Estimation of External Government Debt Thresholds: The Case of Vietnam

Purpose: This paper aims to investigate the nonlinear relationship between government debt and economic growth in Vietnam, specifically identifying the threshold levels at which the impact of debt shifts from positive to negative. Design/methodology/approach: A threshold regression model is employed to analyze the marginal impact of Vietnam's government external debt on GDP growth. The model incorporates various control variables, including total factor productivity, foreign direct investment, private debt, and trade openness. Findings: This research distinguishes itself by focusing on Vietnam's specific context to identify and quantify a precise, non-linear external debt threshold using a threshold regression model, moving beyond general linear assumptions. It provides a quantifiable estimate of debt's impact on growth across varying levels: 36,61% and 78,94%. Moreover, emphasizing the role of moderating factors like productivity, private debt, and trade openness, this research suggests the optimal threshold of public debt-to-GDP ratio for Vietnam is 36.16% represents a critical threshold. Below this level, government debt positively impacts economic growth. However, exceeding this threshold can lead to negative consequences, as total factor productivity and private debt may hinder growth. Research limitations/implications: The study's findings are subject to certain limitations. Firstly, the threshold regression relies on data from 1989 to 2016, which may not fully capture recent economic developments and policy changes in Vietnam. Secondly, while the model incorporates several relevant control variables, it may not account for all potential factors influencing the relationship between debt and growth. Lastly, the study primarily focuses on government debt, neglecting the potential impact of private debt on economic outcomes. Originality/value: This research makes a significant contribution to the literature by applying a threshold regression model to the specific context of Vietnam, thereby identifying empirically derived debt thresholds that delineate the non-linear relationship between external government debt and economic growth. Furthermore, this study goes beyond simply identifying the threshold. It provides a quantifiable estimate of the magnitude of government external debt's impact on economic growth across various debt levels, offering a granular understanding of the sensitivity of growth to debt fluctuations. Importantly, this research underscores the role of critical moderating factors, including total factor productivity, private external debt, and trade openness, in shaping the debt-growth relationship. By explicitly incorporating these variables, the study reveals how these factors influence the threshold and the strength of the debt-growth link. This finding provides nuanced insights into this complex dynamic within a developing economy, offering targeted policy implications for Government external debt management and fiscal policy directly relevant to Vietnam.