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UNITED NATIONS DEVELOPMENT PROGRAMME
PROJECT OF THE GOVERNMENT OF VIETNAM


VIE 01/010

CAPACITY DEVELOPMENT FOR
EFFECTIVE AND SUSTAINABLE
EXTERNAL DEBT MANAGEMENT


P
RELIMINARY EXTERNAL DEBT
S
USTAINABILITY ANALYSIS REPORT



February 2005



Crown Agents Oversea Government and
Administration Ltd. St. Nicholas House, St. Nicholas
Road, Surrey, Sutton, SM1 1EL, UK were responsible
for producing this report under a contract with United
Nations Development Programme for the Project
VIE/01/010: Capacity Development for Effective &

Sustainable External Debt Management. This project
is funded by the UNDP and the Governments of
Australia and Switzerland with counterpart funding
from the Government of the Socialist Republic of Viet
Nam. This report was drafted by Michel Vaugeois and
Dr. Sanga Sangarabalan of Crown Agents and
approved for submission by Colin Seelig, Director,
Institutional Development Group, Crown Agents.

Contract Reference: VIE/01/010 Prospector: T16196

(i)

TABLE OF CONTENTS

Table of Contents (i)
List of Annexes (i)
List of Acronyms and Abbreviations (i)

SECTION PAGE

1. INTRODUCTION 1
2. EXTERNAL DEBT STRUCTURE (END 2003) 1
2.1. EXTERNAL DEBT STRUCTURE – NOMINAL VALUE 1
2.2. EXTERNAL DEBT STRUCTURE – PRESENT VALUE 2
2.3. CURRENCY COMPOSITION 3
2.4. INTEREST RATE STRUCTURE 4
3. EXTERNAL DEBT RESTRUCTURING AND NEW FINANCING STRATEGIES 5
3.1. EXTERNAL DEBT RESTRUCTURING STRATEGIES 5
3.2. NEW FINANCING STRATEGY 9
4. MACROECONOMIC SCENARIOS 9
4.1. RECENT ECONOMIC TRENDS ( 2000-2004) 9
4.2. SCENARIO 1: BASE CASE 11
4.3. SCENARIO 2: PESSIMISTIC 14
4.4. RESULTS OF THE MACROECONOMIC SCENARIOS 15
5. FINANCIAL ANALYSIS 17
5.1. EXTERNAL DEBT SUSTAINABILITY ANALYSIS 17
5.2. SENSITIVITY ANALYSIS 19

6. CONCLUSIONS 21


LIST OF ANNEXES

ANNEX A
Vietnam – Nominal and NPV Debt Outstanding – End 2003
A
NNEX B
Vietnam – Debt Renegotiations
A
NNEX C
Discount and Exchange Rate Assumptions
A
NNEX D
Results of the Simulations
A
NNEX E
Balance of Payments Projections


ACRONYMS AND ABBREVIATIONS

ADB
Asian Development Bank
BOP
Balance of Payments
CIRR
Commercial Interest Rates of Reference
DAF

Development Assistance Fund
DBR
Domestic Budget Revenue
DMFAS
Debt Management Financial Analysis System
DSA
Debt Sustainability Analysis
DSM+
Debt Sustainability Model Plus
FDI
Foreign Direct Investment
GDP
Gross Domestic Product
HIPC
Highly Indebted Poor Countries
IBRD
International Bank for Reconstruction and Development
IDA
International Development Assistance

(ii)
ACRONYMS AND ABBREVIATIONS

IMF
International Monetary Fund
LIBOR
London Inter Bank Offered Rate
MOF
Ministry of Finance
MPI

Ministry of Planning and Investment
NFS
Non Factor Services
NPV
Net Present Value
ODA
Official Development Assistance
PRSP
Poverty Reduction Strategy Paper
SBV
State Bank of Vietnam
SDR
Special Drawing Rights
SOCB
State Owned Commercial Bank
SOE
State Owned Enterprise
TDS
Total Debt Service
UNCTAD
United Nations Conference on Trade and Development
VAT
Value Added Tax
WTO
World Trade Organization

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1. INTRODUCTION
Since 1993, the Socialist Republic of Vietnam has pursued a policy of restructuring its
external debt in order to reduce its debt burden. In 2002, the Bretton Woods institutions
prepared a debt sustainability analysis that concluded that the country was not eligible
for the Enhanced Highly Indebted Poor Country (HIPC) Initiative. Furthermore, in
2003, the Vietnamese authorities approved a debt strategy for the period of 2001-2010
formulated by the Ministry of Planning and Investment (MPI). This debt strategy
provides the overall objectives of the country’s borrowing objectives and volumes over
the next decade.
Staff from the Ministry of Finance (MOF), the Ministry of Planning and Investment
(MPI), and the State Bank of Vietnam (SBV) participated in a National Workshop on
External Debt Sustainability. They were assisted by consultants from Crown Agents and
UNCTAD, and it was financed under the project VIE/01/010. This document presents
the results of their work.
The paper is structured as follows: Chapter II reviews the public and publicly guaranteed
external debt structure of the Socialist Republic of Vietnam at end 2003, while Chapter
III details the debt restructuring and new financing strategies, and Chapter IV, the
macroeconomic scenarios. Chapter V analyzes the external debt sustainability of the
country and Chapter VI presents the various conclusions.
2. EXTERNAL DEBT STRUCTURE (END 2003)
2.1. EXTERNAL DEBT STRUCTURE – NOMINAL VALUE
At end 2003, the public and publicly guaranteed external debt of the Socialist Republic
of Vietnam stood at USD 11.16 billion of which 322 million was in arrears, a rise of 9

percent or USD 975.9 million, from the previous year (USD 10.18 billion at end 2002).
This was due to positive net flows (disbursements minus principal repayments) of USD
982.9 million and the variation of the exchange rates (depreciation of the US dollar) that
cause an additional increase of USD 677 million of the external debt stock
1
. However,
debt buyback operations conducted during that year helped offset this increase.
At the end of 2003, bilateral creditors were the largest creditor category with a debt stock
of USD 5944 million (or a share of about 54%) while multilateral creditors with a debt
stock of USD 3858 million represented about 38% of the total external debt
Commercial creditors (commercial banks and Brady bonds) accounted for the remaining
8% (USD 898.6 million) as shown in Graph 1 below (details are shown in Annex A).
Within the bilateral creditor category, Paris Club creditors account for 90% (or USD 5.4
billion) of the total bilateral debt whereas non-Paris Club creditors represent the
remaining 10% (or USD 622 million). Japan with a share of 66% (or USD 3.6 billion)
of the total Paris Club debt is the largest creditor, followed by Russia (12% or USD 636

