Vietnam’s budget deficit is growing amidst dwindling crude oil revenue and ballooning public debt. Will the proceeds from the divestments of multi-billion dollar state-owned companies and highly controversial across-the-board tax hikes proposal be enough to balance the state’s finances? Will the mega sales of Government’s stakes in Vinamilk, Sabeco, Habeco, Petrolimex, Vietnam Airlines, and other corporations be in time to provide desperately needed capital? | For more reports like this? Follow SPEEDA on Linkedin: www.linkedin.com/showcase/3687396/ or visit https://goo.gl/VfHswA

1. 01
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
By Alex Hang
Global Research and Analysis Team
Executive Summary
In December 2016, the Vietnamese government issued several decrees on restructuring and divesting
state-owned enterprises (SOEs) for 2016–2020. One particular decree, No. 163/2016/ND-CP, is explicit on
the divestment proceeds being a source of government revenue. Even though these directives were
overdue by a year, they illustrate the government’s recent aggressive push to divest several remaining
major SOEs.
Vietnam’s troubled state budget was a key factor in its recent acceleration of SOE restructuring and
divestment. In 2016, the government targeted a budget deficit of VND 259 trillion, or 5% of GDP.
Outstanding debt was just 1.3% from reaching the debt ceiling of 65% of GDP. This, combined with
dwindling crude oil revenue, forced the government to (1) increase domestic tax revenue – for which the
government faced immediate and severe public backlash and to (2) use SOE divestment proceeds to fund
various economic development projects and other expenses.
The government has been facing an increasingly difficult restructuring process in divesting major SOEs.
Although 96.5% of the total 4,700 SOEs have been successfully ‘equitised’, only 8.0% of the total
government ownership value in these companies has been sold to private investors. Due to their diverse
business interests, complicated landholding structures, and information disclosure problems, as many as
730 equitised SOEs are yet to be listed on stock exchanges. As a result, these companies are failing to
attract significant interest from private investors.
The Vietnamese government targets deriving VND 250 trillion from SOE divestment for 2016–2020. As of
August 2017, only 7.6% of this target has been achieved. Based on our projections, missing the divestment
revenue target and the proposed tax reforms could hinder the achievement of the government’s budget
deficit target (3.5% of GDP within 2018–2020 from 5.0% in 2016). The government will either have to
drastically cut spending or raise its public debt ceiling. It remains to be seen how the government will
strike a delicate balance between its ambitious goals.
2017-10-03

2. 02
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Government to Accelerate SOE Divestment as Pressure on Budget Funding
Mounts
On 21 December 2016, the Government of Vietnam issued Decree No. 163/2016/ND-CP to specify the
types of revenue streams that the government is entitled to collect in accordance with the newly revised
State Budget Law passed in 2015. Among the government revenue streams specified were proceeds from
the divestment of government stakes in state-owned enterprises (SOEs), dividend income, and income
received from SOEs. The new regulation thus clearly indicated for the first time that the government is
allowed to use proceeds from SOE divestment as a revenue source. These proceeds are mainly to be used
to (1) restructure funds at the remaining government corporations and (2) meet capital needs for
infrastructure programmes, social programmes, and other government investments.
In 2016, Vietnam’s targeted budget deficit, VND 259 trillion (equivalent to 5.0% of GDP), was the highest
among the ASEAN-6. With total outstanding public debt at 63.7% of GDP (close to the debt ceiling of 65%
of GDP) and dwindling crude oil revenue at just 5.4% of total budget revenue (versus almost 20% of total
revenue in 2012), the government was relying increasingly on tax and fees collection (74.4% of total
revenue) and proceeds from SOE divestment (3.0% of total revenue) to fund its various infrastructure
projects and social programmes. According to projections by the Ministry of Finance, the self-imposed
public debt ceiling of 65% of GDP is likely to be reached within 2017–20; this underlines the limited room
there is for issuing more government bonds and government-guaranteed debt instruments used by
various SOEs in the coming years to fund the budget deficit.
Source: Compiled by UZABASE based on various materials
Mainly two factors have led to the government’s aggressive push to accelerate SOE restructuring and
divestment. Firstly, the government targets VND 250 trillion, or VND 50 trillion per year (approximately
5% of the total annual budget in 2016), from SOE divestment proceeds to contribute to its VND 2,000
trillion (12.5%) target for economic development spend. Secondly, the government needs to cut spending
at the remaining SOEs once a large majority of them become more financially independent or partially
and fully privatised. Lastly, the government’s ambitious targets of keeping its budget deficit below 3.5%
of GDP by 2020 and of reducing the budget deficit by 31.1% YoY in 2017 can be met only if proposals for
both tax increases and SOE divestments are passed and achieve their respective targets.

