Tài liệu UNITED NATIONS DEVELOPMENT PROGRAMME pptx

21 A NNEX A Vietnam – Nominal and NPV Debt Outstanding – End 2003 A NNEX B Vietnam – Debt Renegotiations A NNEX C Discount and Exchange Rate Assumptions A NNEX D Results of the Si

U NITED N ATIONS D EVELOPMENT P ROGRAMME

P ROJECT OF THE G OVERNMENT OF V IETNAM

VIE 01/010

February 2005

Administration Ltd St Nicholas House, St Nicholas Road, Surrey, Sutton, SM1 1EL, UK were responsible for producing this report under a contract with United Nations Development Programme for the Project VIE/01/010: Capacity Development for Effective & Sustainable External Debt Management This project

is funded by the UNDP and the Governments of Australia and Switzerland with counterpart funding from the Government of the Socialist Republic of Viet Nam This report was drafted by Michel Vaugeois and

Dr Sanga Sangarabalan of Crown Agents and approved for submission by Colin Seelig, Director, Institutional Development Group, Crown Agents

Contract Reference: VIE/01/010 Prospector: T16196

Table of Contents (i)

List of Annexes (i)

List of Acronyms and Abbreviations (i)

SECTION P AGE 1 I NTRODUCTION 1

2 E XTERNAL D EBT S TRUCTURE (E ND 2003) 1

2.1 E XTERNAL D EBT S TRUCTURE – N OMINAL V ALUE 1

2.2 E XTERNAL D EBT S TRUCTURE – P RESENT V ALUE 2

2.3 C URRENCY C OMPOSITION 3

2.4 I NTEREST R ATE S TRUCTURE 4

3 E XTERNAL D EBT R ESTRUCTURING A ND N EW F INANCING S TRATEGIES 5

3.1 E XTERNAL D EBT R ESTRUCTURING S TRATEGIES 5

3.2 N EW F INANCING S TRATEGY 9

4 M ACROECONOMIC S CENARIOS 9

4.1 R ECENT E CONOMIC T RENDS ( 2000-2004) 9

4.2 S CENARIO 1: B ASE C ASE 11

4.3 S CENARIO 2: P ESSIMISTIC 14

4.4 R ESULTS OF THE M ACROECONOMIC S CENARIOS 15

5 F INANCIAL A NALYSIS 17

5.1 E XTERNAL D EBT S USTAINABILITY A NALYSIS 17

5.2 S ENSITIVITY A NALYSIS 19

6 C ONCLUSIONS 21

A NNEX A Vietnam – Nominal and NPV Debt Outstanding – End 2003

A NNEX B Vietnam – Debt Renegotiations

A NNEX C Discount and Exchange Rate Assumptions

A NNEX D Results of the Simulations

A NNEX E Balance of Payments Projections

ADB Asian Development Bank

BOP Balance of Payments

CIRR Commercial Interest Rates of Reference

DAF Development Assistance Fund

DBR Domestic Budget Revenue

DMFAS Debt Management Financial Analysis System

DSA Debt Sustainability Analysis

DSM+ Debt Sustainability Model Plus

FDI Foreign Direct Investment

GDP Gross Domestic Product

HIPC Highly Indebted Poor Countries

IBRD International Bank for Reconstruction and Development

IMF International Monetary Fund

LIBOR London Inter Bank Offered Rate

MOF Ministry of Finance

MPI Ministry of Planning and Investment

NFS Non Factor Services

NPV Net Present Value

ODA Official Development Assistance

PRSP Poverty Reduction Strategy Paper

SBV State Bank of Vietnam

SDR Special Drawing Rights

SOCB State Owned Commercial Bank

SOE State Owned Enterprise

TDS Total Debt Service

UNCTAD United Nations Conference on Trade and Development

WTO World Trade Organization

1 INTRODUCTION

Since 1993, the Socialist Republic of Vietnam has pursued a policy of restructuring its external debt in order to reduce its debt burden In 2002, the Bretton Woods institutions prepared a debt sustainability analysis that concluded that the country was not eligible for the Enhanced Highly Indebted Poor Country (HIPC) Initiative Furthermore, in

2003, the Vietnamese authorities approved a debt strategy for the period of 2001-2010 formulated by the Ministry of Planning and Investment (MPI) This debt strategy provides the overall objectives of the country’s borrowing objectives and volumes over the next decade