1
/ The public and publicly guaranteed external debt stock would amount to USD 10.482 billion when computed
using the exchange rates at end 2002.
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million), and France (9% or USD 489 million). This reflects the fact that Japan has been
the largest provider of financial resources to Vietnam over the last decade.
Algeria is the largest non-Paris Club creditor, representing 28% (or USD 171 million) of
the total non-Paris Club debt followed by South Korea (19% or USD 118.5 million) and

China (10% or 60.5 million).
Graph 1 - External Debt Structure - Nominal Value
38%
54%
5%
3%
MultilateraL
Bilateral
Commercial
Bonds

IDA is the largest multilateral creditor with a share of 55% (USD 2346 million) of the
total multilateral debt, followed by the Asian Development Bank (ADB) with 31%
(USD 1314.7 million) as these creditors are two of the largest sources of external
financing over the past decade. The IMF with a debt outstanding of USD 394 million
accounts for 9% of this total and the other multilateral creditors the remaining 5%.
2.2. EXTERNAL DEBT STRUCTURE – PRESENT VALUE
At end 2003, the present value of the external debt stood at USD 9.24 billion, implying a
grant element of 17% that would indicate that Vietnam’s portfolio is not concessional as
it is lower than the threshold of 35%, using the IMF methodology. This is primarily due
to the variation of the parameters (discount and exchange rate) used to compute the
present value. The decrease of the CIRRs rates in 2003 that are used to discount the debt
service payment flows, and the depreciation of the USD vis à vis the other foreign
currencies, have contributed to the increase of the present value. A lower discount rate
means that the present value of the external debt rises, while the depreciation of the US
dollar against the other currencies has the same effect when the present value is
denominated in this currency.
However, as defined in Regulation on the Management and Utilization of Official
Development Assistance published by MOF
2

, a loan is considered concessional if the
grant element is 25% or more, using a fixed discount rate of 10%. Using this
methodology, the present value of Vietnam’s external debt would amount to USD
5420.8 million. The country’s portfolio would then be considered concessional as the
grant element would be equal to 51%.

2
/ See Regulation on the Management and Utilization of Official Development Assistance, External Finance
Department, Ministry of Finance, Hanoi, 2004, page 66 and Annex 1. This is based on the methodology of the
OECD. However, in the revised Decree 17/2001, concessional loan would be defined as having a grant element
of 35%.
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This analysis also helps explain the distribution of the debt burden among the creditor
category. The shares of bilateral and commercial creditors rise to 62% and 10% (see
Graph 2 below) on a present value basis, while the share of multilateral creditors
declines to 28% reflecting the high degree of concessionality of the multilateral debt
portfolio.
The composition of debt among bilateral creditors remains the same. Paris Club creditors
represent 90% (USD 5116.7 million) of the total bilateral debt while non-Paris Club
bilateral creditors have a 10% share (or USD 581.5 million). Within the Paris Club,
Japan is still the largest creditor on a present value basis, but its share increases to 69%
(or USD 3545.8 million) indicating that the
Japanese debt is not concessional using the IMF methodology for a DSA. This is due to
the relationship between the low interest rate (about 1.5%) extended by the creditor and
the low yen CIRR rate (about 2.5%) used as the appropriate discount rate to compute the

present value. Russia follows with 17% of the Paris Club portfolio (or USD 660.3
million), while France represents 7% (or USD 357.6 million) of it.
Graph 2 - External Debt Structure - Present Value
28%
61%
6%
5%
MultilateraL
Bilateral
Commercial
Bonds

Regarding non-Paris Club, Algeria is the largest creditor with a present value of USD
171.1 million (or 30% of the total non-Paris Club debt on a present value basis),
implying a grant element of 0% as it is fully in arrears. The other non-Paris Club main
creditors remain South Korea (USD 105.3 million or 18%) and China (USD 47.5 million
or 8%).
For multilateral institutions, the shares of IDA decline to 47.7% (USD 1245.7 million)
while the proportion of ADB loans increased to 36.4% (USD 949.5 million) respectively
of the total multilateral debt, as the loans extended by IDA have a higher grant element
(about 65%) than the others. With a present value of its debt amounting to USD 253.9
million, the share of the claims of the IMF increases to 9.7%, meaning that the IMF
portfolio is less concessional.
2.3. C
URRENCY COMPOSITION
As shown in the graph below, the four major currencies (Japanese yen, Euro, the Special
Drawing Rights or SDR, and the US dollar) represent 97% of the total external debt of
the country. The Japanese yen and the US dollar have the largest shares of the portfolio
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with 35% and 28% respectively, closely followed by the SDR (26%), while the external
debt denominated in Euro amounted to about 8% of the country’s portfolio.
Nevertheless, with 72% of Vietnam’s portfolio denominated in foreign currencies other
than the US dollar, any depreciation of the latter currency will have an adverse effect on
the external debt stock of the country, as both the nominal and present value of the non
dollar denominated debt will rise, indicating that the country’s debt portfolio remains
vulnerable to foreign exchange rate fluctuation.
Graph 3 - Currency Composition
35%
28%
26%
8%
3%
Japanese Yen
US Dollar
SDR
EURO
Others

2.4. INTEREST RATE STRUCTURE
As Graph 4 indicates, 94% of Vietnam’s external debt portfolio was contracted on fixed
rate while the remaining was priced with variable rates, most of which are based on
LIBOR terms. Loans with interest rate below 3% represent 74% of total portfolio
(mostly multilateral loans), while 12% of the loans contracted has interest rate between
3% and 6%, and the remaining 5% between 6% and 10%. As a result of this policy,
Vietnam does not face important interest rate risks.

