Public debt crisis in greece and lessons for vietnam,

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty - - GRADUATION THESIS PUBLIC DEBT CRISIS IN GREECE AND LESSONS FOR VIETNAM Lecturer Name Class : Mr Ngo Tung Anh (MA, MBA) : Pham Thieu Ngoc Anh : K14 ATCA Hanoi – 20th May 2015 ABSTRACT The Greek public debt crisis that erupted in 2009 represents a serious threat to the stability of the global economy Heads of States of the European Monetary Union, as well as European and international institutions have tried and are still trying to find a workable solution which would limit the losses and prevent crisis contagion to other countries in the world The purpose of this study is to shed light on the impact of the Greek crisis on the European monetary union and Vietnam It explores the real situation of Greece government debt as well as the antecedents which have led to the rising of the public debt Finally, the paper will develop a framework through which the lessons from the crisis can be drawn for Vietnam and through which it is possible to identify the available solutions to tackle the issue in this country ACKNOWLEDGEMENT I would like to thank my honorable supervisor, Mr Ngo Tung Anh (MA, MBA) Words cannot describe how indebted I am to you, for your devotion of countless hours of guiding, encouraging, and editing You were the driving force behind the completion of this paper Your collective efforts kept me believing there was a light at the end of the tunnel I am also grateful to all lecturers in the Foreign Language Faculty I am extremely thankful and indebted to them for sharing expertise about English and Banking, and sincere and valuable guidance and encouragement extended to me I also thank my parents for the unceasing encouragement, support and attention Finally, I place on record my sense of gratitude to one and all, who directly or indirectly have lent their hand in this venture Table of Contents PART A: INTRODUCTION 1 Rationale of the research Aim of the study Scope of the study Methodology of the study Significance of the study Sources of information Structural organization of the thesis PART B: DEVELOPMENT CHAPTER THEORETICAL FRAMEWORK OF PUBLIC DEBT 1.1 Review of previous works and books (in relation to the current matters) 1.2 General definition about public debt 1.2.1 World Bank’s definition 1.2.2 Vietnamese law’s definition 1.3 Classification 1.2.1 Classification by subject 1.2.2 Classification by territory 1.4 Manifestations of public debt problems 1.4.1 Scale of public debts 1.4.2 The structure of public debts 1.4.3 Effectiveness of using public debts 1.4.4 Repayment ability 1.5 Causes of public debt 1.5.1 Budget deficit 10 1.5.2 Weak control in spending and Bad debt management 10 1.5.3 Over-spending to stimulus economy after crisis 11 1.6 The impact of public debt: 11 1.6.1 The positive impacts of public debt 11 1.6.2 The negative impacts of public debt 12 CHAPTER REAL SITUATION OF GREEK PUBLIC DEBT CRISIS 13 2.1 Evolution of the debt crisis in Greece 13 2.2 The situation of public debt in Greece 15 2.3.1 Scale of debt 15 2.2.2 The structure of public debts 18 2.2.3 Effectiveness of using public debts 19 2.3 Reasons for public debt crisis in Greek 24 2.3.1 Subjective reasons 24 2.3.2 Objective reasons 27 2.4 Impacts of public debt in Greece 29 2.4.1 For Greece 29 2.4.2 For Europe 30 2.4.3 For Asia 31 2.4.4 For Vietnam 31 CHAPTER THE PUBLIC DEBT SITUATION IN VIETNAM AND SUGGESTIONS FOR VIETNAM 34 3.1 Current situation of public debt in Vietnam 34 3.1.1 The situation of public debt in Vietnam 34 3.1.2 The scale of public debt 35 3.1.3 Structure of public debt 38 3.1.4 The use of public debt 39 3.2 Lessons of the public debt of Greece to Vietnam 40 3.2.1 The first lesson 40 3.2.2 The second lesson 41 3.2.3 The third lesson 42 3.2.4 The fourth lesson 43 3.3 Suggestions to prevent public debt crisis in Vietnam 44 3.3.1 Improving fiscal policy and public debt management 44 3.3.2 Ensuring the sustainability of the scale and growth of the public debt 45 3.3.3 Controlling loans strictly and improving efficiency and management in the use of loans 45 3.3.4 Transparently disclosing information and policies of public debt management 46 PART C: CONCLUSION 47 Summary 47 Limitations of thesis 48 BIBIOGRAPHY 49 LIST OF TABLES Table 1: Public debt of Greece from 2004 to 2011 16 Table 2: Distribution of Greek exports by product category 2001-2005 21 Table 3: Percentages of public debt / export of some European countries 23 Table 4: The status of public debt and budget deficit of the EU in 2009 24 Table 5: Information about the budget deficit and foreign debt of the country in 2010 26 Table 6: Structure of public debt in Vietnam in the period 2006-2010 39 LIST OF FIGURES Figure 1: Percentages of budget deficit to GDP 17 Figure 2: Percentages of public debt / export of some European countries 22 Figure 3: Public debt to GDP ratio of Vietnam in the period 2010-2012 36 Figure 4: Public debts and government debts of Vietnam from 2001 – 2020 42 ABBREVIATIONS ASEAN: Association of