INTRODUCTION
Rationale
Government debt plays a crucial role in financing economic growth for developing countries, serving as a vital source of capital While it can positively or negatively impact economic stability, effective debt management is essential for national development Conversely, poor debt management can lead to severe long-term issues, including high taxation for consumers and uncontrolled inflation.
In recent years, the issue of foreign debt has emerged as a critical challenge for developing countries, particularly highlighted by the Latin American debt crisis of the early 1980s, which destabilized many low-income economies This crisis, often referred to as "The Decade of Loss," traces its roots back to the 1970s when countries like Brazil, Argentina, and Mexico experienced significant growth fueled by large-scale external borrowing intended to bolster domestic industries and infrastructure However, by the 1980s, these nations struggled to manage their escalating debt obligations, with public debt to financial institutions and the World Bank surging from USD 75 billion in 1975 to over USD 315 billion by 1983, reflecting an annual debt-to-GDP ratio increase of more than 20% Additionally, the burden of interest and principal payments rose dramatically, escalating from USD 12 billion in 1975 to USD 66 billion in 1982, exacerbated by the global crisis of 1979.
In the 1980s, developing countries within the OECD, particularly in Latin America, struggled to sustain high economic growth rates as foreign debt surpassed their earnings, leading to a significant decline in actual income and living standards This economic turmoil contributed to the collapse of several dictatorships in the region, including those in Brazil and Argentina The Latin American crisis persisted for several years but began to resolve in the early 1990s, when countries officially marked the end of "the decade of loss," emerging from the debt crisis and entering a new era of recovery.
Vietnam faces a significant demand for loans to support socio-economic and infrastructural projects, but must heed the lessons from the public debt crises in 1980s Latin America The sharp rise in Vietnam's public debt following the 2007-08 global financial crisis—climbing from about 40% of GDP in 2007 to 56.3% by 2010—raises concerns about sustainable long-term growth Despite a slight decrease to 54.9% in 2011, external debt also surged from 32% to approximately 42% of GDP These challenges underscore the urgent need for comprehensive fiscal policy reforms to restore budget balance and ensure economic stability By examining the causes and resolutions of past debt crises, Vietnam can gain valuable insights to effectively manage its public debt and mitigate the risk of a similar crisis, which is why our team has chosen to study the topic "Public Debt Crisis in Latin America in the 1980s and Lessons Learned for Vietnam."
Literature review
Following the debt crisis in the 1980s, there was intensive research on determinants of a sovereign debt crisis According to the study of Schclarek and Ramon- Ballester
(2005), the data of 20 Latin American and Caribbean nations in five years during 1970 –
2002 were separated seven periods which includes every five years.
The ongoing global economic crisis has prompted empirical research into the non-linear relationship between public indebtedness and economic growth Classical economists like Smith, Ricardo, and Mill argued that public debt negatively impacts a nation's economy The Ricardian Equivalence theory posits that financing public expenditure through taxation or borrowing is equivalent, as government bonds represent loans that require future repayment, typically through increased taxes When governments engage in deficit spending, taxpayers anticipate future tax hikes, leading them to save more and reduce current consumption Consequently, the overall effect on aggregate demand mirrors that of immediate taxation, suggesting a neutral impact of public debt on economic growth.
In the IS-LM model, Keynesian economists assert that an increase in government debt from deficit-financed fiscal policy can enhance income levels, transaction demand for money, and prices They argue that private sector decisions may result in inefficient macroeconomic outcomes, necessitating active public sector interventions, particularly through monetary policy by the central bank and fiscal policy by the government, to stabilize output throughout the business cycle.
Harmon (2012) investigates the effects of public debt on key economic indicators—inflation, GDP growth, and interest rates—in Kenya from 1996 to 2011 Utilizing a descriptive research design and simple linear regression models, the study reveals a weak positive correlation between public debt and inflation, while demonstrating negative relationships between public debt and both GDP growth and interest rates.
Ahmad (2012) highlights that inflation poses a significant challenge, particularly in less developed countries Their study employs OLS regression to analyze the impact of domestic debt on inflation in Pakistan from 1972 to 2009 The findings indicate that both domestic debt and its servicing contribute to rising price levels in the country The authors emphasize that floating debt, such as treasury bills, constitutes a substantial portion of total domestic debt, while interest rates associated with domestic borrowing are key factors driving inflation.
Research on the impacts of public debt within the ASEAN region remains limited, with notable studies including Muhammad (2017) Additionally, some authors have concentrated on specific countries, as seen in the works of Muhammad (2008), Pham (2011), and Lee & Ng.
Lau and Baharumshah (2005) examined fiscal sustainability in a panel of 10 Asian countries from 1970 to 2003, including India, Indonesia, Korea, Malaysia, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, and Thailand Their analysis revealed a mean-reverting behavior among these countries using standard panel unit root tests However, when applying series-specific unit root tests, they identified that only four countries—Korea, Malaysia, Singapore, and Thailand—exhibited stationarity, indicating limited evidence of fiscal sustainability across the broader group of Asian nations.
In 2010, a study utilized panel unit root and co-integration techniques alongside a dynamic ordinary least squares (DOLS) model to assess ‘strong’ versus ‘weak’ sustainability in five Asian countries—India, Pakistan, Philippines, Sri Lanka, and Thailand—covering the period from 1974 to 2001 The findings revealed that government revenue and expenditure in these economies were non-stationary and co-integrated, with a co-integration coefficient significantly below unity, suggesting ‘weak’ fiscal sustainability and the need for policy interventions to enhance public finance stability Additionally, Syed et al (2014) investigated fiscal policy sustainability across ten Asian nations, while Bui et al (2015) focused on Vietnam, concluding that the country's public debt and fiscal policy exhibited no sustainability and potential risks.
Research on public debt management in Vietnam indicates that while the government faces significant challenges, optimal solutions remain elusive This study evaluates current debt management techniques, identifying their strengths and weaknesses, and offers recommendations for a more effective and sustainable management system, providing valuable insights for both academic and practical applications.
Objectives of research
- Public debt crisis in Latin America in the 1980s
- Current situation of public debt and public debt management policy in Vietnam
Methodology
- Collect data and information published on the media
- Collect data from professional reports for the period of 2010 - 2017
This article explores the current state of public debt in Vietnam through qualitative research, utilizing data collected from reputable sources such as the World Bank, the International Monetary Fund (IMF), and the Ministry of Finance By processing and analyzing this data, the study aims to draw specific conclusions regarding the implications of Vietnam's public debt situation.