Graph 4 - Interest Rate Structure
77%
16%
5%
2%
Fixed <3%
3%<Fixed<6%
6%<Fixed<10%
Variable

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3. EXTERNAL DEBT RESTRUCTURING AND NEW FINANCING STRATEGIES
3.1. EXTERNAL DEBT RESTRUCTURING STRATEGIES
When the HIPC Initiative was officially launched in 1997, a low income country was
classified as HIPC country if it:I) received financing from IDA only, II) was experiencing
an unsustainable debt burden despite the application of the current traditional debt
mechanisms, and III) had adopted a structural adjustment or economic reform program
supported by the International Monetary Fund (IMF) and the World Bank during, at least,
two years following the launch of the Initiative. Thus, in 1997, the Socialist Republic of
Vietnam was classified as a HIPC country as it potentially met the above conditions,
partly because the debt owed to the former Soviet Union had yet to be restructured.
In 2002, the IMF and the World Bank conducted a preliminary debt sustainability
analysis to determine whether the country could qualify for HIPC debt relief. The
Bretton Woods institutions concluded that the Socialist Republic of Vietnam was not
eligible to the HIPC debt relief.

Within this context, two external debt restructuring strategies have been elaborated. The
first one tests the country’s eligibility for the HIPC Initiative while the second one
implements the guidelines of the country’s debt strategy.
3.1.1. Scenario 1: Test for the Enhanced HIPC Initiative
The objective of this scenario is to determine whether Vietnam is eligible for the
Enhanced HIPC Initiative by implementing the traditional debt relief mechanisms (Paris
Club debt stock reduction on Naples terms) as required under the Enhanced HIPC
Initiative framework (see Box 1 below) to see whether the country’s public and publicly
guaranteed debt is sustainable.
Box 1 : The Enhanced HIPC Initiative Framework
Under the Enhanced HIPC Initiative, a country will have to follow different phases and
implement certain actions described below:
First Phase:
This phase lasts, in principle, three years from the time the country receives Naples
terms (or 67% Flow reduction on a present value basis) from its Paris Club creditors.
Moreover, the country will have to negotiate comparable treatment with its other bilateral
and commercial creditors. The country will also have to prepare an Interim Poverty
Reduction Strategy Paper (PRSP-I). At the end of this period, the country reaches the :
Decision Point:
This point coincides with the country’s eligibility to a stock treatment on Naples
terms on the part of the Paris Club creditors, upon which the country’s eligibility to the
Initiative will be decided and the amount of debt relief determined. If the country
qualifies, meaning if the indebtedness ratios are above the established norms, the
country enters the:
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Second Phase:
This phase, like the first one, is theoretically three years. However, under the
Enhanced HIPC Initiative framework, the Bretton Woods institutions have introduced
the concept of « floating completion point ». Between the decision point and the
completion point, the country will receive 90% debt relief on its debt service payments
on a present value basis from its Paris Club creditors and non multilateral creditors, as
well as interim relief on the part of certain multilateral creditors. During this second
phase, the country establishes a second « three year track record » with the IMF.
During this period, the country must finalize the PRSP and implement it for at least
one year. This phase ends with the :
Completion Point:
At this point of the Initiative, the country will benefit from a debt stock reduction
from Paris Club creditors (up to 90% or more if necessary). As in the other phases, the
country will have to negotiate comparable treatment from its non multilateral creditors.
This also corresponds to the moment where multilateral creditors will provide debt
relief to the beneficiary country so that the country can have indebtedness ratios
indicating that the debt can be classified as sustainable. The debt reduction is based on
the level of relief agreed at the decision point.
As described above, the Bretton Woods institutions simulate a theoretical Paris Club
stock operation on Naples terms (or 67% debt stock reduction on a present value basis).
Under the rules of the Paris Club, debt relief is only provided on non ODA debt
contracted before the cut-off date and on consolidated loans resulting from prior Paris
Club rescheduling. In the case of Vietnam, this means that loans contracted prior to
January 1
st
, 1990 (pre-cut-off date) and consolidated loans from the 1993 Paris Club
negotiation will be restructured. The methodology also requires that all the computation
must be done on the year where the last historical data are available in the country. This
means that all the restructuring operations take place in 2003 in the case of Vietnam.
The Paris Club also offers a menu of options to its members that they can use to

implement the debt stock reduction :
 Option A or Direct Debt Reduction : Under this option, 67% of the stock of
debt is written off, while the remaining 33% is rescheduled over 23 years
including a 6 year grace period at the appropriate market rate ; and
 Option B or Debt Service Reduction : Under this option, 100% of the stock of
debt is rescheduled over 33 years with a 3 year grace period with a reduced
interest rate sufficient to provide the necessary relief on a present value basis.
Both options provide the same amount of debt relief on a present value basis, but debt
service payments under Option A is higher than under Option B during the first five
years of the repayment schedule.
Concerning Official Development Assistance (ODA) loans, the Paris Club does not
provide debt relief, but reschedule 100% of the stock of debt over 40 years including a
16 year grace period with an interest rate at least as favourable as the one of the original
loan.
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Based on Vietnam’s negotiation with the Paris Club and experience from other HIPC
countries, loans contracted prior to January 1
st
, 1990 and owed to France, Germany,
Norway and the United States will be restructured on the basis of Option A, while the
debt owed to Austria, Belgium, Denmark, Italy, the United Kingdom will be rescheduled
using Option B.
As regard to the consolidated debt resulting from the 1993 Paris Club negotiations, the
Paris Club will not provide the full relief of 67% since these loans were treated under the
Enhanced Toronto terms or London Terms and thus received already a reduction of 50%

on a present value basis. The Paris Club will top up this relief to bring it to the Naples
terms by further reducing these loans by 34%.
Thus 34% the stock debt of the 1993 Paris Club owed to France, Germany, Norway and
the United States will be written off while the remaining 66% will be rescheduled over
23 years including a six year grace period at the appropriate market rate. However, the
stock of debt of the 1993 Paris Club owed to Austria, Belgium, Denmark, Italy, the
United Kingdom will be fully rescheduled over 33 years including a three year grace
period with a reduced interest rate.
Concerning ODA loans (pre-cut-off date and the 93 Paris Club), they will be
rescheduled according to the ODA treatment described above.
Since 1998, Russia has become a permanent member of the Paris Club and, therefore, its
debt is treated under its framework. Russia has chosen Option B as the mechanism to
implement the Paris Club agreement.
Conforming to the requirement of the Paris Club, Vietnam will try to seek comparable
treatment with its non-Paris Club creditors. However, since 1993, Vietnam has
implemented a policy of restructuring its debt with all its non-Paris Club debt. A review
of these agreements (see Annex B) indicates that the country has been able to negotiate
terms at least, if not more favourable, than the ones provided by the Paris Club. In some
cases, the loans have already been fully repaid. For these creditors with claims still
outstanding, debt service will be paid as scheduled.
As a result of these successful negotiations, the country still needs to negotiate
comparable treatment with one creditor (Algeria). Based on the experience of other
HIPC countries, this scenario assumes that this creditor will restructure its debt
according to the Option A of the Paris Club since this debt occurred from commercial
transactions. Recently, Vietnam concluded a restructuring agreement with Iraq whereby
the creditor will write off 33% of the stock of debt, while the remaining will be paid in
two equal instalments in 2005 and 2006 (USD 40 million each).
Commercial debt was restructured under the London Club. It enabled Vietnam to swap
part of its commercial debt into bonds (called Brady bonds). Annex B provides details of
the 1997 London Club restructuring. Under this scenario, the Brady bonds will be