Southeast Asian Nations CIA: Central Intelligence Agency FDI: Foreign Direct Investment ECB: European Central Bank EMU: European Monetary Union EU: European Union EURO: European currency Eurozone: Region using the European currency GDC: Global Dept Clock GDP: Gross domestic product ICOR: Incremental Capital Output Ratio IMF: International Monetary Fund OECD: Economic Cooperation and Development JEDH: Joint External Debt Hub ODA: Official Development Assistance MOF: Ministry of Finance UNCTAD: United Nations Conference on Trade and Development WB: World Bank PART A: INTRODUCTION Rationale of the research Almost all of sustainable developments must be set on the basis of stability This is the fundamental principle of the mankind’s activities and also of all the developments in general As a matter of fact, many countries establish rules and policies to regulate the economy The main purpose of these policies is the macroeconomic stability, creating conditions for the growth and development of a sustainable economy Recently, the world has to cope with large fluctuations in the socio-economic development history Multiple crises in the international scale continue to occur, resulting in adverse impacts on the world economy While the influence of the currency crisis has not passed, the world has to face the risk of a new crisis The focus is on Europe's debt crisis, wherein Greece is a typical country Europe has endeavoured to save the economy of the continent in particular and the world in general from the risk of crisis However, it seems all efforts to this point have many conundrums As a developing country with fledgling and weak economy compared with other powerful nations, Vietnam extremely concerns about the crisis development emerging in Europe Since the 2008 financial crisis, despite the prosperity of the economy, Vietnam is still not ready to deal with a new crisis Moreover, we are also a country with relatively high public debt ratio, therefore it is necessary to find some measures that can help Vietnam to avoid a debt crisis in the future This is also a reason for me to study the topic "The public debt crisis in Greece and lessons for Vietnam" From 2006 onwards, the situation of Vietnam’s debt repayment has been unstable with almost no significant increase in value The average annual amount Vietnam spending on debt and bailout repayment is 3.5% of GDP Percentage of debt repayment/total public debt decreased over the year, from 9.09% in 2008 to 5.53% in 2014 Meanwhile, the size of the public debt had grown at increasing pace with nearly 20%/year On the other hand, the use of debt in Vietnam still exists many shortcomings such as delays in disbursement and the inefficient use of loans to investment projects This impacts negatively on the repayment capacity of Vietnam in the future 3.1.2 The scale of public debt Within 10 years from 2001, the scale of public debt had quintupled with the growth rate of over 15% per annum Specifically, according to The Economist Intelligence Unit, Vietnam's public debt in 2001 was only 11.5 billion dollars, equivalent to 36% of GDP On average, each person burdens approximately 144 dollars By the end of 2010, public debt had rose to 55.2 billion dollars, equivalent to 56.3% of GDP, and at the current, Vietnam was classified as a country having above average debt level 35 Figure 3: Public debt to GDP ratio of Vietnam in the period 2010-2012 Unit: % 2011 2012 54.9 55.7 56.3 2010 PUBLIC DEBT /GDP Source: Debt Newsletter No.2, 21/10/2013 - The Ministry of Finance In 2013, the public debt clock in the world (Global Dept Clock) of The Economist magazine pointed that Vietnam's public debt was 77,082,786,885 dollars, with total loans of the year increased by 11.7%, accounting for 48.5% of GDP With a population of over 90 million people, each person of Vietnam was shouldering averagely 855.38 dollar Until April 2014, under the GDC, the public debt to GDP ratio of Vietnam was 47.2%, and public debt was 85,160,655,738 dollars 36 Source: www.economist.com/content/global_dept_clock If we continue at this rate, until 2016, Vietnam's public debt will exceed 100% of GDP as Greece (133.6%) and Ireland (129.2%) Public debt at over 100% of GDP is a huge figure for a developing and small-scale economy like Vietnam 37 3.1.3 Structure of public debt According to Paragraph 2, Article of the Law on Public Debt Management (Law No.29/2009/QH12), public debt in Vietnam includes Government debt; Government guaranteed debt and local government debt Till 31-12-2010, the structure of public debt in Vietnam was 80% Government debt, 19% Government guaranteed debt and 1% local government debt 58% of total public debt in 2010 was foreign debt and 42% was domestic debt As projected debt levels and interest expense of public debt tends to rise quickly, Vietnam is under pressure of interest and principal payments In recent years, the majority of loans were long-term Specifically, loans with preferential interest rate as ODA and WB’s loans generally have maturity of 40 years, including 10 