Insufficient funds in Vietnam
It's unclear where the communist nation will find the estimated US$480 billion in infrastructure it needs to sustain near-term fast growth
For a city of eight million and counting, Ho Chi Minh City’s mass transit metro system can only be described as an absolute necessity. Yet construction on the six-line railway, first proposed in 2001, has been dogged by delays caused by insufficient state funds.
In 2015, Japan’s Sumitomo Corporation and Vietnam’s state-owed construction firm Cienco 6 – tasked with building part of the system – filed for US$90 million in compensation, or around US$110,000 per day after work was stalled due to lack of funding for almost two years.
Nor is fast progress likely around the corner. A recent report by the Nikkei Asian Review stated that Japan’s ambassador asked Prime Minister Nguyen Xuan Phuc in May to make good on the delayed payments to the Japanese firms constructing the metro. The Tokyo-based publication noted this was a “highly unusual request.”
The central government has only provided roughly 30% of the US$87.9 million needed for one section of the metro linking to Ho Chi Minh City’s People’s Committee, which oversees the project. The Committee itself has struggled in recent years to pony up its own funds for the project.
The root of the problem is clear. In a bid to stabilize national finances and curb runaway inflation, Vietnam’s National Assembly years ago capped public debt at 65% of gross domestic product (GDP). Since the beginning of the year, public debt is thought to hover around 64.7%.
Vietnam has enjoyed some of the highest economic growth rates in Southeast Asia, averaging nearly 7% in recent years. But rising GDP has not translated to improved state finances due to a combination of financial mismanagement, corruption and unsustainable spending, including on keeping hidebound state enterprises afloat, analysts say.
In recent years, almost 5.7% of GDP has been dedicated to large infrastructure projects, a higher percentage than any other Southeast Asia nation – and almost as high as China’s 6.8%.
Now, however, it is obvious that the government cannot keep splashing out on infrastructure projects, though the spending is desperately needed to support its growth-propelling export industries.
Analysts estimate the country will need at least US$480 billion over the next four years for essential infrastructure across the country. If the spending does not go through, analysts say Vietnam risks growth-restraining bottlenecks in logistics and transport, an obvious point to anyone who has ever been stuck in a Ho Chi Minh City traffic jam.
Such projects include a US$16 billion new airport for Ho Chi Minh City; a US$14 billion highway linking the southern financial hub to the capital Hanoi; and mass transit metros for both cities.
The government is currently on the hunt for outside private investors. The government says it received US$7.7 billion in foreign direct investment (FDI) in the first half of this year, up 6.5% over the same period last year.
FDI inflows hit a record high of US$15.8 billion in 2016, according to official statistics. In late June, the local bourse hit a nine-year high.
Last month, Vingroup, a top local property developer, signed a memorandum of understanding worth US$4 billion to develop part of the Hanoi metro. Weeks later, South Korea’s Keximbank, a state-run bank, and Germany’s Siemens AG announced joint interest in Ho Chi Minh City’s metro project.
But if private investors are to become integral to Vietnam’s infrastructure development, radical change must take place. Based on its own estimates, the government can contribute about one-third of the US$480 billion needed in coming years; the rest, officials acknowledge, will have to come from the private sector.
Currently, private investment contributes only about 10% to existing infrastructure projects in Vietnam, according to research by the Asian Development Bank (ADB). Public debt issues, however, are not the only problem facing the nominally communist government. Rising expenditures have been coupled with shortfalls in income.
In 2014, the state budget deficit was estimated at US$11.5 billion, or 6.6 percent of GDP, despite the government setting a 5.3% cap the previous year. The deficit dropped to 4% in 2015 but rose again to 4.4% last year, according to the ADB.
In fact, a recent ADB report insinuates that the figures are more opaque than the government admits. This is in part due to an accounting trick that considers the sale of equity in state-owned enterprises as revenue.
Since such equity can only be sold once, however, the increased revenue masks the reality of the budgetary offset. In other words, the budget deficit appears lower because of short-term adjustments. “Excluding those receipts, fiscal deficit reduction will be much more modest,” the ADB report said.
To achieve the government’s target of reducing the budget deficit to 3.5% of GDP this year, economists say that radical steps must be taken, including fiscal austerity and greater taxation.
Although the government announced last month that the minimum wage of public sector workers will rise by 7%, up to a still paltry US$53 per month, there are indications the government aims to reduce the bulging number of public sector workers.
Last month, the Ministry of Education and Training reportedly drew up plans that will mean teachers are no longer classified as civil servants, placing them instead under labor contracts that have fewer benefits and social protections.
This was portrayed by the ministry as a much-needed policy to modernize the profession, which, it claims, is crammed with incompetent and uncommitted teachers only interested in collecting a paycheck. But analysts view it as a politically risky maneuver to offload a significant portion of state employees from the national budget.
Cuts are also expected at the local level. After a budgetary meeting of the National Assembly in October, the central government reportedly requested that several cities hand over more of their local income to national coffers. Normally, prosperous cities and provinces retain an adequate proportion of their revenue and give the rest to the central government.
Ho Chi Minh City, for example, has typically kept about 23% of its revenue. But under the proposal the city authorities would only retain 17% of income until 2020. Hanoi would lose almost half its revenue under the proposed cuts, with its percentage dropping from 42% to 28%.
It is unclear whether these redistributive orders have been enforced yet. But the proposal has alarmed many local authorities as they would necessitate local government cuts.
Nguyen Thi Quyet Tam, Ho Chi Minh City’s deputy Party secretary, was quoted by local media saying that “we cannot make further cuts”, adding that doing so would have “dire consequences” at a time the the country’s largest city’s population swells with migration from the countryside.
While economists acknowledge the need for austerity to avoid a possible budgetary blowout, the social implications of belt-tightening are no doubt of great concern to Party leaders.
Government critics in Hanoi told this writer that state cutbacks will create even more disaffection among the public towards officialdom, a sentiment already running on high after a recent crackdown on dissent, including on environmental activists.
Indeed, the Communist Party-dominated government’s main source of legitimacy is its ability to steer a fast-growing economy that boosts local livelihoods. But if private investment for necessary infrastructure cannot be found, that compact will come under increased stress.
More fundamentally, if the government relinquishes its role as the benefactor of infrastructure projects and basic services, and hands responsibility instead to the private sector, people will begin to question the usefulness of a one-party authoritarian state, critics say.
It’s a rising financial dilemma that threatens the country’s already delicate political and social balances, and one Party planners have so far shown they are ill-equipped to practically address.