serviced as scheduled.
Lastly, debt service payments for multilateral institutions will be paid as scheduled,
conformed to their preferred creditor status in the first stage of the Initiative.
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3.1.2. Scenario 2 : Current Debt Restructuring Policy
Vietnam’s debt strategy stipulates that certain measures should be taken to ensure a
reasonable composition of debt, and reduce the debt burden through, for example, debt
restructuring, debt buyback operations, and tripartite transferring (or debt conversion).
Over the past several years, the country has acquired significant experience in debt
restructuring and has concluded debt conversion with several Paris Club creditors, and
continued to repurchase its debt through debt buyback operations (with Russia), and
open market operations (repurchase of Brady bonds). This scenario assumes that
whenever possible, Vietnam will continue to implement this policy.
The 1993 Paris Club allows creditor and debtor countries to convert debt on a voluntary
basis (Paris Club debt conversion clause). The clause (see Box 2) enables Vietnam the
possibility to swap 100% of the ODA debt outstanding at the end of 1993, and 10% or
USD 20 million of commercial debt lent by export credits agencies.
This strategy envisages that the country will pursue debt conversion with Paris Club
creditors that have shown interest in such program, for example, France, Germany,
Norway, and the United Kingdom. The objective of the program would be to retire the
most expensive debt, and thus, would attempt to convert non-ODA consolidated loans of
the 1993 Paris Club agreement. Debt would be converted at a minimum discount of
40% (or a maximum conversion price of 60%), and entirely financed from the budget.
About 10% of the debt outstanding of these creditors would be converted over the next
three years. The proceeds of the conversion would be invested in either equity

(debt/equity swap), in nature conservation (debt for nature swap) or development
projects such as education or health (debt for development swaps).
In order to facilitate such transactions, many countries have elaborated policy guidelines
that clearly define the types of eligible debt (Paris Club, non-Paris Club, commercial
debt), the conversion price (minimum discount allowed for the operation to be
considered), the exchange rate policy (use of market rate vs fixed rate), the disbursement
profile forecasted by the investor (the longer the better for the debtor country as it
reduces the impact on the budget), the priority sectors (for example priority sectors
identified in the Poverty Reduction Strategy Paper), the type of swaps (certain countries
only allow debt for development or debt for nature swaps), and the monitoring of these
conversions (to assure that the investors comply with their proposals).
Since 2000, when Vietnam concluded its restructuring agreement with Russia, the
country has continued to reduce its debt burden with this creditor through debt buybacks.
This policy is maintained as the country will attempt to repurchase all the debt
outstanding at a maximum price of 55% (or a discount of 45%). Domestic debt
instruments will be issued in order to finance this operation whose financial terms would
be similar to the external debt loan (23 year maturity, no grace period).
As regard to non-Paris Club creditors, Vietnam will seek comparable terms to the ones
obtained with its Paris Club creditors in 1993 (London terms or 50% reduction on a
present value basis). Therefore, in the case of Algeria, 50% of the arrears will be written
off and the remaining 50% will be rescheduled over 23 years including a six year grace
period at the appropriate market rate. For Iraq, the recent agreement detailed in the first
scenario is simulated.
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After restructuring its debt with the London Club, Vietnam has repurchased its Brady

bonds in the secondary market, taking advantage of the low secondary market price. As
a consequence, secondary market prices have risen since the various debt buybacks have
reduced the supplies of the papers. Nevertheless, depending on market conditions, the
country will continue to repurchase its Brady bonds in the secondary market. The
maximum repurchase price allowed for these operations would be 50% in order to
maximize debt relief.
In theory, these operations could be allowed as long as the secondary market price of the
zero-coupon bonds (for example US Treasury zero coupon bonds) purchased by
Vietnam to guarantee the Brady bonds is greater than Vietnam Brady bonds, thus
enabling the country to arbitrage the market. These operations can be envisaged if the
opportunity cost of using foreign reserves is lower than the benefit derived from selling
the zero coupon bond and repurchasing the Brady bonds and the proceeds from investing
the differences.
Finally, Vietnam will fulfil its policy and commitment of servicing as scheduled all the
other external debt.
3.2. NEW FINANCING STRATEGY
The financing strategy implements the current policy of seeking first grants and if not
available, contracting concessional loans or ODA loans. Two main sources of funds
have been identified:
 Loans already contracted, but not yet fully disbursed, projected based on the
closing date of the loan agreement; and
 Newly committed funds of USD 2.8 billion negotiated at the Consultative Group
meeting held in December 2004. It is assumed that Vietnam will negotiate financial
terms comparable to the ones previously provided by these creditors.
However, if the identified financial resources are not sufficient to finance the balance of
payments deficit, the country will have to mobilize additional funds. In such
circumstances, it is expected that the principal international partners (such as Japan,
IDA, and ADB) will be approached and would provide about 75% of the amount
required. Other bilateral creditors would assist the country by providing 20% of the
funds. Additionally, if market conditions permit it, the Socialist Republic of Vietnam

will attempt to issue international bonds (5 year bullet repayment at LIBOR plus a
maximum spread of 2.5%) or will borrow from commercial creditors.
4. MACROECONOMIC SCENARIOS
4.1. RECENT ECONOMIC TRENDS ( 2000-2004)
3

Output and Inflation : During this period the economic output of Vietnam has averaged
around 7.2 per cent per annum. This high performance in GDP growth is largely
attributed to the high increase in fixed capital formation, exports and consumption. The

3
Based on official data and IMF estimates.
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five year average, measured between 2000 and 2004, shows a GDP composition of;
Primary 24%, Secondary 38% and Tertiary 38%. Significant growth rates were recorded
in sub-sectors such as agriculture, fisheries, manufacturing, construction, communication
and transport. Overall average annual Inflation, measured in terms of change in the
consumer price index, was contained under 5 percent
4
. However, inflation increased in
2004. Largely due to rising commodity prices, avian flu outbreak, drought and growth in
credit.

