Closer look at government debt

I was off yesterday because of a small bike accident that kept me off the internet for the day. But feeling better today, thanks for the support!

Anyway, today I wanted to follow up on government and what I think are some possible paths over the next few years, depending on how quickly things rebound.

Let’s start with what we know:

GDP growth is slowing, because lots of businesses are shut. This will likely persist through 2Q, and hopefully recover in 3Q and beyond.
Government revenues are falling, because private revenues are falling which equals lower tax revenue. Luckily exports and imports are holding up so far (+5.7% YTD through March), so tariff revenues should be solid. But oil revenues (about 3.5% of the budget in 2019) are definitely going to be down (Brent oil is down to $28 now).
Government expenditures are rising, with a stimulus of almost $8bn so far…
Combined, this means that borrowing and borrowing as a percentage of GDP will very likely be the highest it ever has been, based on even my most optimistic scenario.

So I tried to put some numbers around this to get a sense of where debt/GDP could go. Of course, I had to make a bunch of assumptions. To be honest, I just don’t have a good sense of how true they will turn out to be. To cover my a$$, I went with three different scenarios, imaginatively called low, medium, and high.

For each scenario, I changed revenue growth, expenditure growth and nominal GDP growth. I also made a blanket assumption that the VND would depreciate by 2% a year.

The big assumption I made is that it would be a V-shaped recovery, with 2021 back to normal (7% growth). Plus I assume that the government will keep expenditure flat in 2021, in line with 2020 spending. If the economy has not recovered, the government may want to try more stimulus next year as well, which would make these figures worse.

In all but the most optimistic scenario, debt/GDP will rise from just under 60% in 2019 to 65% or almost 75%. Borrowings generally go up in the long term, and the hit to GDP in 2020 continues to hurt the metric over time.

I would hesitate to say that the worst-case scenario here is actually the worst case. Revenues might fall short of even my most pessimistic assumption (-3%), while expenditure might need to be even more to stave off a bigger recession. And the best case could be even better, since maybe GDP growth will be even higher next year.

Don’t get me wrong, now is the time for stimulus, but Vietnam works in an environment with restraints. While it can print its own currency, it has a managed floating exchange rate that it doesn’t want to break and that may limit its ability to just spend. The good thing is that inflation remains fairly low (except for pork prices) and energy prices are likely to fall overall. No inflation should allow it a bit more flexibility.

Overall, I think we are probably looking for Vietnam’s debt/GDP to increase pretty dramatically this year and rise from there, even with a quick return to growth.

VietEcon

Closer look at government debt

VietEcon