Scope of the research
- Research on a national level in Latin America in the 1980s
- Research on a national level in Vietnam
- Research issues related to the current state of public debt in Vietnam
Research structure
This paper is organized into several key sections: Section 2 discusses the fundamental concepts and theories surrounding public debt, its management, and crises In Section 3, we analyze the causes and effects of the Latin American public debt crisis, along with government responses, to extract valuable lessons for Vietnam Section 4 begins by examining the current situation and adverse effects of fiscal deficits and rising public debt on crucial macroeconomic variables, including economic growth, inflation, interest rates, exchange rates, and trade deficits that Vietnam currently faces or may encounter It also evaluates the risks and sustainability of Vietnam's public debt concerning solvency and macroeconomic stability, identifying potential crises and assessing future sustainability Finally, the research proposes policy recommendations aimed at enhancing transparency, supervision, and management of public debt to ensure Vietnam's sustainable future.
THEORETICAL BASIS
General theory about Public debt
Public debt refers to the various aspects of debt management undertaken by countries, with its interpretation and definition varying based on the specific objectives, scope, and practices of each nation's debt management strategies.
* According to the International Monetary Fund (IMF):
Public debt encompasses the financial obligations of the public sector, including those of the government, local authorities, central banks, and independent organizations, with the state responsible for covering debts in case of default In a more specific context, public debt refers primarily to the liabilities of the central government, local governments, and independent organizations that are backed by government guarantees.
According to the IMF framework, public debt is categorized into the financial and non-financial public sectors; however, the total public debt includes government-guaranteed debts from both sectors This classification results in the exclusion of central bank debt and non-government-guaranteed liabilities of public sector institutions, leading to a potentially misleading representation of the overall public debt figures.
* According to the World Bank (WB):
Public debt is understood as the debt obligation of 4 groups of subjects including:
(1) Debt of the Central Government and central ministries, agencies
(3) Debt of the Central Bank
The government is responsible for the debt of independent organizations in which it holds over 50% of the capital In instances of default, the state is obligated to cover the debt on behalf of these entities.
Thus, we can see the concept of public debt of the World Bank is the concept of public debt most fully.
*According to the Law on public debt management issued by the Vietnamese government in 2017:
"Public debt prescribed in this Law includes government debt, guaranteed government debt and local government debt." In which the Law stipulates:
- Government debt is a debt arising from domestic and foreign loans which is signed and issued on behalf of the State and on behalf of the Government.
- Government-guaranteed debt is a loan guaranteed by the State's policy-making enterprises or policy banks.
- Local government debt is a debt incurred by the provincial People's Committee.
Vietnam's Public Debt Management Law 2017 defines public debt more narrowly than the definitions provided by the IMF and World Bank, excluding central bank debt and state-owned enterprise debt Consequently, discrepancies may arise when comparing Vietnam's public debt reports with those from international organizations.
2.1.2 Economic nature and impact of Public debt on the economy
Public debt arises when a government's total revenue falls short of its total expenditures, leading to a budget deficit To address this issue, the government faces the challenge of either reducing spending or enhancing budget revenues While cutting spending can be difficult in the short term, governments frequently opt to increase revenue as a more viable solution.
The government increases its budget revenue primarily through tax hikes, which, while serving as the largest source of income, can negatively impact consumption and labor dynamics, potentially triggering an economic recession Additionally, the government borrows both domestically and internationally via the central bank, issuing shares or bonds to investors, which raises public debt and contributes to budget deficits.
From the economic nature of public debt, we consider the impact of public debt on the economy in two directions: positive and negative.
Public debt plays a crucial role in meeting domestic capital demands and ensuring social security, particularly in the early stages of development where it complements private investment with foreign loans for socio-economic growth Additionally, it provides a timely solution for government budget overspending, as alternatives like tax increases and spending cuts take time to implement, while printing money risks inflation Furthermore, issuing bonds or government shares allows the government to effectively manage monetary policy and facilitates investment, thereby enhancing a country's integration into the global capital market without compromising domestic investment or expenditure.
Public debt can destabilize macroeconomic conditions, as excessive foreign loans may weaken a nation's international standing and cause fluctuations in domestic exchange rates Additionally, domestic borrowing can drive up interest rates, increase investment costs, and diminish investment incentives, potentially leading to an economic recession The resulting high interest rates, coupled with inflation and exchange rate volatility, can exacerbate trade deficits When public debt becomes unsustainable, it risks triggering a public debt crisis, which can escalate into a monetary and economic crisis that impacts not only the affected country but also regional economic unions and, ultimately, the global economy.
Public debt can be classified into two categories: domestic and foreign loans, reflecting both geographical factors and cash flow movements In many countries, including Vietnam, there is often a focus on foreign debt while neglecting domestic debt, leading to inaccuracies in public debt statistics This oversight complicates the ability of managers to effectively control and address emerging financial issues.
According to Vietnam's Public Debt Management Law (2017), public debt has been divided into three categories:
Government debt encompasses various forms of borrowing by the state, including debt instruments issued by the government and loans secured through domestic or international agreements It also includes central budget debt sourced from the state's financial reserve fund, as well as from both the state budget and off-budget financial resources.
- Debts guaranteed by the Government include: Debts of enterprises guaranteed by the Government; the liabilities of the State policy bank are guaranteed by the Government.
Local government debts encompass various financial obligations, including those arising from the issuance of municipal bonds, loans from the State policy bank, provincial financial reserve funds, and the state budget Additionally, these debts may include liabilities related to on-lending of Official Development Assistance (ODA) and concessional loans, all governed by the legal framework of state budget regulations.
To maintain a stable economy, it is crucial for the government to keep the public debt ratio under control Effective forecasting and planning by debt and budget managers play a vital role in achieving macroeconomic stability Understanding the factors influencing public debt is essential for timely prevention and resolution of instability issues arising from these factors.
Public debt is intricately linked to the budget balance, as a budget deficit directly indicates the level of a country's public debt When the deficit decreases, it leads to a reduction in loans, which in turn results in a decrease in public debt.
Market interest rates significantly influence government debt, as fluctuations in these rates can alter the value of loans When interest rates rise, it becomes more challenging for the government to secure loans, potentially jeopardizing its ability to repay debts punctually Conversely, a decrease in interest rates can enhance the government's borrowing capacity, affecting overall debt management.
Public debt Management
Public debt management involves creating and implementing a strategy to effectively manage government debt, aiming to secure necessary funding at minimal cost over the medium to long term while maintaining an acceptable level of risk Additionally, it seeks to fulfill other objectives set by the government, such as fostering a robust and efficient market for government securities.
2.2.2 The importance of Public debt management
The first role is to make sure that debt can be serviced under a wide range of circumstances, including economic and financial distresses, provided meeting debt’s cost and risk objectives.
In the realm of public policy, it is crucial for debt managers to align their priorities with those of fiscal and monetary policy authorities Key concerns include ensuring debt sustainability, understanding government financing needs, and managing borrowing costs effectively.
The second role involves making policy choices related to preferred risk tolerance, government balance sheet management, contingent liabilities management, and effective governance for debt management The primary objectives of these choices are to minimize vulnerability to contagion and financial shocks.
Poorly structured debt portfolio often leads to crises For example:
An excessive emphasis on potential cost savings from debt issuance leads to an increased reliance on short-term or floating rate debt This approach can result in challenges when the country's creditworthiness fluctuates, necessitating debt refinancing and subsequently intensifying exchange rate and monetary pressures.