-4
-2

0
2
4
6
8
10
2000 2001 2002 2003 2004
%
GDP(real
growth)
Inflation(average
)

Balance of Payments: The current account position has widened and become negative
after being positive in 2000 and 2001. During these two years the current account to
GDP was positive at 2.2 per cent but since then, it has gradually worsened to reach a
deficit of around 4.5 per cent by 2004. This is mainly accounted by the widening of
exports of goods (despite high oil prices textiles and manufactures recently) and non-
factor services and imports of goods and non-factor services. Though there has been an
increase in the inflows of private transfers and FDI, the overall position has been
worsening slightly.

0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00

2000 2001 2002 2003 2004
Us $bn
Exports of goods
& NFS
Imports of Goods
& NFS
Net FDI

Gross foreign reserves as a ratio of imports averaged around 9 weeks during this period.
The depreciation of the nominal exchange rate- Dong versus the US dollar- has slowed
down in 2003 and 2004, thus giving an average depreciation for the period about 2 per
cent per annum. Real effective exchange rate has also depreciated sufficiently to
stimulate export expansion.


4
Deflationary in 2000 and 2001
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Government Finances: Revenues (excluding grants) as a percentage of GDP steadily
increased from about 20 percent in 2000 to nearly 23 percent in 2004. Expenditures and
net lending also increased during the same period. As a ratio of GDP, expenditure and
net lending increased from 25.5 per cent in 2000 to 26.8 percent. This has resulted in a
deficit averaging around 5 percent from 2000 to 2003. However, in 2004, the deficit has
decreased to 3.5 per cent.

-5
0
5
10
15
20
25
30
%
2000 2001 2002 2003 2004
Revenue/GDP
Expenditure
&NL/GDP
Fiscal balance/GDP

Overall debt situation : In the early 1990’s, Vietnam had a high debt burden in terms of
solvency and liquidity. In 1993, in order to reduce the debt burden the country
approached the Paris Club to obtain bilateral debt relief. It was also listed as a potential
Highly Indebted Poor Country. Though it began obtaining enhanced Toronto terms for
debt relief under the Paris club, the significant impact of that relief was only felt after the
restructuring of the Russian debt in 2000, as this was a major part of the bilateral debt.
Since then the debt ratios and indicators have decreased significantly. External debt to
GDP has decreased from 71.4 percent in 1999 to over 34 per cent in 2003. During the
same period, external debt service to exports of goods and non factor services has
declined from 12.8 per cent to 7.9 per cent. In terms of solvency the Net Present Value
of external debt to exports of goods and non factor services has come down to 44 per
cent in 2003. On the other hand, domestic debt and other liabilities show an increasing
trend. In recent years, there has been an increasing trend in the share of net financing (
over 55 percent) of budget deficit in 2003 by domestic debt instruments Estimates show
that at end 2003, domestic debt and SOCB/SOE and DAF liabilities account for over 25

per cent of GDP
5
.
Two macroeconomic scenarios have been prepared: a baseline scenario with more
realistic assumptions and a pessimistic scenario with underlying assumptions of the
economy not performing as well as expected and with negative external shocks.
Projections for the macro aggregates begin at 2005 and end on 2015. However, the DSA
is carried out from 2003 as the debt data is validated only until end 2003.
4.2. SCENARIO 1: BASE CASE
The main macroeconomic aggregates are Gross Domestic Product Balance of payments
and Recurrent Government Revenue. These aggregates contribute in two ways to the
Debt Sustainability Analysis. First it allows the calculation of the required ratios and

5
Estimates are tentative obtained from official sources, IMF staff reports and Public Expenditure Review 2004,
World Bank Draft report.
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indicators for testing whether Vietnam is sustainable or not. Second, when the
aggregates are combined and via the BoP accounts it is possible to estimate the gross
financing needs.
4.2.1. Projections for Gross Domestic Product (GDP)
Since the GDP should be calculated based on the current price, three steps are used in the
calculations.
Step 1: GDP growth rate at the constant price. The historical data in 1997-2004 show
that the average growth rate is 6.6%. The only exception is 2005 where the growth rate is

projected to reach 8.15%. Since this is the last year of the 5-year plan, the growth rate in
2005 is expected to attain 8.15% so that the whole 2000-2005 period would meet the
target of 7-7.5% per annum for 2006-2015 period, GDP growth rate is projected to
average 7.5 per cent per annum. This is based on the recent past and realistic
assumptions about the sector performance in the future.
Step 2: Projection of GDP deflator. GDP deflator is estimated according to the trend of
the average level of historical data, which is 5.5% per annum
Step 3: Projection of GDP at current prices (cp)Current price GDP is calculated
according to the following formula:
GDP (cp) at year (t) = GDP (cp) at year (t-1)x Growth rate (real) x GDP deflator.
Base case GDP at current prices are calculated by applying the above formula, with the
GDP real growth rate assumptions of 7.66% per annum from 2005 to 2010 and 7.7% per
annum from 2011 to 2015 and the projected deflator of 4.2% per annum the projections.
Historical data was obtained from official statistical sources from 1997-2004.
Since for the DSA all the data has to be in US dollars
6
, projections on exchange rate
movements of Dong versus the US dollar for the future had to be prepared. The
assumption is that the Dong will depreciate by about 2 percent per annum from 2004 to
2015. This is based on the movements in the recent past and Purchasing Power Parity
(PPP) rule. Inflation in trading partner countries is forecast to be 2-3 percent lower than
Vietnam which gives Vietnam a slight real effective depreciation.
4.2.2. Budget revenues
The historical data in 1997-2004 show that the share of budget revenues in GDP was
between 20.5% and 21.5%. For both scenarios, the share of budget revenue to GDP is
assumed to be 21 percent.
The following steps are conducted to give projections on budget revenues for 2005-
2015:
Step 1: Analyse the major components of recurrent budget revenues; Corporate and
income taxes, Value added taxes, import-export taxes, fees and licenses.

