The latest report by the Ministry of Finance showed that the public debt had reached VND2.395.488 trillion by December 31, 2014, equal to 60.3 percent of GDP. Of this, foreign debts are equal to 39.9 percent of GDP.

The foreign debts are estimated at $73 billion if noting that the GDP is $183 billion. As the dong has been devalued by one percent, Vietnam will have to pay VND15 trillion more to pay debts.

Pham Hong Hai, CEO of the Hong Kong and Shanghai Banking Corporation (HSBC), said in principle, the 1 percent depreciation of the dong will increase the public debt.

However, the impact will not be too harsh because most of the foreign debt is long term, which means that the influence will be divided over many years.

He went on to say that the most important thing Vietnam needs to do is to use loans in the most effective way to ensure profits. That is, the benefits to be obtained from the loans must be higher than the borrowing costs, which include the cost of the exchange rate fluctuations.

MOF, in its report, also warned about challenges for Vietnam in terms of less ODA (official development assistance).

Vietnam is now considered a lower middle-income country compared to the past when it was classified as a low-income country, enabling it to access ODA loans at preferential interest rates.

However, interest rates required by donors have increased. The average interest rate of the World Bank’s loans, for example, has increased from zero percent to 1.25 percent.

This means that the debt burden on the government will be heavier not only because of the dong/dollar exchange rate adjustment, but also because of the higher interest rate.

According to MOF, foreign debts now account for 50 percent of the total government’s debts. And in the case of negative exchange-rate fluctuations, the government’s debts and debt payment obligations will increase accordingly.

Also, according to the report, most of the sovereign debts are from ODA and preferential loans from donors which have low interest rates and capital costs. The average interest rate is 1.6 percent per annum and the average lending term is 20 years.

In addition, mobilizing capital in the international market through government bond issuance has become an important credit channel.

Vietnam, in late November 2014, successfully issued $1 billion worth of 10-year bonds at the interest rate of 4.8 percent. This was done to get money to pay for bonds the government issued in 2005 and 2010 at the interest rate of 6.8 percent.

By Thanh Lich - VietNamNet Bridge - January 15n 2015