- A debt portfolio that is robust to shocks places the government in a better position to effectively manage financial crises.
Government debt portfolio is usually the largest financial portfolio with complex and risky structure, thus has substantial risk to overall financial stability Hence, sound risk management practices are essential.
Effective macroeconomic policies are crucial, as risky debt management practices can heighten an economy's susceptibility to financial shocks While government debt management may not be the primary cause of economic crises, factors such as the maturity structure, interest rate, and currency composition of government debt, along with significant explicit and implicit contingent liabilities—particularly concerning the financial sector—have exacerbated the severity of these crises.
Public debt crisis
The public debt crisis occurs when government debt escalates beyond manageable levels, making regulation and repayment challenging Unpaid debt, exacerbated by compound interest, intensifies the situation, and prolonged budget deficits can lead to severe economic recession.
2.3.2 Causes of Public debt crisis
* Double liabilities and poor management
The primary driver of the public debt crisis is the accumulation of unpayable debt, where existing debts compound upon each other, leading to escalating interest This growing debt burden leaves debtors with no viable options to lower interest rates or extend repayment terms, making it increasingly difficult for them to settle their obligations.
During the 1960-1970 period, poor government management in Western countries was highlighted by an inability to control loans and public expenditures This issue was particularly pronounced in low-income and poorly managed nations, where corruption among certain groups led to prioritizing exports and resulted in a significant outflow of money, surpassing the inflow of funds into these countries.
Government loans often lack public support and may stem from inherited debts from previous administrations Many developing nations began their journey to independence burdened by substantial debts, often resulting from the impacts of war.
Economic decisions, contracts, treaties, and international organizations play a crucial role in shaping globalization, primarily benefiting wealthy nations While many countries struggle with poverty and debt, a select few enjoy significant wealth This disparity is not coincidental; affluent countries have implemented policies that elevate living standards, albeit at a considerable cost Although rich nations also face debt, they possess greater resources and strategies to mitigate risks compared to their poorer counterparts.
2.3.3 Consequences of Public debt crisis
The consequences of the debt crisis will not only affect the target countries of the borrowing countries, but will also affect the lending countries.
The debt crisis acts as a seismic shock to a nation, triggering widespread economic turmoil It leads to a recession characterized by high inflation, declining GDP, stagnant production, and rising unemployment rates.
The instability of the economy often results in political turmoil, which drives developing nations further into dependence on capitalist countries This dependence can lead to political interference from these capitalist nations, ultimately undermining local government policies and exacerbating economic challenges As a consequence, many individuals in these regions find themselves trapped in extreme poverty.
During the debt crisis, capitalist economies face significant challenges when major debtors declare bankruptcy, leading to substantial losses for their governments and hindering economic growth This situation underscores the European Union's ongoing efforts to support Greece, the largest debtor Furthermore, indebted borrowers often attempt to reduce spending by cutting imports, which negatively impacts capital revenues and contributes to rising unemployment rates.
When a debtor faces a debt crisis, reduced liquidity hampers the circulation of market goods This situation becomes more critical if the debtor's debt constitutes a significant portion of their economy, potentially triggering a domino effect that results in widespread bankruptcies Such a chain reaction can lead to the collapse of international organizations and ultimately spark a global economic crisis.
LATIN AMERICAN PUBLIC DEBT CRISIS IN THE 1980S
Causes of Latin American Public debt crisis
The Latin American crisis, due to its extensive scale and significant repercussions, has been a focal point for economists and politicians alike Researchers have identified various causes for this crisis, and in this essay, we will summarize the key factors that we believe had the most substantial impact on the public debt crisis in the region.
*Inefficient economic structure and the foreign capital dependence
In the 1980s, Latin American nations, characterized by low GDP of approximately $4,014 per year, relied heavily on oil exports for income Despite initial revenue boosts from soaring oil prices, inefficient economic models and poor macroeconomic management led to unmet development expectations and a public debt crisis The government's protectionist policies stifled self-development in key sectors, resulting in slow growth and ineffective loan utilization A stagnant financial market increased demand for bank loans, while low interest rates set by state banks distorted supply and demand dynamics Consequently, governments turned to foreign borrowing to meet this demand Misguided investments in industrialization exacerbated the situation, as importing materials shifted these nations from trade surpluses to deficits, leading to significant current account deficits Ultimately, excessive government intervention in industrialization failed to stimulate economic growth, resulting in negative growth rates and increased foreign debt.
Figures 3-1: Latin American external debt and reserve.
From the weak economic governance that led to high demand for foreign debt, Latin American countries became too dependent on foreign investment Since World War
Between 1975 and 1980, foreign investment in the region increased from 19% to approximately 23%, primarily driven by short-term investments However, as the economy began to decline in the early 1980s, there was a significant exit of foreign capital, resulting in a drop in foreign investment to 17% by the 1990s This reliance on borrowing left Latin America vulnerable, leading to a rising risk of default and creating a shock to the regional economy.
Figures 3-2: Latin American Total debt, Total debt service and Interest
*The impact of export deficit
The public debt crisis in Latin America surged due to increased borrowing needs for government purchases and private sector demands Additionally, during the 1970s and 1980s, Latin American economies primarily relied on oil exports However, following the initial oil price shock, importing countries implemented trade protection policies that restricted imports to boost domestic production, significantly impacting the oil export volumes from Latin America, particularly in Mexico.
Figures 3-3: Mexico Crude oil prices from 1861 to 2011.
In the early 1980s, Latin America's export sector faced significant challenges due to international trade policies and rampant inflation, primarily caused by the reliance on the USD for currency valuation As the USD strengthened amid the U.S deficit, Latin American currencies followed suit, leading to skyrocketing inflation rates, particularly in Mexico, where it soared to 27% in 1981 This inflation adversely affected export revenues, resulting in a decline in income and a worsening current account deficit Consequently, countries in the region struggled to utilize foreign currency earnings to service their foreign debts, ultimately leading to widespread insolvency and a public debt crisis across several nations.
*The wrong investment decision of the Europe and the USA
The influx of foreign capital into Latin America indirectly triggered a public debt crisis in the region Following the initial shock of rising oil prices, OPEC nations experienced a current account surplus, channeling substantial profits from oil exports into European and U.S banks These banks targeted Latin America for investment, drawn by the region's status as a major oil exporter with promising profit potential and perceived credit safety However, they overlooked the fragile economic structures and development trajectories of these countries, which were evident in the late 1960s Misguided microeconomic policies and ineffective loan usage led to budget deficits and insolvency Furthermore, the assumption that governments could not become insolvent and that public debt was inherently safe proved erroneous, especially for transitioning nations in Latin America The banks' hasty capital withdrawal upon detecting signs of economic decline left these emerging economies vulnerable, exacerbating the public debt crisis.
*The increase several times of real value of the loan due to the appreciation of the dollar.