6
/ Similarly budget revenues should be converted to US dollar equivalent. BOP, however, is presented normally
in US dollars.
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Step 2: Justify the share of 21 percent of GDP by examining the laws and policies
related to revenue reforms. Some of these are;
 The Value Added Tax rates shall be uniformed into a single rate in 2006
(according to the VAT Law amendment schedule)
 Revenue from income tax increases at a higher pace due to an enlarged tax base
 Preferential tax treatment with several exemptions and allowances of a number
of FDI and domestic companies being removed.
 Due to integration commitments, export and import tariffs shall decrease,
nevertheless, revenues from tariffs shall slightly increase because of higher trade
volumes.
Since the ratio is kept constant at 21 percent of GDP, the growth rate in revenues is
determined by the growth rate in nominal GDP for the Base case scenario. Similar to the
GDP, the projected revenues is then converted to US dollar equivalent.
4.2.3. Balance of Payments
The main sub items in the Balance of Payments accounts are; exports and imports of
goods, services receipts and payments, transfers especially private transfers and net
Foreign Direct Investment. Of these only exports and imports of goods are projected to
be different in the two scenarios. The others are assumed to be the same in both
scenarios.
In the base case, during 2005-2015 period, Viet Nam’s economy is not affected by any

large and abnormal shocks, including external shocks. Taking into account the potential
benefits of Viet Nam’s accession to WTO with greater opportunities in exporting more
textiles and garments, oil prices remaining at a moderate level (though higher than
normal prices are still expected to prevail in 2005) Viet Nam’s trade is expected to grow
at a steady pace. It is also assumed that other commodity ( e.g. Rice, Coffee) prices will
be stable and there will be a moderate increase in the volume of exports of these
commodities. Domestic production shall continue to grow to also substitute a number of
imported goods. Services income also shows a moderately growing trend, especially in
aviation, finance, tourism.
Step 1: The calculated base case GDP in US dollars is retrieved. For exports and imports
of goods, ratio of these variables to GDP is assumed.
Step 2: The following assumptions are made;
 Exports/GDP is 64.6%;
 Imports/GDP is 69.2%;
 Gap between the share of imports and exports to GDP is 4.6%;
 Average growth of goods exports is 12.6%;
 Average growth of goods imports is 12.3%;
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 Average growth of services receipts is 8%
 Average growth of services payments is 8.5%
 Average growth of private transfers is 10%
 Official transfers are low averaging around US $155mn
 Average growth of Net Foreign Direct Investment is 50% between 2004 and
2006 and then by 8% until 2015
 On average foreign reserves are targeted to cover 10.5 months of imports

4.2.4. Current account balance and Gross financing needs
The average current account balance (including interest payments and official transfers)
as a percentage of GDP, during the projection period was around 3.2 per cent per annum.
The deficit to GDP gap steadily narrows until 2010, but rises to 4.5 per cent in that year.
Towards the end, the deficit gap reaches just over 3 percent. Gross financing needs (
excluding any debt relief or new `pipeline’ borrowing) averaged around US$ 2bn per
annum. The requirements show a steady trend under US $2bn, but reaches over US$ 3bn
in years 2010, 2011 and 2015.
4.3. SCENARIO 2: PESSIMISTIC
4.3.1. Projections for Gross Domestic Product (GDP)
In this scenario the GDP is projected to grow by 6.3 percent per annum after 2005.
During 2005, the growth rate is targeted to grow by 8.15 percent. The slightly lower
growth is caused by a marginal decrease in economic output in primary and secondary
sectors. GDP deflator for this case is estimated to be 4.25 percent per annum.
4.3.2. Budget revenues
Budget revenue to GDP (at current prices) ratio remains at 21 percent similar to the base
case. Therefore the growth in revenues is the same as the growth in GDP for the
pessimistic scenario.
4.3.3. Balance of Payments
Our projections of exports and imports of goods and services in 2005-2015 are as
follows:
 Exports/GDP is 62% ;
 Imports/GDP is 69%;
 Gap between the share of imports and exports to GDP is 7% ;
 Average growth of goods exports is 10,59%;
 Average growth of goods imports is 10,88%;
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 Average growth of services exports is 7,72%;
 Average growth of services imports is 9%.
 Official transfers are low averaging around US $155mn
 Average growth of Net Foreign Direct Investment is 50 % between 2004 and
2006 and then by 8% until 2015
 On average foreign reserves are targeted to cover 10.5 months of imports
In this case, we assume that although the real GDP grows at 6.5 per cent per annum, Viet
Nam’s trade position looked more unfavorable than the base case scenario. Exports
experienced a slower growth affected by adverse external shocks and less than expected
gains from accession to WTO.
4.3.4. Current account balance and Gross financing needs:
The average current account balance (including interest payments and official transfers)
as a percentage of GDP, during the projection period was around 3.5 per cent per annum.
The deficit to GDP gap remains fairly constant initially and then decreases to under 3 per
cent. The deficit ratio rises in 2012, but rises to 4.1 per cent in that year. This is followed
by a decrease in the years 2013 and 2014 but rises to 4.5 percent by 2015. Gross
financing needs (excluding any debt relief or new `pipeline’ borrowing) averaged around
US$ 2.5 bn per annum. The requirements show a steady trend under US $2bn, but
reaches over US$ 3bn in years 2011, 2012, 2013 and 2014. The Financing needs is
excessively high, over US $ 5bn in 2015.
4.4. RESULTS OF THE MACROECONOMIC SCENARIOS
This section provides a comparison between the two macro-economic scenarios. The
first graph below highlights the difference in the economic growth rate assumptions as
measured by GDP at current price.