Staff from the Ministry of Finance (MOF), the Ministry of Planning and Investment (MPI), and the State Bank of Vietnam (SBV) participated in a National Workshop on External Debt Sustainability They were assisted by consultants from Crown Agents and UNCTAD, and it was financed under the project VIE/01/010 This document presents the results of their work

The paper is structured as follows: Chapter II reviews the public and publicly guaranteed external debt structure of the Socialist Republic of Vietnam at end 2003, while Chapter III details the debt restructuring and new financing strategies, and Chapter IV, the macroeconomic scenarios Chapter V analyzes the external debt sustainability of the country and Chapter VI presents the various conclusions

2.1 E XTERNAL D EBT S TRUCTURE – N OMINAL V ALUE

At end 2003, the public and publicly guaranteed external debt of the Socialist Republic

of Vietnam stood at USD 11.16 billion of which 322 million was in arrears, a rise of 9 percent or USD 975.9 million, from the previous year (USD 10.18 billion at end 2002) This was due to positive net flows (disbursements minus principal repayments) of USD 982.9 million and the variation of the exchange rates (depreciation of the US dollar) that cause an additional increase of USD 677 million of the external debt stock1 However, debt buyback operations conducted during that year helped offset this increase

At the end of 2003, bilateral creditors were the largest creditor category with a debt stock

of USD 5944 million (or a share of about 54%) while multilateral creditors with a debt stock of USD 3858 million represented about 38% of the total external debt Commercial creditors (commercial banks and Brady bonds) accounted for the remaining 8% (USD 898.6 million) as shown in Graph 1 below (details are shown in Annex A) Within the bilateral creditor category, Paris Club creditors account for 90% (or USD 5.4 billion) of the total bilateral debt whereas non-Paris Club creditors represent the remaining 10% (or USD 622 million) Japan with a share of 66% (or USD 3.6 billion)

of the total Paris Club debt is the largest creditor, followed by Russia (12% or USD 636

1

/ The public and publicly guaranteed external debt stock would amount to USD 10.482 billion when computed using the exchange rates at end 2002

million), and France (9% or USD 489 million) This reflects the fact that Japan has been the largest provider of financial resources to Vietnam over the last decade

Algeria is the largest non-Paris Club creditor, representing 28% (or USD 171 million) of the total non-Paris Club debt followed by South Korea (19% or USD 118.5 million) and China (10% or 60.5 million)

Graph 1 - External Debt Structure - Nominal Value

IDA is the largest multilateral creditor with a share of 55% (USD 2346 million) of the total multilateral debt, followed by the Asian Development Bank (ADB) with 31% (USD 1314.7 million) as these creditors are two of the largest sources of external financing over the past decade The IMF with a debt outstanding of USD 394 million accounts for 9% of this total and the other multilateral creditors the remaining 5%

2.2 E XTERNAL D EBT S TRUCTURE – P RESENT V ALUE

At end 2003, the present value of the external debt stood at USD 9.24 billion, implying a grant element of 17% that would indicate that Vietnam’s portfolio is not concessional as

it is lower than the threshold of 35%, using the IMF methodology This is primarily due

to the variation of the parameters (discount and exchange rate) used to compute the present value The decrease of the CIRRs rates in 2003 that are used to discount the debt service payment flows, and the depreciation of the USD vis à vis the other foreign currencies, have contributed to the increase of the present value A lower discount rate means that the present value of the external debt rises, while the depreciation of the US dollar against the other currencies has the same effect when the present value is denominated in this currency

However, as defined in Regulation on the Management and Utilization of Official

Development Assistance published by MOF2, a loan is considered concessional if the grant element is 25% or more, using a fixed discount rate of 10% Using this methodology, the present value of Vietnam’s external debt would amount to USD 5420.8 million The country’s portfolio would then be considered concessional as the grant element would be equal to 51%

2

/ See Regulation on the Management and Utilization of Official Development Assistance, External Finance

Department, Ministry of Finance, Hanoi, 2004, page 66 and Annex 1 This is based on the methodology of the OECD However, in the revised Decree 17/2001, concessional loan would be defined as having a grant element

of 35%

This analysis also helps explain the distribution of the debt burden among the creditor category The shares of bilateral and commercial creditors rise to 62% and 10% (see Graph 2 below) on a present value basis, while the share of multilateral creditors declines to 28% reflecting the high degree of concessionality of the multilateral debt portfolio