Many Latin American countries faced significant public debt challenges, primarily due to debts denominated in dollars with floating interest rates tied to LIBOR By 1978, the US budget deficit caused the LIBOR rate to surge from 9.5% to 16.6%, resulting in a rise in the USD price and the real value of dollar-denominated credits This escalation led to higher interest rates, making debt obligations increasingly burdensome and ultimately prompting governments to declare insolvency.
Progressions of the Latin American Public debt crisis
In the 1970s, two significant oil price shocks led to current account deficits in numerous Latin American countries, while oil-exporting nations experienced current account surpluses During this period, large US money-center banks were encouraged by the government to act as intermediaries between these two groups, offering a secure and liquid environment for the funds of exporting countries and subsequently lending those resources to Latin American nations (FDIC 1997).
The surge in oil prices during the 1970s prompted numerous Latin American countries to seek additional loans to manage the escalating costs, with some oil-producing nations incurring significant debt for economic development, anticipating that sustained high prices would enable them to repay their obligations Consequently, Latin America's borrowing from US commercial banks and other creditors saw a marked increase, with total foreign debt rising from $29 billion at the end of 1970.
In 1978, foreign direct investment (FDI) in Latin America surged to $159 billion, escalating to $327 billion by 1982 By that same year, nine major US money-center banks significantly contributed to the debt of Latin America and other developing nations, which accounted for 176% and 290% of their total capital, respectively.
Figures 3-4: Total Debt and Public Debt by Region
In 1979, rising interest rates in the US and Europe led to increased debt payments, creating significant challenges for borrowing nations in repaying their debts Additionally, the decline in exchange rates against the US dollar further exacerbated the financial struggles of Latin American governments.
2 FDIC (1997), The LDC Debt Crisis, An Examination of the Banking Crises of the 1980s and Early 1990s, Federal Deposit Insurance Corporation
In the context of the developing country debt crisis, many nations experienced a significant devaluation of their currencies, leading to a loss of purchasing power Concurrently, global nominal interest rates surged, contributing to a worldwide recession in 1981 As a result, Latin American countries recognized that their debt burdens had become unsustainable.
In August 1982, Mexico's Minister Jesus Silva Herzog announced that the country could no longer service its $80 billion debt, leading to a significant reduction or halt in new lending to Latin America by commercial banks The situation worsened as many loans, primarily short-term, faced immediate repayment demands due to the refusal of refinancing This debt crisis quickly spread to other countries, including Argentina, Bolivia, Brazil, and Ecuador, creating a widespread economic turmoil across the Latin American region.
The 1980s, often termed the "lost decade" for many Latin American countries, saw these nations struggle to service their foreign debt, leading to a significant public debt crisis that adversely affected both debtor and creditor economies Major creditors, primarily European and American state banks and governments, faced heightened credit risks, which destabilized their financial systems This crisis not only crippled Latin America's economy but also restricted future borrowing, as global banks classified these countries as high-risk for loans Additionally, Latin American nations experienced severe setbacks in international trade, as creditors imposed economic sanctions, blockades, and confiscated assets abroad.
Impacts of the Latin American Public debt crisis
3.3.1 Impacts on the Latin American countries
During the debt crisis, the peso experienced a nearly 50% devaluation against the US dollar, leading to soaring inflation rates that reached 100% and triggering a recession In 1982, the economy contracted by 0.6%, followed by a significant decline of 4.2% in 1983 As a result, real GDP per capita dropped by 3% in 1982 and 6% in 1983, with a total decrease of 11% over the subsequent five years Additionally, real wages plummeted by approximately 30%, while unemployment surged, particularly in rural areas The economic downturn was exacerbated by contractions in both investment and consumption in 1982.
Following the peso devaluation in February 1982, Mexico experienced a significant increase in net exports, which became the sole positive factor for economic growth However, in the subsequent five years, the country's terms of trade plummeted by 42.2% By the end of 1986, Mexico was burdened with a staggering foreign debt equivalent to 78% of its GDP, while inflation soared beyond 100% The collapse of world oil prices in the same year further hindered economic performance Between 1983 and 1988, Mexico's real GDP growth averaged a mere 0.1% annually, leading to the characterization of the 1980s as the "lost decade."
Figures 3-5: Decomposition of economic growth (Source: OPEC)
4 Buffie, E.F (1989), Mexico 1985-86: From Stabilizing Development to the Debt Crisis
The 1982 debt crisis marked the most severe economic downturn in Latin America's history, characterized by plummeting incomes and imports, stagnant economic growth, and soaring unemployment rates This turmoil led to significant inflation, which diminished the purchasing power of the middle class, profoundly impacting their financial stability over the subsequent decade.
In 1980, real wages in urban areas experienced a significant decline of 20 to 40 percent, while investment funds that could have been allocated to tackle social issues and poverty were redirected towards debt repayment.
Years of accumulating external debt, rising global interest rates, and a worldwide recession led to a sharp increase in external debt payments for Mexico, particularly following the sudden devaluation of the peso Since November 1982, various debt restructuring strategies, including the Baker and Brady plans, have been implemented Notably, under the Brady plan, US banks took on the losses associated with Mexican debt, while the IMF provided three financial packages that were paired with essential structural reforms.
3.3.2 Impacts on the global economy
The 1980s crisis highlighted the shortcomings of an advanced international financial architecture, which ultimately burdened Latin America with unsustainable external debt and led to excessively contractionary macroeconomic policies This public debt crisis not only severely impacted Latin American nations but also had significant repercussions on the global economy.
In the 1980s, Western banks, particularly in the US and UK, faced potential bankruptcy if Latin American countries halted debt payments In response, the IMF and later the World Bank provided bailout loans, marking a historic shift as Latin American nations did not resort to defaulting on their debts Jose Antonio Ocampo, a former Colombian finance minister, criticized this approach, stating it effectively addressed the US banking crisis but poorly managed the Latin American debt crisis.
5 Ferraro, Vincent (1994) World Security: Challenges for a New Century
The current situation in Europe indicates that lessons from past crises remain unheeded, as those in authority prioritize the protection of banks over the broader implications for society.
Latin America is not alone in experiencing the detrimental effects of "unfettered global finance," a term coined by economics professor Stephany Griffith-Jones Throughout the 1980s, 1990s, and into the 2000s, many African nations faced a debt-induced depression This turmoil was mirrored by the Asian financial crisis in the late 1990s, followed by similar crises in Russia, and more recently, the financial challenges faced by the US and Europe.
The reactions and solutions of Latin American countries to the crisis
3.4.1 The reactions of Latin American countries to the crisis
* Phase 1 (From before the crisis - 1985)
During this period, significant macroeconomic changes occurred as economists and policymakers anticipated a swift crisis resolution with signs of economic recovery Efforts to form a union among regional creditors culminated in the 1984 conference in Cartagena, Chile, which led to the postponement of debts for Bolivia and Ecuador However, major debtors like Mexico, Brazil, and Venezuela continued direct negotiations with their banks, while Argentina remained inflexible This lack of consensus among countries, each seeking independent debt solutions, contributed to a deepening crisis in Latin America.