3. 03
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Source: Compiled by UZABASE based on data from General Statistics Office of Vietnam and Ministry of Finance
Note: 2016 and 2017 data are based on the Vietnamese government’s planned budgets
2018–20 are projections by UZABASE based on the Vietnamese government’s budget targets
Source: Ministry of Finance
Note: 2016 data is based on the Vietnamese government’s planned budget
Recurring expenses include spending on ongoing social programmes, government reform programmes, and other
administrative expenditures

4. 04
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Proposals to Increase Taxes for Budget Funding Face Public Backlash
On 17 August 2017, the Ministry of Finance announced its draft plan to revise several types of taxes
including value added tax (VAT), special consumption tax (SCT), corporate income tax (CIT), and personal
income tax (PIT). Under the draft proposal, the government aims to raise VAT to 12% from the current
10% by 2019. Consequently, goods and services currently enjoying a 50% VAT rebate would see their VAT
rate increased to 6% from 5%. Interestingly, the proposal also includes 10% SCT on top of VAT for softdrink
products except fresh juices and dairy products.
Under the proposed tax reforms, the government also introduced lower CIT rates for micro-businesses
(15%) and small and medium enterprises (17%) compared with the current general CIT of 20%. Special tax
subsidy provisions were also proposed targeting start-ups, high-technology ventures, and agricultural
businesses.
Although there are legitimate budget deficit concerns to warrant several tax reforms aimed at raising tax
revenue, the Vietnamese government is already facing a severe public backlash against the newly
proposed increases on several consumption-related taxes such as VAT and SCT. Faced with a rising budget
deficit and falling revenues from trade tariff and crude oil exports, the government has been aggressively
increasing both tax rates and tax collection bases over the past ten years. Domestic collection contributed
67.6% of total revenue over 2011–15 versus just 52.2% in 2001–05. For 2016, the government budgeted
for domestic tax revenue to contribute 77.4% of its total revenue. The bulk of the increase in domestic
collection revenue came from increases in tax rates of VAT, SCT, and PIT, while CIT and trade tariff
contribution rates declined.
Source: Ministry of Finance
Note: 2016 data is based on the Vietnamese government’s planned budget, not on actual revenue
Divestment returns are included in Domestic Collection
2016’s total divestment returns included in budget: VND 30,000 billion

