EVN’s borrowings burden Vietnam’s public debt: World Bank

12-Feb-2019 Intellasia | Hanoi Times | 6:00 AM Print This Post

the country’s sole power distributor has borrowed billions of dollars from foreign lenders through the Vietnamese government’s guarantees over the past years, burdening the country’s public debt, the World Bank has said.

EVN’s debt is split into two categories, namely direct loans from a variety of domestic and international commercial banks (backed by the Ministry of Finance (MOF) and on-lending loans which the MOF had borrowed from international financial institutions (IFIs).

Both categories of borrowing are included in Vietnam’s public debt.

During the period 20102015, up to 96 percent of EVN’s capital expenditure was financed by debt, leading to a total debt of $9 billion in 2016.

Some $8.1 billion of this debt is de facto backed by the MOF, including $4.2 billion on-lent by the MOF, and $3.9 billion directly borrowed from domestic and international commercial banks.

Over the period 201017, EVN’s total borrowings were $25.5 billion. Total foreign commercial borrowing was $6.4 billion, domestic commercial borrowing $9 billion, and borrowing of $10.1 billion from IFIs and development partners (DPs).

Fragile forex rates and high interest rates

As much as 70 percent EVN’s loans are denominated in foreign currencies, leaving the company heavily exposed to foreign exchange risks, the World Bank warned.

EVN’s borrowing, which is denominated primarily in US dollar and Japanese yen, is typically on non-concessional terms and often of short maturity.

The majority of EVN’s loans are short term, yet the debt has been used to acquire long-term assets of up to 25 years, thus causing a mismatch between its assets and liabilities.

In terms of interest rate, the power producer bore the average interest rate of 9.6 percent on all loans in 2011, and about 6.1 percent in 2015.

The high rate was partly resulted from on-lending fee of 0.25 percent from the government. More clearly, the bulk of EVN’s foreign currency loans are not provided at fully concessional financing terms, even when they originate with IFIs.

In fact, the loans are typically channeled through the government and a financial institution that bears credit risk, which on-lends them to EVN, adding an on-lending fee and foreign exchange premium.

Domestic lending regulations force EVN to seek overseas borrowing

Domestic commercial and development banks provide local currency debt to power projects on a corporate basis rather than a nonrecourse project finance basis.

The single borrower limit of 15 percent of a bank’s equity capital constrains lending for many banks. Moreover, lending is further constrained by sector concentration limits set by banks for prudential purposes.

Domestic banks’ current outstanding loans to the energy sector amount $10 billion. Some major banks providing loans to power projects are Vietcombank, Vietinbank, BIDV, Techcombank, and SHB.

dong lending rates to prioritised sectors, including power, are currently set at 69 percent annually for short-term loans, and 810 percent annually for long-term loans, compared with 710 percent and 9-12 percent, respectively, to other sectors.

Given the narrow differential between short-term and long-term borrowing rates, there is little incentive for banks to lend long-term, which is an issue for investors, such as EVN.

Solutions

There is a pressing need to strengthen the domestic commercial banking sector, while deepening and broadening domestic capital markets.

Both project finance and corporate finance structures will benefit from greater availability of long-term fixed-interest local currency finance through the domestic debt and capital markets.

Local-currency financing is attractive as it avoids the additional risks associated with exchange rate variations and currency convertibility.

Therefore, it needs to deepen and broaden Vietnam’s capital markets, particularly the domestic corporate bond market as a promising alternative channel for long-term finance.

It will be important to also mobilise financing from offshore investors and lenders, while ensuring that such financing is raised on a sustainable basis and that the contingent liabilities are appropriately monitored and managed, the World Bank said.

https://english.vietnamnet.vn/fms/business/216720/evn-s-borrowings-burden-vietnam-s-public-debt–world-bank.html

 


Category: Business, Vietnam

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