The eropean sovereign debt crisis and lessons for vietnam,

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty - - GRADUATION THESIS THE EUROPEAN SOVEREIGN DEBT CRISIS AND LESSONS FOR VIETNAM Student : : Tran Hai Yen Class : ATCA – K14 Student ID : 14A7510286 Lecturer : : Nguyen Thi Hong Mai (M.A) 20th May 2015 i ABSTRACT The on-going European sovereign debt crisis has left repercussions that impact the world economy in a global scale, and the effects have already reached Vietnam in certain aspects On the other hand, the crisis has given Vietnam, a country whose economy has mainly depended on public debt to achieve sustainable growth, helpful experiences in debt crisis prevention Therefore, the purposes of the study are to give the whole picture of the European sovereign debt crisis, then to put forwards lessons and suggestions for Vietnam The research paper starts from theoretical framework which provides fundamental academic perception of sovereign debt and sovereign debt crisis The two proceeding parts explores the case of Europe as the most contagious crisis in the history of debt crises, followed by the assessments on the current economic situation in Vietnam and appropriate recommendations to tackle it The paper was conducted by means of qualitative analysis of the data collected from authoritative secondary resources Due to limited time and resources, further research studies are advised to focus more on primary, official data with more recent statistics as well as in-depth investigations Possible implications also include the use of various methods that would help policy makers make the best decisions on public debt issue Key words:  European Sovereign Debt Crisis  Public Debt  Vietnam  Sovereign Debt Crisis Prevention Tran Hai Yen ATCA – K14 ii ACKNOWLEDGEMENTS First and foremost, I would like to express my sincerest appreciation to all my lecturers in Banking Academy of Vietnam, who have fully supported me throughout my four-year learning process My special gratitude goes to Mrs Nguyen Hong Mai, Dean of the Faculty, for her useful guidance, comments, remarks and engagement in helping me complete the graduation thesis Without her this thesis would have been impossible Last but not least, I would like to thank my family and friends, who have been by my side the whole time Their love and support are one of my biggest encouragements Gratefulness is to the readers also, whose feedback will help much in improving the thesis Hanoi, May 2015 Tran Hai Yen Tran Hai Yen ATCA – K14 iii TABLE OF CONTENTS ABSTRACT .i ACKNOWLEDGEMENTS ii TABLE OF CONTENTS iii LIST OF TABLES AND FIGURES vi LIST OF ABBREVIATIONS viii INTRODUCTION 1 Significance of the study Research purposes Research questions Research methods Research structure CHAPTER ONE LITERATURE REVIEW 1.1 Sovereign Debt 1.1.1 Sovereign Debt 1.1.2 Classifications of Sovereign Debt 1.1.3 The Impacts of Sovereign Debt 1.2 Sovereign Debt Crisis 1.2.1 Sovereign Debt Crisis 1.2.2 European Sovereign Debt Crisis Tran Hai Yen ATCA – K14 iv CHAPTER TWO THE EUROPEAN SOVEREIGN DEBT CRISIS 2.1 The Evolution of the European Sovereign Debt Crisis 2.2 Causes of the European Sovereign Debt Crisis 13 2.2.1 Root Causes 13 2.2.2 Direct Causes 15 2.3 The Impacts of the European Sovereign Debt Crisis on European countries 17 2.3.1 Financial Impacts 17 2.3.2 Economic Impacts 19 2.3.3 Political Impacts 23 2.4 Policy Reactions to the European Sovereign Debt Crisis 24 2.4.1 EU Emergency Measures: EFSF and EFSM 24 2.4.2 The ESM 26 2.4.3 The ECB 26 2.4.4 The European Fiscal Compact 30 CHAPTER THREE LESSONS FOR VIETNAM IN SOVEREIGN DEBT CRISIS PREVENTION 31 3.1 The Vietnamese Economy under the Impact of the European Sovereign Debt Crisis 31 3.1.1 Trade in Goods with European countries 31 3.1.2 Investment Capital Flows 33 Tran Hai Yen ATCA – K14 v 3.1.3 Domestic Market Competition 38 3.2 Public Debt in Vietnam 38 3.3 Lessons and Suggestions for Sovereign Debt Crisis Prevention in Vietnam 43 CONCLUSIONS 45 Conclusions 45 Limitations of Research 45 LIST OF REFERENCES Tran Hai Yen ATCA – K14 vi LIST OF TABLES AND FIGURES FIGURES Figure 1.1: Transmission Mechanism .5 Figure 2.1: Timeline of the European Sovereign Debt Crisis Figure 2.2: Debt-to-GDP Ratio, 2015 Forecast .13 Figure 2.3: The Exchange Rate of EUR/USD (2007-2015) 19 Figure 2.4: Real GDP Growth Rates of European countries (2008-2014) .20 Figure 2.5: Eurozone Balance