The debt crisis progressed to its second phase with the launch of the first Baker Plan in Seoul, aimed at reforming lending laws and introducing a comprehensive credit package However, the initial bailout proved insufficient to fully address the crisis Over the following two years, the second Baker Plan was implemented, which introduced innovative measures for facilitating debt repurchase and exchange, as well as enabling the issuance of low-interest bonds.
*Phase 3 (starting in March 1989, almost seven years after the start of the crisis)
Phase 3 began with the Brady Plan, which involved reducing the debt balance, along with facilitating the Latin American region to borrow from international private sources. This was the last stage of the crisis, and Latin American countries also gradually recovered their economy However, a decade of crisis recession reduced the region's contribution to world GDP by 1.5%, along with a regional GDP per capita of 8% lower than that of industrialized nations and 23% compared to the average of whole world
3.4.2 The measures of Latin American countries to the crisis a) Short-term measures
Commercial banks implemented bridge loans as a preventive measure, enabling countries to continue paying interest on existing loans despite being unable to repay the principal These loans essentially acted as new financing to help sovereigns meet their interest obligations To maintain fairness, each bank contributed a predetermined percentage of its outstanding loans to the debtor nation, thus safeguarding their interests This arrangement allowed banks to classify the loans as assets, as the borrowing nations had not fully defaulted Without this provision, regulatory rules would have forced banks to label loans as "nonperforming" if interest payments were over ninety days late, which would have negatively impacted their financial health.
During the 1982 debt crisis, nine major banks faced a precarious situation, having lent out 250% of their capital to sovereign borrowers To avoid potential defaults and safeguard their own financial stability, these banks prioritized ensuring that debtor nations continued to make at least interest payments on their loans Consequently, in response to the crisis announcement, many large banks opted to extend new loans, aiming to mitigate their losses and prevent a total default by these nations.
In the face of falling economic growth rates and rising inflation, the “Baker plan” was implemented in 1982, proposed by US Treasury secretary Baker (Van Wijnbergen,
In 1991, high-debt countries were offered new access to medium-term loans in exchange for implementing economic reforms, which included the rescheduling of old loans The Paris Club, an informal group of financial officials from Western economies, played a significant role in restructuring Mexico's sovereign debt in June 1983 Despite the hope that restored access to capital markets would enable debtors to grow out of their debt, Mexico experienced increased capital outflows, soaring inflation, and declining investments From 1982 to 1988, Mexico saw no economic growth, leading to an external debt that reached 78% of GDP by 1987, highlighting the failure of these economic strategies.
In September 1989, the "Brady Plan" was established, officially recognizing the concept of debt relief for Latin American countries At that time, it was believed that US banks were capable of managing the anticipated losses associated with this debt The plan aimed to make debt relief more palatable for commercial bank creditors by proposing a reduction in the debt amount, ensuring a more sustainable financial future for the affected nations.
11 Van Wijnbergen (1991), Mexico and the Brady Plan, Economic Policy, World Bank.
In 1990, Tammen highlighted the precarious nature of sovereign lending and its implications for the Brady Plan, emphasizing the need for safer payment streams in exchange for unserviceable claims The Mexican government, along with the Bank Advisory Committee representing commercial bank creditors, reached an agreement on a financing package to restructure approximately USD 49.8 billion of Mexico's external debt for the period of 1989-1992 This restructuring primarily focused on long-term debt with commercial banks, affecting about half of the total debt The involved commercial banks were presented with three options for managing their claims.
1 Banks could exchange old loans for new bonds at a discount of 35% of their face value, keeping interest rates at market levels (equivalent to LIBOR + %)
2 Banks could exchange old debt for face-value new bonds (called par bonds) bearing fixed interest rates of 6.25%
3 Banks could provide additional loans over the next three years equivalent to 25% of the banks’ initial medium- and long-term loans, which implied no debt relief but the provision of new money
Most banks opted for par bonds (47%), indicating a reduction in interest rates, while 40% chose to lower the principal, and 13% offered new loans Additionally, an agreement with the Paris Club addressed USD 2.6 billion in principal and interest payments due between 1989 and 1992 The "Brady Plan" significantly enhanced Mexico's capacity to manage its external debt by decreasing both interest and principal payments.
In December 1982, Mexico implemented significant structural reforms as a prerequisite for securing an IMF loan These reforms encompassed fiscal austerity measures, the privatization of state-owned enterprises, the reduction of trade barriers, and industrial deregulation.
In 1983, the budget deficit significantly decreased from 17.6% to 8.9% due to strict fiscal discipline and effective debt restructuring measures implemented by the US Treasury Department This fiscal austerity was complemented by a stringent monetary policy, fostering an environment conducive to foreign investment liberalization.
Mexico underwent significant trade reform, reducing import quotas on domestic non-oil tradable production from 100% in 1984 to under 20% by 1991, alongside cuts to maximum import tariffs Consequently, non-oil merchandise exports surged, now comprising two-thirds of total exports.
1989, foreign investment regulations were considerably relaxed and made more transparent.
The tax system in Mexico underwent significant reforms aimed at encouraging capital inflows and increasing penalties for tax evasion Additionally, the government initiated financial market liberalization by removing ceilings on commercial banks' deposit interest rates and abolishing the forced allocation of credit to preferred sectors The privatization of commercial banks, which had been nationalized in 1982, was also a key development However, delays in banking sector reforms persisted, leading to inadequate supervision despite government guarantees on deposits and liabilities.
Firstly, Latin American countries have had reasonable public debt treatment.
Developing countries should prioritize establishing rational economic structures, focusing on capital investment, and implementing clear repayment plans to manage debt effectively It is crucial to avoid borrowing for inefficient projects and to steer clear of excessive short-term borrowing, as these practices can lead to significant economic instability The rapid withdrawal of short-term investments can create severe imbalances, making over-reliance on public debt a highly risky strategy.
Secondly, they improve foreign currency loans and inflexible exchange rate policy.
Achieved result
Developing countries are often characterized by high levels of debt, as noted by Moore & Thomas (2010) When government debt is utilized effectively to enhance the nation's productive capacity, it can significantly boost economic growth Their meta-analysis reveals a strong positive correlation between debt and economic growth, highlighting the potential benefits of strategic debt management.
Egbetunde (2012) investigated the relationship between public debt and economic growth in Nigeria from 1970 to 2010 using a Vector Autoregressive (VAR) model The findings revealed a bi-directional causality between public debt and economic growth, indicating that each influences the other The study concluded that the relationship is positive only when the government manages loans transparently and utilizes them effectively for economic development.
Al-Zeaud (2014) investigates the effects of public debt on Jordan's economic performance from 1991 to 2010, revealing through OLS estimation that public debt significantly contributes to economic growth, whereas population growth adversely affects it The study suggests that for sustained economic growth, the Jordanian government should leverage the benefits of public debt while mitigating the challenges posed by population growth.