years of grace period with interest rate of 0.75%/year Asian Development Bank’s loans were 30-year maturity with a grace period of 10 years and interest rate of 1%/year Japan's loans were 30-year term with 10-year grace period and interest rates of 1-2% year However, from July 2011 onwards, Vietnam has to use multiple loans applied to the average countries group with a shorter loan term and higher interest rates 38 Table 6: Structure of public debt in Vietnam in the period 2006-2010 Unit 2006 2007 2008 2009 2010 Average billion USD 23.7 24.1 31.2 37.8 45.3 32.4 % GDP 39.0 33.8 36.5 40.4 44.6 38.9 Government % public 85.0 68.0 76.2 79.2 82.1 78.1 debt debt 14.6 17.3 18.9 23.9 25.1 20.0 61.6 71.6 60.7 60.0 55.4 61.9 Government debt Government debt External debt billion USD of government External debt % of government government debt Source: Debt Newsletter No.2, 21/10/2013 - The Ministry of Finance 3.1.4 The use of public debt Through the programs of public investment, Vietnam's public debt is transferred to the investment projects in order to improve infrastructure, creating the foundation for sustainable economic development However, the use of debt in Vietnam is not effective because of some reasons Firstly, disbursement is delayed The postponement in disbursement of investment capital from government budget and government bonds happens quite often As reported by the State Treasury, at the end of October 2009, only 26.586 out of 64.000 billion 39 Vietnamese dong was disbursed, equivalent to 47.5% of annual plan As a result, many projects or constructions are unfinished, lengthened and slowly progressed, which is a large conundrum This situation along with the lack of financial discipline in public investment and in the operation of state enterprises as well as in large corporations result in spread, waste and lost investment in the process of managing investment projects Secondly, low investment efficiency of Vietnam is also demonstrated by ICOR In 2009, while the total social investment amounted to 42.2 % of GDP, the growth rate was only 5.2% ICOR in 2009 rose too high to over compared with 6.6 in 2008 This means that if in 2001 Vietnam needed VND 5.24 capital to generate VND output, now they need to invest VND capital more 3.2 Lessons of the public debt of Greece to Vietnam 3.2.1 The first lesson: Effectiveness of using borrowed capital Debtor countries should be aware that their borrowed money needs using reasonably and effectively, so money makes money to repay debts and develop the economy When borrowing capital, it is necessary to determine a spending plan for it to motivate economic development The plan can help debtors adjust expenditure and use their profits efficiently to repay debts If a country has inefficient use of capital, especially using a debt to clear another debt, the country may fail in debt management and soon become insolvent On the other hand, countries should not pursue flashy or bulky works and projects that are inconsistent with development level of the economy Greece is an exemplification when investing in infrastructure for magnificent Olympics As a result, spendthrift Greece with unnecessary expenses had to pay dearly For Vietnam, learning from mistakes of Greece in the spending of public debt, the government needs to review longterm and costly projects and works to focus on more urgent ones Along with that, the 40 government should revise unproductive businesses to have timely measures Consequently, Vietnam can avoid the situation that large business is collapsed, and government had to guarantee and support it financially 3.2.2 The second lesson: Public debt management This is a lesson for any economy, any person and any business The issue here is controlling spending, but the appropriate amount of money is different for each country The idea that a low spending can help avoid crisis is incorrect For example, the Asian financial crisis occurred in 1997 when Thailand had a debt with only about 15% of GDP) Therefore, each country should be aware and control debt levels consistent with the country's economy Regarding Greece, opportunity to borrow cheap loans of Eurozone made the Greek government overspend and forget repayment obligations in the future This is a lesson for developing countries chasing “beautiful” numbers of growth targets If they keep borrowing and using the loan as Greece did over the past decade, heritage certainly can be a massive debt in the future Vietnam currently has public debt management law specifies the object, scope, targets and debt control systems Thus, the authorities have a clear legal basis for the implementation of public debt management However, the management is having some issues such as the overlapping management authority, limited capacity of debt managers or ambiguous debts for government corporations 41 Figure 4: Public debt of Vietnam from 2001 – 2020 Unit: %GDP Source: vnexpress.net With the statistics of the current public debt are considered safe, but with the forecasted figure rapidly rising to 64% in 2015and 