The composition of debt among bilateral creditors remains the same Paris Club creditors represent 90% (USD 5116.7 million) of the total bilateral debt while non-Paris Club bilateral creditors have a 10% share (or USD 581.5 million) Within the Paris Club, Japan is still the largest creditor on a present value basis, but its share increases to 69% (or USD 3545.8 million) indicating that the

Japanese debt is not concessional using the IMF methodology for a DSA This is due to the relationship between the low interest rate (about 1.5%) extended by the creditor and the low yen CIRR rate (about 2.5%) used as the appropriate discount rate to compute the present value Russia follows with 17% of the Paris Club portfolio (or USD 660.3 million), while France represents 7% (or USD 357.6 million) of it

Graph 2 - External Debt Structure - Present Value

Regarding non-Paris Club, Algeria is the largest creditor with a present value of USD 171.1 million (or 30% of the total non-Paris Club debt on a present value basis), implying a grant element of 0% as it is fully in arrears The other non-Paris Club main creditors remain South Korea (USD 105.3 million or 18%) and China (USD 47.5 million

2.3 C URRENCY C OMPOSITION

As shown in the graph below, the four major currencies (Japanese yen, Euro, the Special Drawing Rights or SDR, and the US dollar) represent 97% of the total external debt of the country The Japanese yen and the US dollar have the largest shares of the portfolio

with 35% and 28% respectively, closely followed by the SDR (26%), while the external debt denominated in Euro amounted to about 8% of the country’s portfolio

Nevertheless, with 72% of Vietnam’s portfolio denominated in foreign currencies other than the US dollar, any depreciation of the latter currency will have an adverse effect on the external debt stock of the country, as both the nominal and present value of the non dollar denominated debt will rise, indicating that the country’s debt portfolio remains vulnerable to foreign exchange rate fluctuation

Graph 3 - Currency Composition

2.4 I NTEREST R ATE S TRUCTURE

As Graph 4 indicates, 94% of Vietnam’s external debt portfolio was contracted on fixed rate while the remaining was priced with variable rates, most of which are based on LIBOR terms Loans with interest rate below 3% represent 74% of total portfolio (mostly multilateral loans), while 12% of the loans contracted has interest rate between 3% and 6%, and the remaining 5% between 6% and 10% As a result of this policy, Vietnam does not face important interest rate risks

Graph 4 - Interest Rate Structure

3 EXTERNAL DEBT RESTRUCTURING AND NEW FINANCING STRATEGIES

3.1 E XTERNAL D EBT R ESTRUCTURING S TRATEGIES

When the HIPC Initiative was officially launched in 1997, a low income country was classified as HIPC country if it:I) received financing from IDA only, II) was experiencing

an unsustainable debt burden despite the application of the current traditional debt mechanisms, and III) had adopted a structural adjustment or economic reform program supported by the International Monetary Fund (IMF) and the World Bank during, at least, two years following the launch of the Initiative Thus, in 1997, the Socialist Republic of Vietnam was classified as a HIPC country as it potentially met the above conditions, partly because the debt owed to the former Soviet Union had yet to be restructured

In 2002, the IMF and the World Bank conducted a preliminary debt sustainability analysis to determine whether the country could qualify for HIPC debt relief The Bretton Woods institutions concluded that the Socialist Republic of Vietnam was not eligible to the HIPC debt relief

Within this context, two external debt restructuring strategies have been elaborated The first one tests the country’s eligibility for the HIPC Initiative while the second one implements the guidelines of the country’s debt strategy

3.1.1 Scenario 1: Test for the Enhanced HIPC Initiative

The objective of this scenario is to determine whether Vietnam is eligible for the Enhanced HIPC Initiative by implementing the traditional debt relief mechanisms (Paris Club debt stock reduction on Naples terms) as required under the Enhanced HIPC Initiative framework (see Box 1 below) to see whether the country’s public and publicly guaranteed debt is sustainable

Box 1 : The Enhanced HIPC Initiative Framework

Under the Enhanced HIPC Initiative, a country will have to follow different phases and implement certain actions described below:

First Phase:

This phase lasts, in principle, three years from the time the country receives Naples terms (or 67% Flow reduction on a present value basis) from its Paris Club creditors Moreover, the country will have to negotiate comparable treatment with its other bilateral and commercial creditors The country will also have to prepare an Interim Poverty Reduction Strategy Paper (PRSP-I) At the end of this period, the country reaches the :

Decision Point:

This point coincides with the country’s eligibility to a stock treatment on Naples terms on the part of the Paris Club creditors, upon which the country’s eligibility to the Initiative will be decided and the amount of debt relief determined If the country qualifies, meaning if the indebtedness ratios are above the established norms, the country enters the:

