Vietnam's Strained State Coffers

Vietnam's public finances came under strain in 2023 as a slowing global economy, high inflation and the prolonged Russia-Ukraine war weighed on the country's exports and tax revenues.

Total state budget revenue reached just $68.7 billion, equal to 108% of estimates but down nearly 4% from 2022 levels. Expenditures meanwhile hit $67.9 billion, forcing the government to draw heavily on domestic bond issuance to cover the budget shortfall.

The challenges besetting Vietnam's economy in 2023 were myriad. An update from the United Nations Conference on Trade and Development projected global merchandise trade volumes declined 5% year-on-year to $30.7 trillion, reflecting economic slowdowns in most major economies. The situation strained Vietnam's export-oriented manufacturing sector and crimped revenues from trade taxes.

Domestically, businesses continued grappling with headwinds like high inflation, rising borrowing costs, supply-chain disruptions and softening consumer demand.

The real estate market remained in the doldrums. Private investment lagged as firms hoarded cash. Natural disasters exacerbated by climate change added to the economic dislocation.

In response, the government enacted fiscal support measures like temporarily reducing value-added tax by 2 percentage points, lowering environmental taxes on gasoline and granting rent relief to businesses. The finance ministry estimates such policies lowered total revenue by around $2.9 billion.

Revenue Composition Shifts

While total revenue expanded moderately versus projections, its composition shifted substantially versus recent years. Receipts from crude oil surged 47.5% above estimates to $2.4 billion as the Russia-Ukraine war pushed global energy prices higher. However, oil revenues dropped over 20% from 2022's elevated levels.

By contrast, revenues from trade taxes plunged, reaching just 91.8% of targets as the global trade slowdown sapped import and export volumes. Lower corporate profits further depressed income tax payments.

Domestic revenues like value-added tax thus comprised a higher share of total receipts in 2023, expanding 10% versus estimates. But that segment was just 1.7% higher than 2022 as economic growth moderated.

Bond Reliance Grows

On the expenditure side, total state budget outlays reached an estimated $67.9 billion in 2023, equal to 83.4% of full-year targets and up 10.9% from 2022 levels.

Current expenditures rose 3.2% to $41.5 billion as the government boosted social spending and was 90.3% of estimates. It raised minimum wages for civil servants and state pensioners to $70 per month, up $12.

Development and infrastructure investment outlays jumped 33% to $22.7 billion as the government maintained an expansionary fiscal stance to stimulate the economy. Payments for public debt principal and interest eased 7.6% from 2022 to $3.5 billion.

With expenditures outpacing revenues by some wide margin, the government turned heavily to domestic bond issuance to cover the fiscal deficit in 2023. It sold $11.7 billion worth of bonds, nearly reaching the $12 billion adjusted target despite the challenging economic climate.

The heavy debt issuance reflected Vietnam's proactive efforts to raise capital for pressing expenditure needs like public investment, social security payments and interest costs. The government centralized management of the national budget in 2023, pooling idle cash reserves held across ministries and localities to reduce commercial borrowing.

Scrutiny on Debt Burdens

Market analysts scrutinized Vietnam's growing debt burden closely in 2023 amid economic uncertainties. While public debt remains manageable at around 37% of GDP, the widening fiscal deficit will require sustained fiscal discipline, especially if global growth remains sluggish.

"The external environment is unlikely to improve significantly in the coming year, so Vietnam will need to mind its finances carefully, an economics lecturer at a leading university in Vietnam who asked to remain anonymous said. "Ensuring debt affordability will be crucial going forward," he added.

The government's active issuance of longer-dated bonds helped manage refinancing risks and debt service costs. The average maturity on new issuance reached 12.6 years in 2023, extending the average remaining term on Vietnam's debt stock to over 9 years. The effective interest rate was a relatively modest 3.2% thanks to strong domestic investor demand.

However, global monetary tightening poses potential risks for Vietnam's debt trajectory. Higher borrowing costs would add financial strains, while a stronger dollar makes servicing foreign currency-denominated obligations costlier in relative terms.

"Managing exchange rate risks on the public debt portfolio will be an increasing challenge in this higher interest rate environment," noted the university economist. "Policymakers will need to balance exchange rate stability and debt affordability."

Continuing Challenges in 2024

Looking ahead to 2024, Vietnam's fiscal outlook depends heavily on the trajectory of the global economy. A protracted downturn would further dampen exports and investment inflows, while sustained price pressures could necessitate additional fiscal support measures.

Deft policymaking will therefore be required to balance fiscal sustainability, economic revival and social stability. Buttressing state finances through enhanced revenue mobilization, prudent expenditure management and strategic borrowing will be critical for funding Vietnam's development needs.

"Fiscal consolidation will inevitably be a priority in the period ahead," said the university economist. "But the depth of adjustment should be carefully calibrated to avoid derailing growth and development progress."