of Trade (2009-2015) 21 Figure 2.6: Unemployment Rates of European countries (2009-2014) 22 Figure 2.7: Youth Unemployment Rates in EU and Euro area (2000-2015) 23 Figure 2.8: SMP Covering Bond Purchases (May 2010 – February 2012) 28 Figure 3.1: Vietnam – EU Trade Flows (2008-2014) 31 Figure 3.2: FDI in Vietnam by Countries and Territories (1988-2010) 34 Figure 3.3: Vietnam FDI Inflows (2007 – 2013) 35 Figure 3.4: The EU Evolution of Aid Disbursements in Vietnam (2007 – 2013) 36 Figure 3.5: ODA Commitment for Vietnam (2008 – 2013) 37 Figure 3.6: Public Debt Structure: Domestic and External Debt (2010 – 2014) 41 Figure 3.7: Debt-to-GDP ratio of Vietnam and Other countries in the world (2013) 42 Tran Hai Yen ATCA – K14 vii LIST OF TABLES AND FIGURES TABLES Table 2.1: Current Account Balances 15 Table 2.2: Granted Rescue Packages 25 Table 2.3: Interest Rates Policies by ECB .27 Table 3.1: Vietnam – EU Trade Flows by SITC Section (2010 – 2014) 32 Table 3.2: Vietnam’s Rate of Investment and Saving and GDP Growth Rate (2000- 2011) 38 Table 3.3: Vietnam’s State Budget Final Accounts and Plans (2006 – 2015) 39 Table 3.4: Public Debt in Vietnam (2006 – 2014) 41 Tran Hai Yen ATCA – K14 viii LIST OF ABBREVIATIONS ECB European Central Bank EEC The European Economic Community EFSF European Financial Stability Facility EFSM European Financial Stabilization Mechanism ESM European Stability Mechanism EU European Union EUR The Euro GDP Gross Domestic Product IMF International Monetary Fund LTRO Long(er)-term Financing Operation SMP Securities Markets Program SOE State-owned Enterprise USD The United States Dollar VND The Vietnam Dong WB World Bank Tran Hai Yen ATCA – K14 INTRODUCTION Significance of the study The European debt crisis, which originated in Greece and strongly spread to other European countries since 2010, has been a burning issue and attracts the attention of many economic researchers as well as policy makers around the world This crisis was seen as the second stage and was an inevitable result of the global financial crisis in 2008 Member states’ governments struggled with serious debt positions, countries were downgraded in credit ratings, leading to a gloomy economy with rising unemployment rates and political instability More drastically, the crisis has created a bleak prospect for the global market, and Vietnam is no exception Vietnam, with its high budget deficit, high public debt ratio and diminishing investment efficiency, is still partly vulnerable to the European sovereign debt crisis Although the country is staying within the safe zone, many organizations and economic experts, including the International Monetary Fund has indicated that Vietnam will be at the verge of a debt crisis within the next ten years if the situation still persists The current status calls for immediate improvements in public debt management and crisis prevention The European debt crisis has given Vietnam constructive lessons to tackle the problems more thoroughly Realizing the significance of this issue, this graduation thesis is conducted under the topic “The European Sovereign Debt Crisis and Lessons for Vietnam” Research purposes The graduation thesis aims at first giving a complete overview of the European sovereign debt crisis, including its evolution, causes, impacts, and policy reactions; then, its influence on the Vietnamese economy; and finally some suggestions drawn to improve the country’s public debt situation Tran Hai Yen ATCA – K14 35 Figure 3.3: Vietnam FDI Inflows (2007 – 2013) (Source: GSO) The main reason for this movement is the inefficient foreign investment cut in Europe and the world Vietnam has been a promising market with socio-political stability but yet remained certain limiting factors besides the present crisis: low general effectiveness of FDI (invested in projects with small scale little value generated and low capability), the slowness in FDI distribution, technology innovation and project execution, the imbalance among economy sectors and regions, fraudulences in creating “real profit, fake losses” Bearing those disadvantages, Vietnam lost its competency and could not grasp the opportunity of the FDI flows shifted from Europe like other ASEAN economies Tran Hai Yen ATCA – K14 36 b ODA The aftermath of fiscal consolidation plans in Europe included the deduction not only in FDI flows but also the ODA value to Vietnam To be more