Second Phase:

This phase, like the first one, is theoretically three years However, under the Enhanced HIPC Initiative framework, the Bretton Woods institutions have introduced the concept of « floating completion point » Between the decision point and the completion point, the country will receive 90% debt relief on its debt service payments

on a present value basis from its Paris Club creditors and non multilateral creditors, as well as interim relief on the part of certain multilateral creditors During this second phase, the country establishes a second « three year track record » with the IMF During this period, the country must finalize the PRSP and implement it for at least one year This phase ends with the :

Completion Point:

At this point of the Initiative, the country will benefit from a debt stock reduction from Paris Club creditors (up to 90% or more if necessary) As in the other phases, the country will have to negotiate comparable treatment from its non multilateral creditors This also corresponds to the moment where multilateral creditors will provide debt relief to the beneficiary country so that the country can have indebtedness ratios indicating that the debt can be classified as sustainable The debt reduction is based on the level of relief agreed at the decision point

As described above, the Bretton Woods institutions simulate a theoretical Paris Club stock operation on Naples terms (or 67% debt stock reduction on a present value basis) Under the rules of the Paris Club, debt relief is only provided on non ODA debt contracted before the cut-off date and on consolidated loans resulting from prior Paris Club rescheduling In the case of Vietnam, this means that loans contracted prior to January 1st, 1990 (pre-cut-off date) and consolidated loans from the 1993 Paris Club negotiation will be restructured The methodology also requires that all the computation must be done on the year where the last historical data are available in the country This means that all the restructuring operations take place in 2003 in the case of Vietnam The Paris Club also offers a menu of options to its members that they can use to implement the debt stock reduction :

„ Option A or Direct Debt Reduction : Under this option, 67% of the stock of

debt is written off, while the remaining 33% is rescheduled over 23 years including a 6 year grace period at the appropriate market rate ; and

„ Option B or Debt Service Reduction : Under this option, 100% of the stock of

debt is rescheduled over 33 years with a 3 year grace period with a reduced interest rate sufficient to provide the necessary relief on a present value basis Both options provide the same amount of debt relief on a present value basis, but debt service payments under Option A is higher than under Option B during the first five years of the repayment schedule

Concerning Official Development Assistance (ODA) loans, the Paris Club does not

provide debt relief, but reschedule 100% of the stock of debt over 40 years including a

16 year grace period with an interest rate at least as favourable as the one of the original loan

Based on Vietnam’s negotiation with the Paris Club and experience from other HIPC countries, loans contracted prior to January 1st, 1990 and owed to France, Germany, Norway and the United States will be restructured on the basis of Option A, while the debt owed to Austria, Belgium, Denmark, Italy, the United Kingdom will be rescheduled using Option B

As regard to the consolidated debt resulting from the 1993 Paris Club negotiations, the Paris Club will not provide the full relief of 67% since these loans were treated under the Enhanced Toronto terms or London Terms and thus received already a reduction of 50%

on a present value basis The Paris Club will top up this relief to bring it to the Naples terms by further reducing these loans by 34%

Thus 34% the stock debt of the 1993 Paris Club owed to France, Germany, Norway and the United States will be written off while the remaining 66% will be rescheduled over

23 years including a six year grace period at the appropriate market rate However, the stock of debt of the 1993 Paris Club owed to Austria, Belgium, Denmark, Italy, the United Kingdom will be fully rescheduled over 33 years including a three year grace period with a reduced interest rate

Concerning ODA loans (pre-cut-off date and the 93 Paris Club), they will be rescheduled according to the ODA treatment described above

Since 1998, Russia has become a permanent member of the Paris Club and, therefore, its debt is treated under its framework Russia has chosen Option B as the mechanism to implement the Paris Club agreement

Conforming to the requirement of the Paris Club, Vietnam will try to seek comparable treatment with its non-Paris Club creditors However, since 1993, Vietnam has implemented a policy of restructuring its debt with all its non-Paris Club debt A review

of these agreements (see Annex B) indicates that the country has been able to negotiate terms at least, if not more favourable, than the ones provided by the Paris Club In some cases, the loans have already been fully repaid For these creditors with claims still

outstanding, debt service will be paid as scheduled

As a result of these successful negotiations, the country still needs to negotiate comparable treatment with one creditor (Algeria) Based on the experience of other HIPC countries, this scenario assumes that this creditor will restructure its debt according to the Option A of the Paris Club since this debt occurred from commercial transactions Recently, Vietnam concluded a restructuring agreement with Iraq whereby the creditor will write off 33% of the stock of debt, while the remaining will be paid in two equal instalments in 2005 and 2006 (USD 40 million each)