On the 10th anniversary of the debt crisis, observers are hesitant to label the period as a lost decade Jaime Pellicer, a debt expert at the Center for Latin American Economic and Monetary Studies, emphasizes that this decade has been one of preparation and learning, providing Latin America with a new foundation for economic growth.
16 Moore, W., & Thomas, C (2010) A meta-analysis of the relationship between debt and growth.
17 Al-Zeaud, H.A (2014) Public debt and economic growth: An empirical assessment.
Governments have discovered the art of effective governance by prioritizing key areas, delegating responsibilities to private enterprises, and maximizing the impact of limited financial resources.
Latin American officials assert that the shift towards export-driven growth, primarily led by private initiative, is a more robust foundation that is yielding positive outcomes Notably, manufactured goods now represent over 50% of Mexico's exports, a significant increase from approximately 20% in 1983.
Recent signs indicate that workers in export-oriented industries are starting to see improvements, though they have not yet regained the purchasing power lost over the last decade In Mexico, while the minimum wage remains below inflation levels, unionized workers have experienced better contract terms in the past three years President Carlos Salinas de Gortari emphasized that unlike the unsustainable wages of 1981, which were funded by foreign debt, current wages are supported by domestic savings, making them more sustainable.
In order to empirically examine the highly disputed the nexus between sovereign debt and economic growth for 20 developed countries over the periods 1954 – 2008 and
From 1905 to 2008, Lof and Malinen (2014) utilized panel vector autoregressions (panel VAR) to analyze the relationship between public debt and economic growth Their findings indicate that public debt does not significantly affect growth, even at elevated levels Conversely, they discovered a noteworthy negative reverse effect, where economic growth adversely influences public debt levels.
Puente-Ajovin and Sanso-Navarro (2014) explore the relationship between national debt—including public, non-financial corporate, and household debt—and economic growth across 16 OECD countries from 1980 to 2009, utilizing bootstrap methods for their analysis.
18 Lof, M., & Malinen, T (2014) Does sovereign debt weaken economic growth?
19 Puente-Ajovin, M., & Sanso-Navarro, M (2014) The causal relationship between debt and growth: evidence from OECD
Granger causality test, the estimated results show government debt does not cause the growth of real GDP per capita Furthermore, the economic growth negatively influences government debt
A study by Zouhaier and Fatma (2014) employed a dynamic panel GMM estimator to analyze the impact of debt on economic growth across 19 developing countries from 1990 to 2011 The findings reveal a significant negative relationship between debt levels and economic growth in these nations.
The impact of the world recession on developing countries was significant, with a reported average decline of 1 percent in export values during 1981-1982, as stated by William R Cline of the Institute for International Economics This period also saw Eurodollar interest rates soar to an average of 15 percent, contrasting sharply with the 23 percent average annual growth in developing country exports between 1976 and 1980, when Eurodollar interest rates were only 9 percent.
Latin American economies experienced modest growth of only 1.6 percent last year, as reported by a recent Inter-American Development Bank survey, reflecting a challenging new economic environment Mr Kuczynski aptly summarized the situation by stating, "The music has stopped."
The 1982 debt crisis marked the most severe economic downturn in Latin America's history, leading to significant declines in incomes and imports, stagnation of economic growth, and soaring unemployment rates Over the decade following 1980, real wages in urban areas plummeted by 20 to 40 percent, severely impacting the middle class's purchasing power Furthermore, crucial investments that could have alleviated social issues and poverty were diverted to debt repayment, exacerbating the region's economic challenges.
VIETNAM PUBLIC DEBT AND LESSON FROM LATIN AMERICAN
Current situation of Vietnam public debt
In developing countries like Vietnam, borrowing serves as a crucial mechanism for financing capital, fulfilling investment needs, and promoting production growth during times of low economic accumulation However, if debt is mismanaged and borrowed funds are allocated inefficiently, it can lead to a significant future burden, jeopardizing the sustainability of the economy.
With the development of the economy, Vietnam's public debt rose up very fast in
2010 – 2016, but tends to decrease in the recent years.
Figures 4-6 Total public debt of Vietnam period 2010 - 2018
Between 2010 and 2012, Vietnam's public debt saw a decline from 56.3% to 50.8% of GDP, according to a report by the Ministry of Finance However, by 2016, this figure rose significantly to 63.7% of GDP, nearing the National Assembly's public debt ceiling of 65% In 2017, public debt remained high at 61.3% of GDP.
Year Public debt Year Public debt
Tables 4-1 Total public debt of Vietnam (billion VND)
The scale of public debt in 2017 was more than 3.130 million billion VND, nearly 3 times in 2010 (1.12 million billion), nearly 8 times in 2006 and 18 times more than the year
Between 2011 and 2015, the average annual growth rate of public debt was 16.3%, significantly outpacing the economic growth rate by nearly three times Despite this rapid increase, the rate of public debt growth began to decline, with a 3% rise in 2014 followed by a more modest 2.7% increase in 2015.
Figures 4-7 Public debt in Asian developing countries
Vietnam's public debt calculations differ from global standards, leading to variations in reported figures, particularly as the public debt-to-GDP ratio fluctuates over time due to factors like exchange rate impacts According to IMF data, the scale of Vietnam's public debt reflects these complexities.
As of 2014, Vietnam's public debt reached over 60% of GDP, marking the highest rate among developing countries in the region In contrast, many neighboring nations, such as Indonesia, maintain a significantly lower public debt, around 25% of GDP From 2010 to 2017, Vietnam's public debt rose by 5%, from 56.3% to 61.3%, while Cambodia's debt increased only slightly by 1.6% Other countries experienced varying increases, with the Philippines seeing an 11.9% rise Although ad-hoc measures and privatization receipts may help keep Vietnam's debt below 65% in the near to medium term, without further consolidation efforts or in the event of economic shocks, the country risks breaching its debt limit within a few years.
In Vietnam, public debt is primarily composed of government debt, accounting for 85.6%, and government-guaranteed debt, which makes up 13.5% as of 2018 While local government debt is gradually rising, it remains relatively low at around 1% of the total public debt The proportion of government debt within the overall public debt has been stable, fluctuating around 80% with a slight upward trend.
Figures 4-8 Structures of total public debt
Along with the increase in public debt, the structure of Vietnam’s public debt has also changed
The proportion of domestic debt to total public debt increased from 44.4% in 2010 to 55.4% in 2018.
Figures 4-9 Structure of total public debt
In government debt, the proportion of foreign debt decreased, in the period from
2010 to 2016, decreased from 59.8% to 48.1% Because of the increasing demand for capital, while the access to foreign capital is limited, the Government has to rely mainly on domestic loans.
Figures 4-10 Structure of Government debt
In contrast, the foreign debt in the Government-guaranteed loan balance increased,replacing domestic debt.
