What is sovereign guarantee? Conditions for granting sovereign guarantee in Vietnam

What is sovereign guarantee? Conditions for granting sovereign guarantee in Vietnam (Internet image)

1. What is sovereign guarantee?

According to Clause 20, Article 3 of the Law on Public Debt Management 2017, sovereign guarantee means the Government's commitment with the lender to make the repayment of principal and interests in case of borrower’s failure to pay the due debt in full.

Specifically, the borrowers of sovereign guarantees include:

- Any enterprise whose investment projects are subject to investment policy decisions of the National Assembly, the Government, or subject to investment decision of the Prime Minister as prescribed in the Law on Investment 2020 and the Law on Public Investment 2019.

- Any bank for social policies that have carried out state credit program.

(Article 41 of the Law on Public Debt Management 2017)

2. Eligibility for sovereign guarantees in Vietnam

2.1.  Eligibility for granting sovereign guarantees to enterprises in Vietnam

Specifically, in Clause 1, Article 43 of the Law on Public Debt Management 2017, an enterprise is eligible for a sovereign guarantee when it fulfills the following conditions:

- It has legal status, established lawfully in Vietnam and operated for at least 3 years;

- It has not incurred loss for the last 3 consecutive years according to the audit report, except for the loss incurred due to adoption of state policies as approved by competent authority;

- It has no overdue debt when the application for a sovereign guarantee is submitted;

- Its debt-to-equity ratio does not exceed 3 to 1 according to the last annual financial statement of the year of assessment;

- The guarantee amount is within the annual guarantee limit approved by the Government;

- It has completed investment procedures under the investment law and other relevant laws;

- It has the financial plan assessed by the Ministry of Finance and approved by the Prime Minister;

- Its ratio of owner’s equity to total investment of the project is at least 20%. The owner’s equity will be disbursed according to time for performance.

2.2. Conditions for granting sovereign guarantee to a bank for social policies in Vietnam

According to Clause 2, Article 43 of the Law on Public Debt Management 2017, a bank for social policies is eligible for a sovereign guarantee when it fulfills the following conditions:

- It has established and operated as per the law and raised funds in accordance with its charter promulgated by the competent authority;

- The guarantee amount is within the annual guarantee limit approved by the Government;

- The sovereign-guaranteed loan shall be used to carry out the state credit program as prescribed by the Government.

When an enterprise issues sovereign-guaranteed bonds in the domestic capital market, it must both fulfill conditions prescribed in Clause 1 of this Article and obtain an application for issue of bonds as prescribed in laws on securities and relevant law provisions.

(Clause 3, Article 43 of the Law on Public Debt Management 2017)

3. Guaranteed amounts in Vietnam

According to Article 6 of Decree 91/2018/ND-CP, the amounts of sovereign guarantee are regulated as follows:

- With regard to a project of which the investment policy is approved by the National Assembly, or the Government, the guaranteed amount equals the loan principal, or the price of bonds issued, but does not exceed 70% of total investment as defined in the investment decision issued by a competent authority.

- With regard to a project in which investment is decided by the Prime Minister, the guaranteed amount equals the loan principal, or the price of bonds issued, but does not exceed 60% of total investment specified in the investment decision.

- The maximum guaranteed amount for bonds issued by a bank for social policies is 100% of the limit on quantity of government-guaranteed bonds issued with the approval by the Prime Minister under regulations in Article 48 of Decree 91/2018/ND-CP.

Thanh Rin

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