64.9% in 2016, Vietnam public debt is expected to reach the safety limit of public debt, 65% It means that the ability to pay debts of Vietnam is quite weak If the government does not have appropriate solutions for managing the public debt with proper reforms and tight control of budget expenditures, there is possibility that Vietnam can be insolvent 3.2.3 The third lesson: Transparent disclosure of loans and the use of loans to improve investors’ confidence The debt crisis of Greece stemmed from the doubts of investors about its debt situation Earlier, to enter the Eurozone, Greece had used some "tips" to conceal its public debt condition, giving many fake numbers to meet the EU standards Nevertheless, after many 42 ambiguous figures published, investors began to doubt about the budget deficit of Greece Then, there were numerous surveys on the public debt of Greece When, the truth was unveiled, a wave of withdrawing from Greek banks pushed Greece into difficulties in mobilizing funds on international capital markets This is the consequence of lacking transparent data and trying to paint a rosy picture of the budget situation and economic variables For Vietnam, although the problem is not as severe as that in Greece, Vietnam has had the germ of a dearth of transparency in debt figures In 2009, according to the Ministry of Finance, the public debt accounted for 44.7%, while in another report in late 2009, MOF announced a new figure, 52.6% Simultaneously, figures given by the MOF were also different with the WB’s and the CIA’s According to the World Bank, public debt of Vietnam was at 47.5%, whereas CIA published the figure 52% for this The reason for these different results is that Vietnam was inconsistent in the calculation of public debt under international rules With these difficulties, overcoming weakness to regain the trust of investors is essential for Vietnam, if Vietnam does not want to become a second Greece On the other hand, Vietnam is advantageously independent in regulating monetary policy, and it is important that Vietnam has Greece to draw lessons for themselves 3.2.4 The fourth lesson: Developing strategies and plans for repayment Greece borrowed money for their expenditure without being worry about debt repayment obligations, leading to debt accumulated In order not to suffer the same situation as Greece, Vietnam needs to design the repayment plan First, Vietnam needs medium and long-term strategies for public debt including assessment of debt situation, public debt management, objectives and orientations for mobilization and use of loans 43 Second, the annual borrowing and repayment plan of the government should include domestic borrowing plan (including capital mobilization plan for the state budget and for development investment) and foreign borrowing plan Repayment plan needs to be detailed by creditors, without confusion between principal repayment and interest repayment as well as between domestic debt repayment and foreign debt repayment 3.3 Suggestions to prevent public debt crisis in Vietnam Debt crisis in Greece has raised some important issues about the management of public debt and budget deficit in Vietnam In fact, in recent years, public debt has contributed to accelerate the economic and social development Recently, Vietnam's economy has always had relatively high growth rate Even in 2009, when the world economy was in recession and many large economies had negative growth, the GDP growth rate of Vietnam still achieved 5.3% In the next years, public debt will still an important source of compensating budget deficit to invest in economic growth and sustainable development However, the increase of public debt also creates potential risks for the state budget, especially the fiscal risks To manage public debt strictly, to improve efficiency of debt use, and to maintain national prestige and financial security, following solutions need serious consideration 3.3.1 Improving fiscal policy and public debt management Government should develop a plan of borrowing which is consistent with socioeconomic development strategy and revenues and expenditures plan of the government Vietnam should clearly identify the purpose of loans such as financing the budget deficit, debt restructuring and re-lending, financing important programs or ensuring national financial security Vietnam also needs to determine the amount of short-term, mediumterm and long-term capital for each borrower with appropriate interest rate Plan on public debt should also clearly define the subjects using loans, the expected effects, the 44 maturity of loans, and the amount of capital in each period, so Vietnam can avoid that borrowed money is not used for a long time or there is no need to use the capital 3.3.2 Ensuring the sustainability of the scale and growth of the public debt The sustainability of the scale and growth of public debt can ensure the solvency in different situations, limit potential risks and reduce variety of costs Therefore, Vietnam should set the safety limit of public debt