GDP (current prices)

0.00

50.00

100.00

150.00

2004

2006

2008

2010

2012

2014


US$
bn
Pessimistic
Base case


The second graph shows the behaviour of export growth rates over the projected period
of the two scenarios.
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Exports of Goods and Non-factor Services
0.0
20.0
40.0
60.0
80.0
100.0
2
00
4
2005
200
6
2007
200
8
200
9
2
01
0
2011
2
01
2
2013

US $ bn
Base case
Pessimistic

The graph exposes the trend of the recurrent budget revenues of the two scenarios.
0.0
5.0
10.0
15.0
20.0
25.0
30.0
US$ bn
2004 2006 2008 2010 2012 2014
Recurrent Govt. Revenue
Base case
Pessimistic

The last two graphs indicate the impact of the different assumptions of the two
macroeconomic scenarios, first on the current account of the balance of payments and
then, on the gross financing requirements.
Current Account Balance(deficit)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
20

04
200
5
2
006
2007
2008
200
9
2
010
20
11
2012
201
3
201
4
2
015
US $(bn)
Base case
Pessimistic



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Gross Financing Needs
0.00
2.00
4.00
6.00
20
0
4
2
0
06
20
0
8
2
0
1
0
2012
2
0
1
4
US $(bn)
Base case
Pessimistic

5. FINANCIAL ANALYSIS

Three scenarios that combine the various external debt restructuring and new financing
strategies with the two macroeconomic scenarios have been analysed. They are:
 External debt restructuring scenario I with the macroeconomic base-case
scenario (GS1) ;
 External debt restructuring scenario II with the macroeconomic base-case
scenario (GS2); and
 External debt restructuring scenario II with the macroeconomic pessimistic
scenario (GS3).
A fourth one (GS4) reviews the impact of the variation of the structure and cost of the
new financing. The results of these various simulations are analysed in the following
sections. The discount rate and exchange rate assumptions used in this analysis are
presented in Annex C, while the results of the simulations are attached as Annex D.
5.1. E
XTERNAL DEBT SUSTAINABILITY ANALYSIS
The analysis of the first scenario (GS1) indicates that the Socialist Republic of
Vietnam is not eligible for HIPC debt relief and confirms the conclusions reached
by the Bretton Woods institutions. Two indebtness indicators are used to determine
whether the country is eligible for the Enhanced HIPC Initiative : i) the ratio of NPV to
exports (NPV/X) and ii) the ratio of NPV to Budget revenues (NPV/DBR). However,
the second indicator can only be used if two conditions are met : i) the ratio of Export to
GDP (X/GDP) must be greater or equal than 30% and ii) the ratio of Budget Revenues to
GDP (DBR/GDP) must be greater or equal than 15%. A country is considered eligible
for HIPC debt relief if the first ratio is greater than 150% and/or the second one is greater
than 250%.
At end 2003, the present value of Vietnam’s public and publicly guaranteed external
debt is estimated at USD 8618.4 million corresponding to a ratio of NPV to exports of
42.4%%%, after the application of traditional debt relief mechanisms, which is well
below the HIPC threshold of 150% (see Table 1 below). Since the country meets the
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two conditions (X/GDP equals 59.2% and DBR/GDP equals 21.3%), Vietnam could
also qualify under the fiscal ratio. At end 2003, this ratio is equal to 102.3%, also well
below the HIPC threshold of 250%. As both ratios are below the HIPC thresholds,
Vietnam cannot qualify for HIPC debt relief.
Table 1
Debt Ratios After Debt Relief HIPC Criteria

NPV/X
42.4% 150%


NPV/DBR
102.3% 250%
There are several reasons that can explain this conclusion. First, as the largest share of
the external debt structure is bilateral debt, the application of traditional debt relief will
have a greater impact in a country like Vietnam as opposed to another HIPC country
whose debt structure is mainly composed of multilateral debt. Second, the debt
reorganization with Russia enabled the country to reduce this debt by 85% when, prior to
the launch of the Initiative, Russia was its largest creditor. Lastly, the various debt
restructuring undertaken over the last decade have further decreased the share of bilateral
creditors and the country’s debt burden. In the context of the Enhanced HIPC Initiative,
Vietnam is the victim of its own successful debt restructuring strategy.
The second scenario (GS2) demonstrates that Vietnam’s public and publicly
guaranteed debt is sustainable over the observed period of 2004-2015. At end 2003,
the present value of the external debt is estimated at USD 9240 million corresponding to
a ratio of NPV to exports of 45.5%% which is well below the HIPC threshold of 150%,

indicating that the external debt of the country is sustainable. The ratio remains below
40% throughout period (see Table 2), showing a declining trend from 41.5% in 2004 to
29.9% in 2009 before rising to 32.4% at the end of the period.
The fiscal ratio (NPV/DBR) follows the same pattern. At end 2003, the ratio NPV to
Budget Revenues was 109.7% , declining to 96.3% in 2005, continuing this trend to
reach 89.3% in 2009, before climbing to 99.5% in 2015. Thus, throughout the period, the
ratio remains below the threshold of 250% indicating that the external debt is sustainable
on the fiscal side.
Table 2
Debt Ratios Criteria 2003 2005 2010 2015

NPV/X 150%
45.5% 35.5% 29.9% 32.4%


NPV/DBR 250%
109.7% 95.2% 93.7% 99.5%


TDS/X 15%
4.2% 1.8% 1.4% 1.4%


TDS/DBR 10%
11.8% 5.8% 4.7% 4.7%
The analysis of both solvency ratios demonstrates that Vietnam’s external debt is
sustainable both on the external and fiscal sides. It further indicates that the expected
volume of borrowing and its financial conditions required to finance the country’s
economic growth and development can be undertaken without endangering the
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sustainability of the country. To remain sustainable at the threshold levels, the growth
rate of the present value of the new borrowing must equal to the growth rate of its
exports or budget revenues. In the case of Vietnam, the review of the indebtedness ratios
shows that the export and budget revenues growth rates are greater than the growth rate
of the present value. This explains the declining trend of both indebtedness ratios.
The volume of disbursements required to finance the balance of payments is estimated at
USD 1.8 billion in 2004, USD 1.5 billion in 2005, USD 3.5 billion in 2010, and USD 4.2
billion in 2015. Of these amounts, it results that the country would need to mobilize
additional resources on top of the identified ones of USD 382 million in 2004, nothing in
2005, USD 3.2 billion in 2010, and the entire amount in 2015. Based on historical
trends, it would appear that the country should not have major difficulties in financing its
balance of payments deficits.
No threshold for the liquidity ratios (ratio of Total Debt Service to Export or TDS/X and
the ratio of Total Debt Service to Budget Revenues or TDS/DBR) have been determined
by the Bretton Woods institutions. However, one implicit objective of the Enhanced
HIPC Initiative by the IMF and the World Bank is to bring debt service payments in
relation to the exports of the country at or below 15%. On the fiscal side, the
international community has not come to an agreement yet, but the National Assembly
of Vietnam has set a limit at 10%.
The review of both indicators during the period shows that there are well below these
targets, indicating that the country should not face liquidity problems over the next
decade. The levels of these liquidity ratios decrease from 4.2% for TDS/X and 11.8%
for TDS/R in 2003, to 1.4% and 4.7% in 2015 respectively. In 2003, the fiscal liquidity
ratio exceeds the 10% limit due the debt buyback operations whereby the cash payments
required to repurchase the debt is accounted as principal payment, thereby increasing the