Figures 4-11 Structure of Government-guaranteed debt
As of the end of 2016, commercial banks held 55.4% of Vietnam's government bonds, primarily in the form of domestic debts This concentration poses two significant risks: first, a potential decline in the sustainability of commercial banks due to sudden drops in government bond values, which can adversely affect their asset summaries; and second, increased challenges for private enterprises, particularly small and medium-sized businesses, in obtaining affordable credit Between 2011 and 2013, most government bonds had short to medium terms of three years or less, with five-year bonds averaging over 10% interest, leading to heightened payment pressures from 2014 to 2016 Currently, however, all government bonds have maturities exceeding five years, with an average maturity of 13.52 years and an average interest rate of 6.07% per year.
Vietnam's access to international capital markets has primarily relied on ODA and concessional loans from governments and financial institutions However, since becoming a middle-income country in 2010, ODA loans have declined significantly According to Mr Trương Hùng Long from the Finance Ministry’s Department of Debt Management and External Finance, loan repayment terms have decreased from 30 to 40 years to just 20 to 25 years, and in some cases, even down to a decade Additionally, interest rates on these loans have more than doubled, increasing from under one percent to over two percent, which intensifies the pressure on ODA loan repayments The rise in private commercial borrowing is largely attributed to foreign direct investment (FDI) enterprises.
Access to international capital markets in the form of commercial loans is quite limited and mainly through the Government's international bond issuance
4.1.3 The cause of the increase in Vietnam public debt
Vietnam's significant public debt is primarily attributed to an increasing fiscal deficit, driven by a substantial rise in recurrent expenditures and ineffective public investment projects initiated by state-owned enterprises in recent years.
Figures 4-12 Fiscal balance of Vietnam (%)
Between 2010 and 2019, Vietnam experienced a significant fiscal deficit, with government spending consistently exceeding revenue Although revenue has steadily increased, the gap between expenditure and revenue has widened, particularly after 2011 The country is currently attracting substantial foreign direct investment (FDI), leading to increased fiscal spending on infrastructure during this rapid development phase However, this pace of expenditure growth may not be sustainable in the long term, as public administration has increasingly comprised a large share of public spending in recent years.
Over the past few decades, Vietnam's economic structure has undergone significant changes, with agriculture experiencing a decline while the industrial and service sectors have seen substantial growth This shift can largely be attributed to foreign direct investment (FDI), which has enhanced the manufacturing industry's share within the economy Additionally, increased public investment in infrastructure and industrial bases has contributed to this transformation, resulting in higher public expenditures and private borrowing.
Until 2012, the Vietnamese government primarily relied on domestic debt to finance its budget deficit, with over 70% of total government debt sourced from domestic resources between 2000 and 2008 However, the global financial crisis and a growing trade deficit eroded confidence in the currency, prompting significant capital outflows as residents converted their VND assets into foreign currency or gold This led to a drastic decline in international reserves and a depreciation of the exchange rate, causing Vietnam's external debt to surge more than 7.5 times, escalating from 19,668 billion VND in 2008 to 1,647,124 billion VND.
2012 Even though, foreign borrowing has already exceeded by 1.75 times compared to domestic borrowing in 2013
Vietnam's public debt rose significantly from around 40% of GDP in 2007 to about 56.3% by the end of 2010, largely as a result of the global financial crisis of 2007-2008, before experiencing a slight decline to 54.9% of GDP in 2011.
The debt service principal amount has increased by 3 times from 62.6 trillion VND in 2010 to 187,9 trillion VND in 2014 The volume of rollover was 260.8 trillion VND in
In 2014, the total value of bonds reached 288.7 trillion VND, primarily due to the issuance of short-term bonds with maturities ranging from 1 to 3 years since 2009 As these bonds began maturing in 2011, the total principal payments surged The introduction of short-term bills with 3-6 month maturities further contributed to this increase Although the issuance of long-term bonds has been encouraged, particularly following the National Assembly's Resolution No 78/2014/QH13, which aimed to limit government bonds to under 5-year maturities starting in 2015, the demand for long-term bonds remains significantly low.
Tables 4-2 Public debt payment using budgetary expenditure (billion VND)
Interest payments have significantly impacted budget expenditures, rising from 3.2% in 2010 to 6.8% in 2015, effectively doubling in volume during this period This substantial allocation for interest payments often overshadows funds available for development investments, largely due to the high public debt ratio Additionally, expenditures on education, pensions, social security, and public administration are considerable, with pension costs particularly escalating due to Vietnam's aging population.
4.1.4 The impacts of budget deficit and public debt on Vietnam macroeconomy
Lessons from Latin America debt crisis for Vietnam
The debt crisis in Latin American countries during the 1980s stemmed from a mix of populist policies characterized by excessive spending and irresponsible borrowing from foreign sources, reflecting significant policy failures This situation left these nations susceptible to capital withdrawal by investors, ultimately leading to a crisis that was difficult to address once it occurred.
Vietnam must learn from the challenges of reckless government borrowing and the associated corruption risks that contribute to budget deficits driven by excessive spending While much of Vietnam's current debt comes from favorable long-term Official Development Assistance (ODA) loans, the country's status as a middle-income nation limits its ability to secure such advantageous terms in the future This shift brings several risks, including long-term debt sustainability and foreign exchange rate vulnerabilities, which need to be carefully managed.
Effective control of external borrowing is crucial, as it heightens vulnerability to external factors Floating-rate debt increases debt-servicing costs when foreign interest rates rise, leading to higher budgetary outlays and potentially larger deficits Similarly, currency depreciation exacerbates these challenges Government borrowing to address growing deficits can result in unsustainable debt levels and significant foreign exchange usage for debt servicing, potentially culminating in a debt crisis While Vietnam's total external debt remains within a safe percentage of GDP, lessons from Latin American countries indicate that a universal safe threshold for external debt does not exist.
The ongoing crises stem from inadequate economic mechanisms and structures, highlighted by issues such as ineffective supervision in the finance and banking system, a lack of transparency in private businesses, and the intertwining of government and major corporations Consequently, a comprehensive economic restructuring, particularly within the finance and banking sector, is essential to mitigate future crises.
Maintaining a USD-based fixed exchange rate system requires the nation to prepare for potential economic challenges, as this approach can ultimately result in a balance of payments crisis over the long term.
Measures to apply lesson from the crisis in Vietnam’s context
To prevent irresponsible government borrowing, it is essential to implement the IMF's stringent structural adjustment policies, including contractionary measures that reduce the budget deficit and control public debt A disciplined fiscal policy must be followed, utilizing any revenue surplus to pay down debts and aiming to keep the budget deficit at 4% until 2020, and subsequently at 3% thereafter.
In 2019, the State Bank of Vietnam (SBV) established a credit growth target of 14 percent to maintain low credit growth while focusing on priority sectors This approach aims to ensure effective risk management and bolster economic growth Additionally, the SBV will implement specific credit growth quotas for individual banks based on their financial health, thereby regulating overall credit expansion and aligning with government objectives.