Commercial debt was restructured under the London Club It enabled Vietnam to swap part of its commercial debt into bonds (called Brady bonds) Annex B provides details of the 1997 London Club restructuring Under this scenario, the Brady bonds will be serviced as scheduled

Lastly, debt service payments for multilateral institutions will be paid as scheduled, conformed to their preferred creditor status in the first stage of the Initiative

3.1.2 Scenario 2 : Current Debt Restructuring Policy

Vietnam’s debt strategy stipulates that certain measures should be taken to ensure a reasonable composition of debt, and reduce the debt burden through, for example, debt restructuring, debt buyback operations, and tripartite transferring (or debt conversion) Over the past several years, the country has acquired significant experience in debt restructuring and has concluded debt conversion with several Paris Club creditors, and continued to repurchase its debt through debt buyback operations (with Russia), and open market operations (repurchase of Brady bonds) This scenario assumes that whenever possible, Vietnam will continue to implement this policy

The 1993 Paris Club allows creditor and debtor countries to convert debt on a voluntary basis (Paris Club debt conversion clause) The clause (see Box 2) enables Vietnam the possibility to swap 100% of the ODA debt outstanding at the end of 1993, and 10% or USD 20 million of commercial debt lent by export credits agencies

This strategy envisages that the country will pursue debt conversion with Paris Club creditors that have shown interest in such program, for example, France, Germany, Norway, and the United Kingdom The objective of the program would be to retire the most expensive debt, and thus, would attempt to convert non-ODA consolidated loans of the 1993 Paris Club agreement Debt would be converted at a minimum discount of 40% (or a maximum conversion price of 60%), and entirely financed from the budget About 10% of the debt outstanding of these creditors would be converted over the next three years The proceeds of the conversion would be invested in either equity (debt/equity swap), in nature conservation (debt for nature swap) or development projects such as education or health (debt for development swaps)

In order to facilitate such transactions, many countries have elaborated policy guidelines that clearly define the types of eligible debt (Paris Club, non-Paris Club, commercial debt), the conversion price (minimum discount allowed for the operation to be considered), the exchange rate policy (use of market rate vs fixed rate), the disbursement profile forecasted by the investor (the longer the better for the debtor country as it reduces the impact on the budget), the priority sectors (for example priority sectors identified in the Poverty Reduction Strategy Paper), the type of swaps (certain countries only allow debt for development or debt for nature swaps), and the monitoring of these conversions (to assure that the investors comply with their proposals)

Since 2000, when Vietnam concluded its restructuring agreement with Russia, the country has continued to reduce its debt burden with this creditor through debt buybacks This policy is maintained as the country will attempt to repurchase all the debt outstanding at a maximum price of 55% (or a discount of 45%) Domestic debt instruments will be issued in order to finance this operation whose financial terms would

be similar to the external debt loan (23 year maturity, no grace period)

As regard to non-Paris Club creditors, Vietnam will seek comparable terms to the ones obtained with its Paris Club creditors in 1993 (London terms or 50% reduction on a present value basis) Therefore, in the case of Algeria, 50% of the arrears will be written off and the remaining 50% will be rescheduled over 23 years including a six year grace period at the appropriate market rate For Iraq, the recent agreement detailed in the first scenario is simulated

After restructuring its debt with the London Club, Vietnam has repurchased its Brady bonds in the secondary market, taking advantage of the low secondary market price As

a consequence, secondary market prices have risen since the various debt buybacks have reduced the supplies of the papers Nevertheless, depending on market conditions, the country will continue to repurchase its Brady bonds in the secondary market The maximum repurchase price allowed for these operations would be 50% in order to maximize debt relief

In theory, these operations could be allowed as long as the secondary market price of the zero-coupon bonds (for example US Treasury zero coupon bonds) purchased by Vietnam to guarantee the Brady bonds is greater than Vietnam Brady bonds, thus enabling the country to arbitrage the market These operations can be envisaged if the opportunity cost of using foreign reserves is lower than the benefit derived from selling the zero coupon bond and repurchasing the Brady bonds and the proceeds from investing the differences

Finally, Vietnam will fulfil its policy and commitment of servicing as scheduled all the other external debt

