Vietnam’s Economic Growth and Debt Strategy: A Comprehensive Analysis

Over the past decade, Vietnam has witnessed remarkable economic growth, emerging as one of the fastest-growing economies in the world. This transformation has been driven by a mix of effective government policies, robust foreign investments, and structural reforms. However, one key aspect that often goes under the radar is the country's government debt profile, which has been instrumental in shaping its growth trajectory.

Vietnam’s government debt is particularly notable for being among the lowest in Asia. As of 2021, Vietnam’s government debt-to-GDP ratio stood at approximately 39.6%, a figure that positions it as a low-debt economy when compared to neighboring countries such as the Philippines (around 60%) and Thailand (59.6%), and significantly lower than India’s debt-to-GDP ratio of over 89%. The question that arises is: How has Vietnam managed to maintain such rapid economic growth without relying heavily on public debt?

Vietnam's Government Debt Overview

In simple terms, government debt refers to the total amount borrowed by a country's government, both domestically and externally. In Vietnam's case, its relatively low debt-to-GDP ratio signals a disciplined borrowing approach, a contrast to other rapidly growing economies that often accumulate substantial public debt to fund infrastructure projects and other public services.

Vietnam’s government debt consists of both domestic and external borrowing. According to the Ministry of Finance, Vietnam had $46.5 billion in external debt and $95.4 billion in domestic debt in 2021, totaling around $141 billion in outstanding debt. Bilateral loans, such as those from Japan ($13 billion), South Korea ($1.38 billion), and France ($1.3 billion), make up a significant portion of the country's external debt, while multilateral creditors like the World Bank ($16 billion) and the Asian Development Bank ($8.1 billion) also play a substantial role.

While these numbers may seem significant, Vietnam's government debt remains relatively low compared to other Asian economies. The restrained use of debt has enabled Vietnam to navigate its rapid economic growth without becoming overly dependent on borrowing.

Why Vietnam’s Debt Remains Low

Several factors explain why Vietnam has maintained such low public debt despite its rapid economic expansion.

1. Rapid Economic Growth: One of the primary reasons Vietnam's debt-to-GDP ratio remains low is its rapid economic growth. The country's economy has been growing at an impressive rate, averaging about 6-7% annually before the COVID-19 pandemic. This high growth rate has allowed Vietnam to expand its economy faster than its debt, reducing the need for excessive borrowing.
2. Export-Oriented Economy: Vietnam's export-led growth model has been a key driver of its low debt levels. By focusing on exports, the country has attracted substantial foreign direct investment (FDI) and experienced rapid economic growth, generating a steady stream of foreign exchange earnings. This has helped the country manage its external debt more effectively and reduce its reliance on debt-financed growth.
3. Efficient Public Spending: The Vietnamese government has also been efficient in allocating public spending to sectors with the highest potential for economic growth and social benefits. This has allowed the government to avoid excessive borrowing while still investing in crucial areas like infrastructure, education, and healthcare.
4. Macroeconomic Stability: Vietnam has maintained a stable macroeconomic environment with low inflation, a stable exchange rate, and sound fiscal policies. This stability has made it easier for the government to manage its debt and maintain a low debt-to-GDP ratio.
5. Cautious Borrowing: While many countries borrow heavily to finance growth, Vietnam has adopted a more cautious approach. The government has been selective about when and how much it borrows, preferring to rely on sustainable growth rather than accumulating large amounts of debt. This has helped Vietnam avoid the pitfalls of over-leveraging its economy.

The Role of State-Owned Enterprises (SOEs)

It is essential to note that while Vietnam’s government debt remains low, the country’s state-owned enterprises (SOEs) also play a significant role in its debt profile. SOEs in sectors like infrastructure, energy, and transportation have often borrowed heavily to finance their investments. However, the debt of these enterprises is generally considered separate from government debt.

An infamous case is Vinashin, a state-owned shipbuilding company that collapsed due to financial mismanagement and corruption. In 2010, Vinashin defaulted on a $600 million international loan, which led to significant economic losses, job cuts, and a downgrade in Vietnam’s credit rating by Moody’s Investor Service. This example highlights how SOE debt, while distinct from government debt, can still pose risks to the broader economy.

Vietnam's Debt Management Strategy

Vietnam has demonstrated a sound approach to debt management, particularly in its handling of external debt. The country’s foreign reserves, which stood at about $83 billion as of 2021, are nearly double its external debt. This indicates that Vietnam is in a strong position to repay its foreign borrowings and manage its currency risk.

Additionally, Vietnam's government has taken steps to reduce its reliance on external debt by promoting domestic borrowing. Domestic loans, which make up the majority of Vietnam’s government debt, are generally easier to manage than external loans as they do not involve currency risks and provide more fiscal sovereignty.

Vietnam's Future Debt Outlook

Despite Vietnam's current low debt levels, the question remains whether this trend will continue as the country continues to develop. As developing nations progress towards becoming more advanced economies, their public debt often rises, with debt-to-GDP ratios exceeding 100% in some cases. However, Vietnam has shown that it can manage its growth without relying heavily on debt, even during crises like the COVID-19 pandemic. While many countries saw their debt-to-GDP ratios surge during the pandemic, Vietnam’s ratio only increased slightly, from 41.5% in 2019 to 41.8% in 2020, before dropping below 40% the following year.

Vietnam’s economic growth story is one of disciplined debt management, rapid GDP growth, and strategic government policies. The country’s low debt-to-GDP ratio has enabled it to grow sustainably while avoiding the pitfalls of excessive borrowing. As Vietnam continues its path towards becoming a more developed nation, its cautious approach to debt may serve as a model for other developing economies seeking to achieve growth without over-relying on public debt.

With sound fiscal management, a stable macroeconomic environment, and a focus on exports and efficient public spending, Vietnam’s future in the global economy looks promising. However, it remains crucial for the country to monitor its state-owned enterprises and external debt levels to maintain its current trajectory of growth and stability.