specific, the evolution of EU aid disbursements in Vietnam is illustrated as follows: Figure 3.4: The EU Evolution of Aid Disbursements in Vietnam (2007 – 2013) (Source: EU) From 2007 to 2013, the EU disbursed €3.6bn, in which 55% (€2bn) in grants and the rest €1.6bn in loans However, Figure 3.4 shows that the ODA disbursement fell gradually as the crisis deepened (2009 – 2012), hitting the bottom of nearly €0.4bn in 2012 Throughout the period, the amount of granted ODA dropped by a half to €0.19bn while the amount of loan underwent a decline from 2010 and recovered back in 2013 at about €0.7bn At the same time, the European debt crisis also put negative impacts on the global ODA to Vietnam As the crisis hampered the economies of other donor countries, the total registered ODA for Vietnam was reported with a downward trend After reaching its highest record in the history of $8.063bn in 2010, the figure then slowly decreased in Tran Hai Yen ATCA – K14 37 the following years The year 2013 recorded the third decline in the aid flow, to only $6.485bn in ODA and this movement is anticipated to continue in 2014 and 2015 Figure 3.5: ODA Commitment for Vietnam (2008 – 2013) (Source: Vietnam Consultative Group) c Remittance In 2009, Vietnam was reported with 18% of the remittance inflows coming from European countries, which ranked second after its biggest sender - North America, accounting for 71% (Human Development Report, 2009) High unemployment rates, economic recession resulted from the European debt crisis were predicted to lower the remittance value sent to Vietnam substantially due to the region’s considerable contribution However, statistics told a different story, in which there was only a drop from $7.2bn to $6.02bn in 2009 Then the figure quickly recovered, reaching $11bn and $12bn in 2013 and 2014 respectively This development has given Vietnam a spot in top 10 recipient countries (WB) Tran Hai Yen ATCA – K14 38 3.1.3 Domestic Market Competition In the context of ongoing debt crisis, foreign investors have been putting more pressure on Vietnamese firms as they tend to look for new, emerging markets with the purpose of diversifying and risks hedging Additionally, foreign companies are granted with more privileges in taxes, tariffs, borrowing rates and have greater competence as well as trademarks compared to Vietnamese ones Thus, an increase in domestic market competition was inevitable 3.2 Public Debt in Vietnam Regarding sovereign debt (public debt), the difficulties that Vietnam is currently facing emerged in 2006 and were rooted from before To achieve development goals, Vietnam had promoted investment strongly and over an extended period had achieved an investment-to-GDP ratio rating second only to China, while the saving rate was significantly lower, leaving the large spread between the two rates with years up to 16 – 17% of the GDP This can be clearly seen from Table 3.2 as it compares Vietnam’s exceedingly high investment-to-saving ratio from 2005 to 2011 Table 3.2: Vietnam’s Rate of Investment and Saving and GDP Growth Rate (2000-2011) (Source: Vu, Q.V, 2013) Tran Hai Yen ATCA – K14 39 Despite the excessive investment, the returns were notably lower, resulting in an average budget deficit at 5% of GDP throughout the period, in which 7% was recorded in 2009 due to the impact of the global financial crisis The following table gives an overview of the Vietnamese government revenues and expenditures from 2006 to 2015 Table 3.3: Vietnam’s State Budget Final Accounts and Plans (2006 – 2015) (Source: Ministry of Finance) In the 7-year period from 2006 to 2012, it is clear that the collection of taxes and fees accounted for the major proportion of government budget revenue, hitting 24.6% of the total revenue in 2011 Apparently, Vietnam was the country with the highest tax rate in Asia region (ADB, Key economic indicators 2012) The large amount of tax revenue limited the accumulation ability of enterprises, reduced development investment activities as well as competitiveness of the private sector However, the tax incomes seemed to be disproportionate to the rate of infrastructure development and social welfare supplement This could create barriers to the economic development in long term Forecasts for taxes and fees in the upcoming years are up to a hefty 39.51% Crude Tran Hai Yen ATCA – K14 40 oil from foreign investment sector was considered