on government-guaranteed loans is not limited to Vinashin. A number of cement, steel and sugar refinery projects, all funded by government-guaranteed foreign loans, are also unable to make good on their debts, which means that burden of repayment rests with the state.

DNSG