5. 05
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Source: Ministry of Finance
Note: 2016 data is based on the Vietnamese government’s planned budget, not on actual revenue
Divestment returns are included in Domestic Collection
2016’s total divestment returns included in budget: VND 30,000 billion
Vietnamese Government’s Budget and Debt Projections for 2018–20
Source: Projected by UZABASE based on the Vietnamese government’s announcements on budget and debt targets
Note: 2016 and 2017 data are the Vietnamese government’s targets
2018–20 data are UZABASE’s projections based on various government targets
Deficits for 2016 and 2017 are partially funded by the previous years’ transfer and provincial governments
2015 % of Total 2016 % of Total 2017 % of Total 2018 % of Total 2019 % of Total 2020 % of Total
A. Revenue (VND Billion)
1. Domestic Collection 749,560 75.1% 785,000 77.4% 990,280 81.7% 1,138,822 83.0% 1,309,645 84.0% 1,506,092 85.0%
- of which Divestment Proceeds - 30,000 3.0% 55,000 4.5% 55,000 4.0% 55,000 3.5% 55,000 3.1%
2. Crude Oil Revenue 67,510 6.8% 54,500 5.4% 38,300 3.2% 37,053 2.7% 39,774 2.6% 41,673 2.4%
3. Trade Tariff and Trade Activities Collection 169,303 17.0% 172,000 17.0% 180,000 14.8% 192,600 14.0% 206,082 13.2% 220,508 12.4%
4. Foreign Aids 11,844 1.2% 3,000 0.3% 3,600 0.3% 3,600 0.3% 3,600 0.2% 3,600 0.2%
Total Government's Revenue 998,217 100.0% 1,014,500 100.0% 1,212,180 100.0% 1,372,075 100.0% 1,559,102 100.0% 1,771,873 100.0%
B. Expenditure (VND Billion)
1. Economic Development Spending 308,853 24.4% 254,950 20.0% 357,150 25.7% 408,459 26.3% 460,803 26.3% 519,918 26.3%
2. Debts and Grants Repayment 167,970 13.3% 155,100 12.2% 98,900 7.1% 88,525 5.7% 99,870 5.7% 112,682 5.7%
3. Financial Aids - - 1,300 0.1% - - - - - -
4. Recurring Expenses 788,500 62.3% 823,995 64.7% 896,280 64.5% 1,009,499 65.0% 1,138,866 65.0% 1,284,967 65.0%
5. Government Restructuring Expenses - 13,055 1.0% 6,600 0.5% 15,531 1.0% 17,521 1.0% 19,769 1.0%
6. Financial Reserves Injection 302 0.0% 100 0.0% 100 0.0% 100 0.0% 100 0.0% 100 0.0%
7. Reverses - 26,000 2.0% 29,300 2.1% 31,061 2.0% 35,042 2.0% 39,537 2.0%
Total Government's Expenditure 1,265,625 100.0% 1,273,200 100.0% 1,390,480 100.0% 1,553,075 100.0% 1,752,102 100.0% 1,976,873 100.0%
C. Budget Deficits (VND Billion) 267,408 258,700 178,300 181,000 193,000 205,000
D. Increase in Public Debt to Finance Deficits 247,200 172,300 186,900 199,049 211,987
GDP at Current Prices 4,192,862 4,502,733 4,795,411 5,107,112 5,439,075 5,792,614
Difference between Deficit and Increase in Public Debt -11,500 -6,000 5,900 6,049 6,987
Deficit as % of GDP 5.7% 3.7% 3.5% 3.5% 3.5%

6. 06
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Assumptions:
GDP growth rate assumed at 6.5% YoY
Outstanding public debt at 65.% GDP
Budget deficit at 3.5% GDP
Divestment proceeds target: VND 250,000 trillion
Domestic revenue growth rate: 15%
Trade tariff revenue growth rate: 7%
Total crude oil and trade tariff revenue: 14% - 16% of total revenue
Domestic collection: 84% - 85% of total revenue
Economic development spending: 25% - 26% of total spending
Using the government’s GDP growth-rate target, the public debt ceiling level, budget deficit targets, and
several other budget annoucements, we project the overall budget deficit levels as well as the maximum
annual permitted public debt increase for 2018–20. In 2016, the Vietnamese government approved VND
247,200 billion, VND 172,300 billion, and VND 186,900 billion worth of additional borrowings to fund the
budget deficits for 2016, 2017, and 2018 respectively. Assuming a nominal GDP growth rate of 6.5% YoY
for 2018–20 and assuming that the public debt ceiling (65% of GDP) is reached in 2018, the maximum
annual increase in public debt would be 6.5% YoY if the government is to avoid breaching the debt ceiling.
According to our projections, the differences between possible new annual public borrowings to fund the
budget gap for 2018–20 should be between VND 6,000 billion and VND 7,000 billion. Given this small
space within which to maneuver, the Vietnamese government will need to meet both its targets for
divestment revenue as well as for tax increases. Failing this, we predict the government will be forced to
either drastically cut its spending or to raise its debt ceiling of 65% of GDP.
Equitisation Processes and Information Disclosure Problems Slow Divestment of
Major SOEs
The process of divestment of the government’s stakes in SOEs includes the highly crucial step of
equitisation. According to Government Decrees 59/2011 and 189/2013, an SOE must undergo the
equitisation process to become a joint stock company or a joint stock corporation. Through this process,
the company’s asset, debt, and equity book values are determined and announced publicly. Concurrently,
the government also announces the maximum level of ownership that it will hold at each SOE. After
successful equitisations, divestment routes are determined for each enterprise, based on the feasibility
of each strategy and the size of the government stakes being sold. Usually, major state corporations that
have large government stakes to be divested are listed on the stock exchange. Enterprises that attract
substantial interests from the private sector are then divested via private block sales to selected strategic
investors, based on prior agreements on ownership levels.