as the second most important source of government inflows, although there was a fall until 2010 On the other hand, the table showed the paradox of massive investment in the SOEs sector, whose contribution made up about 40% of GDP, whereas the returns were insignificant, at around 13 – 14% of the budget’s revenue The figure of this sector is predicted to increase remarkably in the next three years, achieving nearly on quarter; unfortunately, the targets may not be feasible to acquire if there are no amendments in the investment strategies In order to maintain constant economic growth, the Vietnamese government has gotten loans from foreign sources and excessive issuance of credit lines Consequently, a surge in public debt is inevitable By the end of 2014, public debt was nearly $81.1bn, which equaled to 60.3% of GDP The ratio was 2.2 times higher compared to that of 2006 and is projected to reach a new record at 64.9% in the following years Furthermore, stated by the Ministry of Finance, the average debt growth rate of 10.5% and this figure is anticipated to be up to 19.9% in 2015 Structure-wise, government debt constituted the largest proportion compared to GDP over the period, increasing from 39% to 46.9% in 2014 The figure of government-guaranteed debt and local authorities’ debt was lower, at 12.6% and 0.8% in 2014 respectively Also in terms of structure, there has been a shift from borrowing funds externally to internally in recent years as more than half of the loans came from domestic sources in the same year For a detailed view, all statistics related to Vietnam’s public debt are summarized in Table 3.4 and Figure 3.6 Tran Hai Yen ATCA – K14 41 Table 3.4: Public Debt in Vietnam (2006 – 2014) (Source: The Ministry of Finance & The Economist Intelligence Unit) Figure 3.6: Public Debt Structure: Domestic and External Debt (2010 – 2014) (Source: Ministry of Finance) Additionally, the amount of public debt per person, documented by the Economist Intelligence Unit, in 2014 was approximately $897; which was decent compared with the quantity of other Asian countries, namely: China ($1,204.41), Indonesia ($1,049.32), Tran Hai Yen ATCA – K14 42 Philippines ($1,346.67), and Thailand ($3,168.64) However, comparing to the data 10 years ago (which was only $210.5), the amount of debt quadrupled and would continue to grow in the next few years In a global perspective, the research report at the “Determining the scope of public debt and safe debt threshold of Vietnam in 2014 – 2020 period” by Academy of Policy and Development made a comparison of debt-to-GDP ratios between Vietnam and other territories in the world by 2013 (Figure 3.7) It is clear the average of the world and especially the developed countries had much higher rates than Vietnam did, at 79.7% and 95.7% orderly Mr Habib Rab, Senior Economist at World Bank Vietnam, addressed that the current public debt situation in Vietnam, is still under control but the drastic increase in the amount of debt would pose a threat to the country’s capability to cope with future financial shocks (2014) Figure 3.7: Debt-to-GDP ratio of Vietnam and Other countries in the world (2013) (Unit: percentage) Tran Hai Yen ATCA – K14 43 3.3 Lessons and Suggestions for Sovereign Debt Crisis Prevention in Vietnam Some valuable lessons can be learned from the case of Europe so that the Vietnamese government can prevent itself from a sovereign debt crisis outbreak: The most fundamental requirement is an effective governmental regulatory mechanism to control financial activities and funds flows This includes transparency of information, reflective calculation of sovereign debt, effective maintenance of macrolevel supervisory mechanism, while guaranteeing the needs for social welfare, mobilizing and combining resources to develop the country in a sustainable manner Also, there is a need for more discipline in implementing approved spending plans as actual spending in recent years has significantly exceeded planned spending Setting up spending limits accompanied by specific fines for different sectors is advisable as well At the same time, it is necessary to properly manage and improve the efficiency of government investment In recent years, Vietnamese economic growth has mainly depended on state investments and as mentioned above, the returns were not sufficient enough to cover the budget deficits Long-term strategies must