To enhance fund utilization amidst declining ODA and rising commercial loan dependence, it is crucial to modernize the State Budget system Strengthening transparency and public participation in the budget process at all government levels is essential; for instance, disclosing the State Budget to the National Assembly and Local People’s Councils simultaneously allows for citizen feedback Clear communication of budget information will facilitate public understanding and engagement Additionally, enforcing discipline in spending plans is necessary, as actual expenditures have often exceeded projections, undermining credibility Major budget changes should be approved through a supplemental budget to promote efficient spending Implementing medium-term budgeting will provide three to five-year projections of revenue, spending, and borrowing, aiding in assessing the feasibility of development plans Furthermore, consolidating public sector activity reporting through comprehensive financial statements will give a clearer picture of fiscal policy It is vital to monitor risks from extra budgetary funds and state enterprises, as historical crises indicate that these often pose significant threats to the State Budget.
To effectively manage external borrowing, the sustainability of public debt hinges not only on a country's debt level but also on its creditworthiness, which is crucial for preventing liquidity crises Vietnam has seen a gradual improvement in its creditworthiness, currently rated 2-3 units below the investment level by leading global credit rating agencies Although specific IIR ratings for Vietnam are not publicly available, they can be inferred from independent ratings, placing Vietnam among nations with limited access to international capital markets Furthermore, the State Bank of Vietnam must bolster foreign reserves to safeguard against potential debt repayment issues and to ensure exchange rate stability.
Vietnam's foreign exchange reserves have increased sharply recently after the State Bank of Vietnam focused on buying foreign currencies from banks.
Figures 4-13 Vietnam's foreign exchange reserves 2016-2019
However, total reserves (% of total external debt) in Vietnam reported since 2010 have been low, despite of slight increase.
To enhance the health of the domestic finance and banking sector, it is crucial to establish an appropriate capital account Additionally, implementing a robust mechanism for monitoring both macro and micro finance will be essential for effectively managing credit for private enterprises and overseeing private borrowing backed by government guarantees.
Thirdly, to avoid risks from USD based – fixed exchange rate system, Vietnam should implement healthy and cautious macroeconomic policies to maintain suitable exchange rate system.
In 2016, the State Bank of Vietnam transitioned from a fixed to a controlled floating exchange rate system, allowing for greater flexibility while maintaining overall control By the end of 2015, data indicated that the value of the Vietnamese Dong (VND) was stable, yet the SBV aimed for a more adaptable exchange rate that aligns with global financial trends, particularly fluctuations in the Chinese Yuan (CNY) and U.S Federal Reserve interest rates The previous fixed exchange rate system had rendered the VND vulnerable to the rising value of the USD due to Fed interest hikes and significant trade deficits with China, which reached approximately $3.4 billion in 2015.
Policy recommendation for Public debt management in Vietnam
The primary goal of public debt management is to assess strategy and debt structure-related risks, enabling policy adjustments to ensure the sustainability of public debt in the medium to long term This section proposes several policies for discussion aimed at identifying effective approaches to managing Vietnam's current public debt and budget deficit.
*Establishing the Public debt Monitoring Committee under the Finance and Budget Committee of the National Assembly
The establishment of the Public Debt Monitoring Committee enhances the independent oversight and management of public debt by granting access to comprehensive information from various ministries, including the Ministry of Finance and State-Owned Enterprises This includes critical details on debt scales, maturities, interest rates, and currencies, enabling effective monitoring and analysis of the public sector's total debt The Committee is responsible for supporting the Finance and Budget Committee in producing quarterly reports for the National Assembly, summarizing the latest data and discussing relevant policy and market developments Additionally, it has the authority to collaborate with stakeholders and execute essential administrative, auditing, accounting, and reporting processes.
*Establishing a system of debt safety indicators
To enhance fiscal discipline, it's essential to establish a system of indicators that regulate debt limits based on both quantity and repayment flows These limits should be articulated in nominal values and as percentages of key macroeconomic variables, categorized by total public debt, external public debt, domestic public debt, and total external debt Typically, the total debt limit is expressed as a percentage of GDP and exports, while debt service limits relate to total tax revenue and foreign reserves or the annual debt to capital expenditure ratio The National Assembly must set reasonable limits; excessively low thresholds can impede the government's ability to respond effectively during crises, as adjusting regulations takes time, while excessively high limits serve no purpose Ongoing oversight of the government's fiscal discipline is crucial and should be conducted by the Public Debt Monitoring Committee.
*Debt accounting according to international standards
To effectively assess debt management practices and develop suitable strategies, it is essential to maintain transparency in public debt and budget accounting in accordance with international standards Avoiding off-balance sheet expenditures is crucial, and a thorough evaluation of budget deficit measures—excluding unsustainable revenues and property sales—is necessary for an accurate fiscal assessment Additionally, future budget burdens, including pension and health insurance obligations, should be incorporated into budget deficit forecasts to provide a clearer understanding of the medium and long-term public debt outlook.
The debt of State-Owned Enterprises (SOEs) poses potential risks to public debt in Vietnam, necessitating thorough calculation, analysis, and reporting within the current public debt framework Therefore, evaluating SOEs' debt is essential and should be integrated into the overall reporting of Vietnam's public debt.
Enhancing both the primary and secondary domestic government bond markets is crucial for long-term economic stability Initially, the Government may face higher domestic borrowing costs to foster the development of these markets However, as liquidity improves over time, the Government will be able to mobilize capital at lower costs A well-developed bond market enables the Government to secure long-term financing with fixed interest rates, particularly in domestic currency, thereby minimizing risks associated with interest rates, exchange rates, and rollovers Furthermore, the expansion of the secondary government bond market will facilitate the growth of the corporate bond market, as government bonds serve as a benchmark for assessing the risk of other debt instruments.
The tax system requires reform to establish a sustainable, efficient, fair, and transparent revenue framework A careful reduction of the tax burden is essential, as excessive taxation can lead to tax evasion and inefficient resource allocation To enhance effectiveness, a review of the tax and fee structure is necessary to eliminate overlaps Additionally, taxes should be adjusted to protect low-income individuals, promote savings, and restrict consumption, particularly of imported luxury goods.
CONCLUSION
In a resource-limited society, government borrowing can be an effective strategy for financing essential expenditures, provided it aligns with sound fiscal policies The debt crisis in Latin America during the 1980s stemmed from a mix of populist policies, excessive spending, and reckless foreign borrowing, highlighting significant policy failures For Vietnam, the key takeaway is the urgent need for comprehensive fiscal reform to achieve a balanced budget, ensuring debt sustainability and long-term economic stability Effective management and strict adherence to economic principles are crucial for securing public debt, which is essential for sustainable economic growth and creating favorable conditions for future generations It is vital that the issues surrounding public debt and crisis management remain a national priority, fostering innovative solutions to enhance Vietnam's public debt situation.