7. 07
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
SOE Equitisation and Divestment Process (Simplified)
Source: Compiled by UZABASE based on Government Decrees No. 59/2011/ND-CP and No. 189/2013/ND-CP
As of August 2017, 96.5% of the 4,700 SOEs have been successfully equitised since the beginning of the
restructuring and divestment campaign in the late 1990s. As the equitisation campaign reached major
state corporations with diverse business interests, the number of equitised SOEs declined significantly to
55 in 2016 from 222 in 2015. The complexity of determining the asset values of major corporations leads
to wide differences between private investor and government valuations. Overestimates of enterprise
values can result in a low level of interest from private investors, while underestimates can cause a loss
of value in state assets and divestment returns. To compound the problem further, companies may be
reluctant to publish full financial information, information on land holdings and investment activities, and
other sensitive information for fear of prompting government inspection of potential wrongdoings.
Unresolved bad loans, commercial disputes, and complicated legal commitments may also cause serious
delays in equitisation.
Despite the large majority of SOEs successfully equitised thus far, only 8.0% of the government’s total
stake in all SOEs have been sold to private investors. There are as many as 730 equitised SOEs (around
16% of the total number of equitised SOEs) yet to be listed on stock exchanges as of August 2017.
Furthermore, a large number of these unlisted equitised SOEs continue to refuse to publish full financial
information and corporate information as required by the equitisation regulations. As of December 2016,
only 241 of the 620 major SOEs complied with corporate information disclosure requirements. Even
among these 241 SOEs, a large majority do not publish all the required information on their corporate
websites. The severe lack of transparency among these SOEs has resulted in several complaints by
interested private investors, especially foreign investors, to the government and the Ministry of Finance.
Recently, the government published the names of the 730 SOEs that failed to list on the stock exchanges,
pressuring them to disclose more information and to accelerate their IPO processes.

8. 08
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Source: Compiled by UZABASE based on Ministry of Finance and Government Business Reform Portal
Note: 2015 data is planned equitisation numbers; actual number of equitised SOEs may differ
2017 data is as of 31 August 2017
Target Divestment Revenue for 2016–20 Threatened
Total divestment returns over 2012–16 reached VND 27.5 trillion, exceeding the book value of the
government ownership stake of VND 19.8 trillion by 38.8%. Divestment proceeds for 8M2017 reached
VND 11.8 trillion, exceeding the book value of VND 863.8 billion by 1,267.8%. However, the jump in the
divestment return followed the sale of one of the Vietnamese government’s most prized assets: shares of
Vietnam Dairy Products Joint Stock Company (Vinamilk; listed): Vinamilk shares worth VND 401.2 billion
in book value (equivalent to 2.87% of Vinamilk’s total equity book value) were sold for VND 11.3 trillion
on the stock market. This transaction alone accounted for 95.5% of total divestment returns during the
first eight months of 2017. Further divestment of 3.3% of Vinamilk shares held by the government is slated
for sale later in 2017; this could generate around VND 7 trillion at the current market valuation. By the
end of 2017, the government will have divested 64.0% of its total shareholdings in Vinamilk through its
planned multi-year divestment process.
The slow progress in divestment is clearly reflected in the significant decline in the book value of
government stakes successfully sold. Only government stakes of a book value of VND 863.8 billion in SOEs
have been sold by the end of August 2017, versus a peak VND 9.9 trillion divested in 2015. At the current
rate, total divestment proceeds over 2016–8M2017 account for only 7.6% of the total divestment target
of VND 250 trillion for 2016–20. To expedite both the equitisation of the remaining major corporations
and the divestment processes, the government is expected to announce several measures to force major
SOEs to list on stock exchanges as well as to disclose crucial corporate information to private and public
investors. Without the successful divestment of several key state corporations such as Hanoi Beer Alcohol
and Beverage (Habeco), Saigon Alcohol Beer and Beverages Corporation (Sabeco), Airports Corporations
of Vietnam (ACV), and Vietnam Airlines, among others, it is unlikely that the government’s divestment
target will be achieved by 2020.