involve actively reducing state investments while increasing those from non-budget resources, shifting the focus of state investments to social and infrastructural developments Transformation from an extensive to intensive growth model is a must in the current situation At the same time, the investment process needs to be revised and reformed to serve a more standardized criteria for public projects SOEs should be concentrated on key industries, mainly those related to and dealing with socio-economic infrastructure, public services and those pertaining to macroeconomic stability Furthermore, the excessive investment into SOEs must be limited, maintaining a small, manageable SOEs This can be achieved by promoting equitization of SOEs; maintaining only 100-percent-state-capital SOEs specialized in industries and Tran Hai Yen ATCA – K14 44 fields that hold an essential role in the economy, or those that the private sector cannot or is unwilling to take part in Another suggestion with regards to the independence of the State Bank of Vietnam The State Bank should act on its ultimate goal of maintaining market price stability, rather than following the government’s directive to generate an excessive money supply for SOEs as stimulating spearheads for the development Within expectation, higher inflation rate added up to economic instability A coordinated policy regarding fiscal and monetary to gain macro-economic stability needs to be taken under consideration The next recommendation is to introduce medium-term budgeting, which is subject to annual updates, aligned with Socio-Economic Development Plans (SEDP), and linked with the Medium-Term Investment Plan (MTIP) At the moment SEDPs run for five years, whereas the State Budget is annual A medium-term budget would provide projections of total revenue, spending and borrowing over the coming three to five years This would enable the government and the public to estimate the cost and affordability of its development plans Lastly, it is essential to have a comprehensive framework for local borrowing At the moment all local debt is treated outside the State Budget because local authorities are not allowed to run budget deficits I would recommend the effective framework which includes integration of local borrowing onto the State Budget, strengthening of local debt management capacity, and adopting borrowing limits that are more closely related to borrowing capacity of local authorities This can help provide much needed resources to meet infrastructure needs in selected provinces, whilst ensuring responsible and transparent local borrowing for high return public investments Success in engaging policies that follow the aforementioned advices would help Vietnam engage a more safe and secure environment to develop as well as bring in more opportunities for the country in attracting foreign capital flows Tran Hai Yen ATCA – K14 45 CONCLUSIONS Conclusions The European sovereign debt crisis is the failure of the Euro – the currency that first tied 17 European countries together in an intimate but flawed manner Since 2009, the PIIGS countries and the newest ones, Cyprus have all teetered on the brink of financial collapse, threatening to bring down the continent as well as the rest of the world The crisis, with its contagious nature, has hampered on not only the Europe’s economic systems and lives of its people but also the outsiders, including developing countries like Vietnam As researched and analyzed in the thesis, the crisis had significant impacts on the investment capital flow and domestic competitiveness; whereas trading activities were less remarkable Possessing a certain exposure to the crisis and limited ability to respond, Vietnam is now facing simultaneous challenges: diminishing the consequences stemmed from the Eurozone debt crisis while improving its government debt status All aspects of the European debt crisis, from causes to resolutions, have been valuable experiences for Vietnam in sovereign debt crisis prevention strategies The basic guidelines that are suitable for its intrinsic factors are: effective regulatory mechanism, improvements in investment managing and its outcome, local authorities’ participation, medium-term budgeting, and the key role of the State Bank of Vietnam in stabilizing the financial sector It is advisable that the Vietnamese government should take advantage of the debt sources