Back! And sovereign debt…

Hope you didn’t miss me too much while I was away on my vacation. It was nice, thanks for asking.

Anyway, this week is spring meetings of the IMF. As part of that, the Jubilee Debt campaign is trying to get people interested in debt service for low and middle income countries. Their point is that “external debt payments by developing country governments grew by 85%, as a proportion of government revenue, between 2010 and 2018.” Of course, this by itself doesn’t mean much. Who cares if debt is growing. US government debt has been increasing by crazy amounts partially because of the budget and partly because of lower taxes. That hasn’t stopped the economy from growing and government spending from increasing. But the Jubilee Debt campaign says that actually for these countries, per capita spending falls as debt service increases.

Jubilee Debt Campaign has also calculated that in the 15 countries with the highest debt payments, in ten of them public spending per person fell between 2016 and 2018. Across the 15, public spending fell by an average of 4%. The largest cuts were in Egypt, Cameroon, Angola and Mongolia, all of which are on IMF loan programmes.

In some cases, more debt could mean more per capita spending. But it looks like for many countries (maybe just lower income countries), more debt means less spending.

PERCENTAGE OF EXTERNAL DEBT PAYMENTS TO GDP SOURCE: JUBILEE DEBT CAMPAIGN (BUT APPEARS TO BE WORLD BANK DATA)

I, of course, wanted to look at Vietnam. What I have been hearing is that the Vietnamese government is trying to bring in foreign investment so that they won’t have to pay for things like infrastructure themselves (and increase deficits/debts). That’s why there has been such a push on public-private partnerships (PPP). PPP has been quite impressive, although lawyers think the legal framework for PPP has not been supportive, according to Giles Cooper, a lawyer from Duane Morris:

From 1990 to 2016, the country completed 84 PPP projects amounting to US$16.2 billion, with 79 percent of the projects in the energy sector. However, since the issuance of the PPP pilot programme in 2011, no PPP project has been signed under this framework. Compared with regional neighbours, foreign investment in infrastructure in Vietnam is lagging behind.

SOURCE: VIETECON.COM, STATE BANK OF VIETNAM, WORLD BANK

But back to debt, Vietnam, at first blush, doesn’t look too bad. External debt payments have been less than 10% of GDP. These were 7.0% in 2018, which is up a bit from the low of 4.8% in 2006, but well below the figure in 1999 of 24.5%. The low and middle-income average is 12.2% and the median is 9.0%. Within lower middle income (the group Vietnam is in), the mean is 13%, so Vietnam is well below that. It’s a bit surprising that it has grown so quickly for Vietnam, given strong GDP growth (meaning that debt has increased quick fast, and faster than GDP), but it still isn’t a crazy high amount. And it is volatile, meaning that it can fall a fair amount year-to-year (but also rise year-to-year).

That’s external debt payments. I wanted to look at total debt to get a sense of how risky this is, and it turns out that things don’t look great. Total debt was around 61.5% of GDP in 2017, with the majority of this composed of external debt (3x as large as local debt). If it were in local currency, there would be a lot more flexibility for debt to increase. While on a global relative basis, it doesn’t look that bad (although it is on the higher end of the spectrum, especially for countries without monetary sovereignty), given that so much of it is external means it doesn’t look great.

Obviously, it is going to be interesting to see how these debt figures change over time. No wonder the government is trying to reduce its external debt. I am not sure how well Vietnam is able to source debt locally, but that would be one solution.

Tomorrow, I want to talk about all of this in the context of MMT (Modern Monetary Theory), which is all the rage these days. But to conclude, it appears that Vietnam’s external debt is concerning, especially since the government has been managing the currency, which adds another dimension to it.