3.2 N EW F INANCING S TRATEGY

The financing strategy implements the current policy of seeking first grants and if not available, contracting concessional loans or ODA loans Two main sources of funds have been identified:

„ Loans already contracted, but not yet fully disbursed, projected based on the closing date of the loan agreement; and

„ Newly committed funds of USD 2.8 billion negotiated at the Consultative Group meeting held in December 2004 It is assumed that Vietnam will negotiate financial terms comparable to the ones previously provided by these creditors

However, if the identified financial resources are not sufficient to finance the balance of payments deficit, the country will have to mobilize additional funds In such circumstances, it is expected that the principal international partners (such as Japan, IDA, and ADB) will be approached and would provide about 75% of the amount required Other bilateral creditors would assist the country by providing 20% of the funds Additionally, if market conditions permit it, the Socialist Republic of Vietnam will attempt to issue international bonds (5 year bullet repayment at LIBOR plus a maximum spread of 2.5%) or will borrow from commercial creditors

4.1 R ECENT E CONOMIC T RENDS ( 2000-2004)3

Output and Inflation : During this period the economic output of Vietnam has averaged

around 7.2 per cent per annum This high performance in GDP growth is largely attributed to the high increase in fixed capital formation, exports and consumption The

3

Based on official data and IMF estimates

five year average, measured between 2000 and 2004, shows a GDP composition of; Primary 24%, Secondary 38% and Tertiary 38% Significant growth rates were recorded

in sub-sectors such as agriculture, fisheries, manufacturing, construction, communication and transport Overall average annual Inflation, measured in terms of change in the consumer price index, was contained under 5 percent4 However, inflation increased in

2004 Largely due to rising commodity prices, avian flu outbreak, drought and growth in credit

-4 -2 0 2 4 6 8 10

2000 2001 2002 2003 2004

GDP(real growth) Inflation(average )

Balance of Payments: The current account position has widened and become negative

after being positive in 2000 and 2001 During these two years the current account to GDP was positive at 2.2 per cent but since then, it has gradually worsened to reach a deficit of around 4.5 per cent by 2004 This is mainly accounted by the widening of exports of goods (despite high oil prices textiles and manufactures recently) and non-factor services and imports of goods and non-factor services Though there has been an increase in the inflows of private transfers and FDI, the overall position has been worsening slightly

0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00

& NFS Net FDI

Gross foreign reserves as a ratio of imports averaged around 9 weeks during this period The depreciation of the nominal exchange rate- Dong versus the US dollar- has slowed down in 2003 and 2004, thus giving an average depreciation for the period about 2 per cent per annum Real effective exchange rate has also depreciated sufficiently to stimulate export expansion

4

Deflationary in 2000 and 2001

Government Finances: Revenues (excluding grants) as a percentage of GDP steadily

increased from about 20 percent in 2000 to nearly 23 percent in 2004 Expenditures and net lending also increased during the same period As a ratio of GDP, expenditure and net lending increased from 25.5 per cent in 2000 to 26.8 percent This has resulted in a deficit averaging around 5 percent from 2000 to 2003 However, in 2004, the deficit has decreased to 3.5 per cent

-5 0 5 10 15 20 25 30

Overall debt situation : In the early 1990’s, Vietnam had a high debt burden in terms of

solvency and liquidity In 1993, in order to reduce the debt burden the country approached the Paris Club to obtain bilateral debt relief It was also listed as a potential Highly Indebted Poor Country Though it began obtaining enhanced Toronto terms for debt relief under the Paris club, the significant impact of that relief was only felt after the restructuring of the Russian debt in 2000, as this was a major part of the bilateral debt Since then the debt ratios and indicators have decreased significantly External debt to GDP has decreased from 71.4 percent in 1999 to over 34 per cent in 2003 During the same period, external debt service to exports of goods and non factor services has declined from 12.8 per cent to 7.9 per cent In terms of solvency the Net Present Value

of external debt to exports of goods and non factor services has come down to 44 per cent in 2003 On the other hand, domestic debt and other liabilities show an increasing trend In recent years, there has been an increasing trend in the share of net financing ( over 55 percent) of budget deficit in 2003 by domestic debt instruments Estimates show that at end 2003, domestic debt and SOCB/SOE and DAF liabilities account for over 25 per cent of GDP5