more sophisticatedly and thoroughly to bring out the best returns for sustainable economic growth Limitations of Research The graduation thesis solely relies on the secondary data without accessing to primary data Thus, the research may not be up-to-date and thoroughly reliable as it only applied basic analysis on the limited given sources Moreover, within a limited amount of time, the study cannot go any further on the other aspects of the Vietnamese economy Tran Hai Yen ATCA – K14 46 as well as provide an in-depth analysis on the given aspects (for example: the FDI, ODA of different sectors or the supplementary level of Vietnam and so on) Due to the same reason, the paper cannot adequately compare the impacts theses aspects have on Vietnam and other countries as well as give out the impacts on the world in general Last but not least, the work did not involve a wide range of methods such as conducting questionnaire, surveys, etc Tran Hai Yen ATCA – K14 LIST OF REFERENCES Academy of Policy and Development (2013) Determining the scope of public debt and safe debt threshold of Vietnam in 2014 – 2020 period Ministry of Planning and Investment Bastasin, C (2012) Saving Europe: How National Politics Nearly Destroyed the Euro Brookings Institution Press Blanchard, O.; Giavazzi, F (2002) “Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?” Brookings Papers on Economic Activity, no.2 Bloomberg Television & Jarvis, J (2012) The European Debt Crisis Visualized Bloomberg Business Correa, R.; Sapriza, H (2014) “Sovereign Debt Crises” – International Finance Discussion Papers, No 1104 Federal Reserve System Department of Debt and External Finance Management (2013) Public debt bulletin issue no.3 Ministry of Finance Dippelsman, R.; Dziobek, C.; Gutierrez, C.A (July 27th 2012) What lies beneath: The statistical Definition of Public Sector Debt IMF – Statistic Department ECB (2011) Coordinated central bank action to address pressures in global money markets ECB (2012) “Monthly Bulletin” – January 2012 10 ECB (2012) Press Release on September 6th, 2012 – Technical features of Outright Monetary Transactions 11 ESM (2013) FAQ on European Stability Mechanism (ESM) 12 IMF (2010) Public Sector Debt Statistics – Guide for Compliers and Users Tran Hai Yen ATCA – K14 13 Krugman, P (2009) Revenge of the Glut The New York Times: “For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine But bubbles always burst sooner or later, and yesterday’s miracle economies have become today’s basket cases, nations whose assets have evaporated but whose debts remain all too real." 14 Le, T.M.N (2011) Public Debt – Impacts on Economic Growth and Burden for the future generations Finance Faculty – Banking Academy 15 M Nautet & L Van Meensel (2011) Economic impact of public debt National Bank of Belgium 16 Mankiw, N.G (2010) Macroeconomics (7th Edition) Worth Publishers 17 Nguyen, T.T (2012) Public debt in Vietnam: Real situation and Solutions Hanoi National University 18 Pham, T.A; Dinh, T.M; Nguyen, T.D; To, T.T (2013) Public debt and its sustainability in Vietnam: The past, present and the future Knowledge Publishing House 19 Popov, A.; Horen, N.V (2013) “The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis” – Working paper no 382 De Nederlandsche Bank 20 Rab, H (2014) A modern state budget system for a middle-income Vietnam World Bank Vietnam 21 Schwartz, N.D; Jolly, D (2011) “European bank in strong move to loosen credit” New York Times 22 Stirling, C.; Thesing G.(2011) ECB Lends 489 billion Euros for years, exceeding forecast Bloomberg Tran Hai Yen ATCA – K14 23 Su, T; Bui, H (2009) Theory framework of public finance Ho Chi Minh National University 24 The National Assembly (2012) Law on Public Debt Management (No 29/2009/QH12) 25 United Nations Development Program (2009) Human Developments Report 26 Vu, Q.V (2013) Crisis and the financial-credit system: Practical analysis in regard to the American and Vietnamese economy 27 Some statistics are collected from: - ECB: http://www.ecb.europa.eu/ - Eurostat database: http://ec.europa.eu/eurostat - EU: europa.eu/index_en.htm - IMF’s World Economic Outlook - General Statistics Office (Vietnam): www.gso.gov.vn/ - Ministry of Finance (Vietnam): www.mof.gov.vn/ - The Economist – Global Debt Clock: http://www.economist.com/content/global_debt_clock - Vietnam Investment Network - Vietnam Consultative Group Tran Hai Yen ATCA – K14