9. 09
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Source: Compiled by UZABASE based on Ministry of Finance and various government announcements
Note: 2017 data is as of 31 August 2017
Divestment Schedule for Major SOEs and Potential Divestment Proceeds for 2017–20
Source: Calculated by UZABASE based on Information released by State Capital Investment Corporation, Ministry of Finance,
and the Government of Vietnam
Note: Calculation of values based on current market prices (listed companies) and most recent divestment information
(unlisted companies)
Note: Assuming Habeco divestment schedule follows Sabeco’s divestment schedule
Vinamilk:
VND
11,286
billion
Company
Government
Stake (%)
Government's
Stake Value
(VNDBillion)
2017
Divestment
Stake (%)
2018
Divestment
Stake (%)
2019
Divestment
Stake (%)
2020
Divestment
Stake (%)
Total Potential
Divestment
Proceeds
(VNDBillion)
Post-
divestment
Government's
Stake (%)
Saigon Beer- Alcohol - Beverage Corporation (Sabeco) 89.6% 150,811 53.6% 90,217 36.0%
Airports Corporation of Vietnam (ACV) 95.4% 124,201 20.0% 10.4% 39,578 65.0%
Vietnam Dairy Products (Vinamilk) 39.3% 86,204 3.3% 7,299 36.0%
Vietnam National Petroleum Group (Petrolimex) 75.9% 65,773 24.9% 21,578 51.0%
PetrolVietnam PowerCompany (PV - Power) 100.0% 33,556 49.0% 16,442 51.0%
Vietnam Airlines 86.2% 25,912 35.2% 10,586 51.0%
Vietnam Engine and Agricultural Machinery Corporation (VEAM) 88.5% 16,766 52.5% 36.0% 16,766 0.0%
Hanoi BeerAlcohol and Beverage (Habeco) 81.8% 15,869 45.8% 8,885 36.0%
Vietnam Construction and Import- Export(VINACONEX) 57.8% 5,360 57.8% 5,360 0.0%
Vietnam Steel Corporation (VNSteel) 93.9% 4,776 57.9% 36.0% 4,776 0.0%
Vietnam National Textile &GarmentGroup (Vinatex) 53.5% 3,022 53.5% 3,022 0.0%
FPTCorporation 11.8% 2,772 11.8% 2,772 0.0%
Vietnam Pharmaceutical Corporation (Vinapharm) 65.0% 2,526 35.0% 30.0% 2,526 0.0%
Thieu Nien Tien PhongPlastic(NTP) 37.1% 1,888 37.1% 1,888 0.0%
Bao Minh Corporation (BMI) 50.7% 1,223 50.7% 1,223 0.0%
Thai Nguyen Iron and Steel (TISCO) 35.2% 1,110 35.2% 1,110 0.0%
Binh Minh Plastic(BMP) 29.5% 970 29.5% 970 0.0%
Total Potential DivestmentProceeds (VNDBillion) 542,739 57,252 144,967 10,586 22,193 234,998
% of VND250
trilliontarget
94.0%

10. 10
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
Source: Calculated by UZABASE based on Information released by State Capital Investment Corporation, Ministry of Finance,
and the Government of Vietnam

11. 11
Vietnam’s State-owned Enterprises Divestment Targets: Striking a Delicate Balance
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