Two macroeconomic scenarios have been prepared: a baseline scenario with more realistic assumptions and a pessimistic scenario with underlying assumptions of the economy not performing as well as expected and with negative external shocks Projections for the macro aggregates begin at 2005 and end on 2015 However, the DSA

is carried out from 2003 as the debt data is validated only until end 2003

4.2 S CENARIO 1: B ASE C ASE

The main macroeconomic aggregates are Gross Domestic Product Balance of payments and Recurrent Government Revenue These aggregates contribute in two ways to the Debt Sustainability Analysis First it allows the calculation of the required ratios and

5

Estimates are tentative obtained from official sources, IMF staff reports and Public Expenditure Review 2004, World Bank Draft report

indicators for testing whether Vietnam is sustainable or not Second, when the aggregates are combined and via the BoP accounts it is possible to estimate the gross financing needs

4.2.1 Projections for Gross Domestic Product (GDP)

Since the GDP should be calculated based on the current price, three steps are used in the calculations

Step 1: GDP growth rate at the constant price The historical data in 1997-2004 show

that the average growth rate is 6.6% The only exception is 2005 where the growth rate is projected to reach 8.15% Since this is the last year of the 5-year plan, the growth rate in

2005 is expected to attain 8.15% so that the whole 2000-2005 period would meet the target of 7-7.5% per annum for 2006-2015 period, GDP growth rate is projected to average 7.5 per cent per annum This is based on the recent past and realistic assumptions about the sector performance in the future

Step 2: Projection of GDP deflator GDP deflator is estimated according to the trend of

the average level of historical data, which is 5.5% per annum

Step 3: Projection of GDP at current prices (cp)Current price GDP is calculated

according to the following formula:

GDP (cp) at year (t) = GDP (cp) at year (t-1)x Growth rate (real) x GDP deflator

Base case GDP at current prices are calculated by applying the above formula, with the GDP real growth rate assumptions of 7.66% per annum from 2005 to 2010 and 7.7% per annum from 2011 to 2015 and the projected deflator of 4.2% per annum the projections Historical data was obtained from official statistical sources from 1997-2004

Since for the DSA all the data has to be in US dollars6, projections on exchange rate movements of Dong versus the US dollar for the future had to be prepared The assumption is that the Dong will depreciate by about 2 percent per annum from 2004 to

2015 This is based on the movements in the recent past and Purchasing Power Parity (PPP) rule Inflation in trading partner countries is forecast to be 2-3 percent lower than Vietnam which gives Vietnam a slight real effective depreciation

4.2.2 Budget revenues

The historical data in 1997-2004 show that the share of budget revenues in GDP was between 20.5% and 21.5% For both scenarios, the share of budget revenue to GDP is assumed to be 21 percent

The following steps are conducted to give projections on budget revenues for 2015:

2005-Step 1: Analyse the major components of recurrent budget revenues; Corporate and

income taxes, Value added taxes, import-export taxes, fees and licenses

6

/ Similarly budget revenues should be converted to US dollar equivalent BOP, however, is presented normally

in US dollars

Step 2: Justify the share of 21 percent of GDP by examining the laws and policies

related to revenue reforms Some of these are;

„ The Value Added Tax rates shall be uniformed into a single rate in 2006 (according to the VAT Law amendment schedule)

„ Revenue from income tax increases at a higher pace due to an enlarged tax base

„ Preferential tax treatment with several exemptions and allowances of a number

of FDI and domestic companies being removed

„ Due to integration commitments, export and import tariffs shall decrease, nevertheless, revenues from tariffs shall slightly increase because of higher trade volumes

Since the ratio is kept constant at 21 percent of GDP, the growth rate in revenues is determined by the growth rate in nominal GDP for the Base case scenario Similar to the GDP, the projected revenues is then converted to US dollar equivalent

4.2.3 Balance of Payments

The main sub items in the Balance of Payments accounts are; exports and imports of goods, services receipts and payments, transfers especially private transfers and net Foreign Direct Investment Of these only exports and imports of goods are projected to

be different in the two scenarios The others are assumed to be the same in both scenarios

In the base case, during 2005-2015 period, Viet Nam’s economy is not affected by any large and abnormal shocks, including external shocks Taking into account the potential benefits of Viet Nam’s accession to WTO with greater opportunities in exporting more textiles and garments, oil prices remaining at a moderate level (though higher than normal prices are still expected to prevail in 2005) Viet Nam’s trade is expected to grow

at a steady pace It is also assumed that other commodity ( e.g Rice, Coffee) prices will

be stable and there will be a moderate increase in the volume of exports of these commodities Domestic production shall continue to grow to also substitute a number of imported goods Services income also shows a moderately growing trend, especially in aviation, finance, tourism