numerator. The liquidity ratios are very low by international standards, primarily due to
the high export and budget revenues. The various debt restructuring operations will help
reduce debt service payments by USD 55 million on average per year.
This scenario also clearly demonstrates that the Enhanced HIPC Initiative will not
provide any benefit to the Socialist Republic of Vietnam. Under the Enhanced HIPC
framework, a country may not qualify for HIPC debt relief, but, nevertheless, it remains
eligible for traditional debt relief mechanisms from its bilateral creditors, notably the
Paris Club. The analysis of the liquidity ratios has shown that the country will not
experience any problems, thereby implying that Vietnam does not need a flow
rescheduling on Naples terms from its Paris Club creditors in the short, medium and long
term. Furthermore, the levels of the solvency ratios demonstrate that a stock operation
on Naples from the Paris Club is neither required as the external debt is sustainable.
Therefore, as the country’s balance of payments does not require exceptional financing
to close the gap, the IMF does not have any technical arguments to present to the Paris
Club to request a debt restructuring. Hence, Vietnam does not need further official debt
restructuring. Thus, from an external debt point of view, there is no advantage of
remaining on the HIPC list.
5.2. S
ENSITIVITY ANALYSIS
Even under lower than expected GDP and export growths, Vietnam’s external debt
remains sustainable. The analysis of all the indebtness indicators (solvency and
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liquidity) in this scenario (GS3) shows that they are below the thresholds (see Table 3),
even though they are at a higher level when compared with the previous scenario (GS2).
This is principally due to the expectation that export (even if at a lower level than the

base case scenario ) will remain at a high level mainly because of the diversification of
its export base that allows the country to be able to absorb external shocks on one of its
major product (such as textile). The ratio NPV to exports declines from 45.5% in 2003 to
32.1% in 2010, before rising to 37.1% in 2015. The ratio NPV to budget revenues
follows the same trend, decreasing from 109.7% in 2003 to 95.9% in 2010, but climbing
to 119.4% in 2015.
Table 3
Debt Ratios Criteria 2003 2005 2010 2015

NPV/X 150%
45.5% 36.0% 32.1% 37.1%


NPV/DBR 250%
109.7% 96.3% 95.9% 119.4%


TDS/X 15%
4.2% 1.9% 1.7% 1.6%


TDS/DBR 10%
11.8% 59.8% 5.5% 5.5%
Contrary to the precedent scenario, starting in 2010, the export and budget revenues
growth rates are not sufficient to compensate the growth rate of the cumulative present
value of the new borrowing, as more new financing is needed to fill the gap. Since the
beginning ratios are very low, especially when compared to other developing countries,
the added borrowing does not pose a threat to the sustainability of the country, but it
would require macroeconomic policy adjustment to reverse this trend.
Under this scenario, new borrowing required to finance the balance of payments deficit

is estimated at USD 1.8 billion in 2004, USD 1.6 billion in 2005, USD 2 billion in 2010,
and USD 5.9 billion in 2015. The difference between the financing needs and the
identified new borrowing would result in a gap that would require the country to
mobilize USD 1.7 billion in 2010 and USD 5.9 billion by 2015. The amount required for
2010 is within the historical levels that the country has been able to obtain. However, for
2015, the financing needs are relatively high compared with the previous years and the
historical experience of the country, which would indicate that Vietnam might have
difficulties raising this amount of funds, thus also pointing out for a need for
macroeconomic adjustments.
Nevertheless, as in the previous scenario, the country should not experience liquidity
problems as the indicators remain very low, well below the intended targets throughout
the period.
Even when the financing structure and the cost of borrowing is changed (GS4),
Vietnam’s external debt remains sustainable. When the assumptions of the financing
gap are changed to increase borrowing on commercial terms to 50% (such as Vietnam
issuing bonds in the international capital markets) and borrowing 20% on IBRD terms
(15 year maturity including 5 year grace period at LIBOR + 0.5%), both solvency ratios
(NPV/X and NPV/DBR) remains below the intended thresholds. While the ratio NPV/X
shows a continuous declining trend, the ratio NPV/DBR decreases to 104.4% in 2010
before increasing to 114.2% in 2015 (see Table 4 below), but they are maintained below
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the thresholds because of strong economic growth (in particular exports) projected in the
macroeconomic base case scenario.
Table 4
Debt Ratios Criteria 2003 2005 2010 2015

NPV/X 150%
45.5% 36.2% 34.5% 34.1%


NPV/DBR 250%
109.7% 97% 104.4% 114.2%


TDS/X 15%
4.2% 1.9% 1.8% 3.5%


TDS/DBR 10%
11.8% 6.0% 6.1% 13.0%
Regarding the liquidity ratios, both follow the same tendency, declining from 2003 until
2010, before rising until 2015, but remain below the intended targets throughout the
period, excepted on the fiscal side where in 2015 the ratio of TDS/DBR is greater than
the limit established by the National Assembly. Nevertheless, as with the other scenarios,
the country should not face liquidity problems.
This indicates that being a blend country in terms of resource allocation between ODA
and non-ODA lending by multilateral organizations would not have an adverse impact
on the country’s debt sustainability. Nevertheless, the rising trend of several
indebtedness indicators starting in 2010 when the country will rely almost entirely on
non-concessional lending points out to the need of close monitoring from the authorities.
6. CONCLUSIONS
The analysis of the Socialist Republic of Vietnam’s public and publicly guaranteed
external debt indicates to be sustainable at end 2003, both on a solvency and liquidity
basis and is expected to remain sustainable over the next decade due to expected strong
economic performance as measured by a high GDP and export growth rates. Even under

more pessimistic assumptions, the country’s external debt remains sustainable as the
solvency ratios (NPV/X and NPV/DBR) remains below the thresholds established by the
Bretton Woods institutions. Furthermore, during that period, Vietnam should not
experience liquidity problem as both liquidity ratios (TDS/X and TDS/R) are expected to
be below the intended targets.
This DSA also confirms the conclusions of the Bretton Woods institutions that Vietnam
is not eligible for HIPC debt relief and that, from an external debt point of the view, the
initiative will not provide any additional benefit to the country.