Step 1: The calculated base case GDP in US dollars is retrieved For exports and imports

of goods, ratio of these variables to GDP is assumed

Step 2: The following assumptions are made;

„ Exports/GDP is 64.6%;

„ Imports/GDP is 69.2%;

„ Gap between the share of imports and exports to GDP is 4.6%;

„ Average growth of goods exports is 12.6%;

„ Average growth of goods imports is 12.3%;

„ Average growth of services receipts is 8%

„ Average growth of services payments is 8.5%

„ Average growth of private transfers is 10%

„ Official transfers are low averaging around US $155mn

„ Average growth of Net Foreign Direct Investment is 50% between 2004 and

2006 and then by 8% until 2015

„ On average foreign reserves are targeted to cover 10.5 months of imports

4.2.4 Current account balance and Gross financing needs

The average current account balance (including interest payments and official transfers)

as a percentage of GDP, during the projection period was around 3.2 per cent per annum The deficit to GDP gap steadily narrows until 2010, but rises to 4.5 per cent in that year Towards the end, the deficit gap reaches just over 3 percent Gross financing needs ( excluding any debt relief or new `pipeline’ borrowing) averaged around US$ 2bn per annum The requirements show a steady trend under US $2bn, but reaches over US$ 3bn

in years 2010, 2011 and 2015

4.3 S CENARIO 2: P ESSIMISTIC

4.3.1 Projections for Gross Domestic Product (GDP)

In this scenario the GDP is projected to grow by 6.3 percent per annum after 2005 During 2005, the growth rate is targeted to grow by 8.15 percent The slightly lower growth is caused by a marginal decrease in economic output in primary and secondary sectors GDP deflator for this case is estimated to be 4.25 percent per annum

4.3.2 Budget revenues

Budget revenue to GDP (at current prices) ratio remains at 21 percent similar to the base case Therefore the growth in revenues is the same as the growth in GDP for the pessimistic scenario

„ Gap between the share of imports and exports to GDP is 7% ;

„ Average growth of goods exports is 10,59%;

„ Average growth of goods imports is 10,88%;

„ Average growth of services exports is 7,72%;

„ Average growth of services imports is 9%

„ Official transfers are low averaging around US $155mn

„ Average growth of Net Foreign Direct Investment is 50 % between 2004 and

2006 and then by 8% until 2015

„ On average foreign reserves are targeted to cover 10.5 months of imports

In this case, we assume that although the real GDP grows at 6.5 per cent per annum, Viet Nam’s trade position looked more unfavorable than the base case scenario Exports experienced a slower growth affected by adverse external shocks and less than expected gains from accession to WTO

4.3.4 Current account balance and Gross financing needs:

The average current account balance (including interest payments and official transfers)

as a percentage of GDP, during the projection period was around 3.5 per cent per annum The deficit to GDP gap remains fairly constant initially and then decreases to under 3 per cent The deficit ratio rises in 2012, but rises to 4.1 per cent in that year This is followed

by a decrease in the years 2013 and 2014 but rises to 4.5 percent by 2015 Gross financing needs (excluding any debt relief or new `pipeline’ borrowing) averaged around US$ 2.5 bn per annum The requirements show a steady trend under US $2bn, but reaches over US$ 3bn in years 2011, 2012, 2013 and 2014 The Financing needs is

excessively high, over US $ 5bn in 2015

4.4 R ESULTS OF THE M ACROECONOMIC S CENARIOS

This section provides a comparison between the two macro-economic scenarios The first graph below highlights the difference in the economic growth rate assumptions as measured by GDP at current price

GDP (current prices)

0.0050.00100.00150.00

US$

bn

Pessimistic Base case

The second graph shows the behaviour of export growth rates over the projected period

of the two scenarios

Exports of Goods and Non-factor Services

0.0 20.0 40.0 60.0 80.0 100.0

200

4 200

5 200

6 200

7 200

8 200

9 201

0 201

1 201

2 201 3

Base case Pessimistic

The graph exposes the trend of the recurrent budget revenues of the two scenarios

0.0 5.0 10.0 15.0 20.0 25.0 30.0

US$ bn

Recurrent Govt Revenue

Base case Pessimistic

The last two graphs indicate the impact of the different assumptions of the two macroeconomic scenarios, first on the current account of the balance of payments and then, on the gross financing requirements

Current Account Balance(deficit)

0.0 1.0 2.0 3.0 4.0 5.0 6.0

4 2015