and regularly assess the risks arising from government debt in relation to GDP, state budget revenues, total exports, trade balance, foreign reserves, or finance reserves 3.3.3 Controlling loans strictly and improving efficiency and management in the use of loans This is a crucial issue as it can guarantee the repayment capacity and the sustainability of public debt Government often borrows money to re-lend Loan guarantee usually arises when businesses need to raise a large amount of capital on the international capital markets, but they not have enough charisma to obtain a loan by themselves Meanwhile, the government can help businesses gain access to international funding sources on a large scale with low interest rates These loans and guarantees are actually provision budgetary obligations, heightening the risk for the state budget to cover the debts when businesses are in difficulty or insolvency Thus, Vietnam government should be careful about providing borrowing-to-lending loans and loan guarantees Vietnam should prioritize key programs and projects of the State or the high priority fields of the country Strict control of foreign loans guaranteed by government and the guarantee for domestic loans is necessary for Vietnam to prevent public debt crisis 45 3.3.4 Transparently disclosing information and policies of public debt management The transparent disclosure of information and policies related to budget and public debt is very necessary and important This is the inevitable trend that the Government of Vietnam in general and the Ministry of Finance in particular have to implement However, inconsistent disclosure of information may become double-edged sword, causing suspicion and uncertainty for investors as well as market For example, regarding Greece, the cause of the crisis was the falsified data to cope with the harsh conditions of the European Union In other words, Greece is an exemplification of discrepant information in the context of uncertainty and doubt, making this country’s crisis become more severe To implement effectively the transparent disclosure, public debt should be calculated and determined in full settlement of the state budget and the result needs to be confirmed by specialized agencies 3.4 Sub-conclusion Chapter is the current situation and recommendations for the public debt problem in Vietnam From the experience of Greece, the thesis analyses the debt situation of Vietnam and draws the lessons for this country As a result, some suggestions have been developed to help Vietnam manage their public debt effectively 46 PART C: CONCLUSION Summary To some extent, the crisis in the world today has an influence on Vietnam However, for Vietnam, external risks like global crisis are not as considerable as internal ones Specifically, foreign debt is an extremely important and necessary capital for the implementation of the economic targets in a developing economy like Vietnam, especially when global integration trend has become popular As a result, it is essential for Vietnam to aware properly about loans and repayment to exploit foreign sources of capital effectively and to stimulate the economic development Still, there are many conundrums to Vietnam including the risk to financial security and the dependence on the economic and political interference from foreign countries Apart from the introduction and the conclusion, the thesis is divided into three chapters as follows: Chapter provides Theoretical Framework of public debt It presents systematically the basic theory about public debt, the classification of public debts, the causes of public debt and its impacts Chapter offers Real situation of Greek public debt In this chapter, the thesis provides data and information about the real situation of public debt situation in Greece, its reasons and influences Chapter is The debt situation in Vietnam and suggestions for Vietnam The thesis has analyzed the real situation of Vietnam's public debt scientifically based on a variety of data and documents Also, through the debt crisis in Greece, the thesis has drawn lessons in public debt in order to help Vietnam avoid the mistakes that other countries have experienced On that basis, the thesis has proposed some suggestions for enhancing efficiency and management of public debts of Vietnam: 47 - Firstly, Vietnam needs to improve fiscal policy and public debt management - Secondly, Vietnam should also ensure the sustainability of the scale and growth of the public debt - Thirdly, Vietnam should control strictly loans and improve the efficiency and management in the use of loans - Finally, Vietnam should disclosure information and policies transparently Limitations of thesis Due to my limited practical experience theoretical knowledge, my thesis still has many shortcomings I hope that in the future I can have more opportunity to study further this problems as well as other related fields Again, I would like to sincerely thank Mr Ngo Tung Anh (MA, MBA) because of his dedicated guidance to help me finish this project 48 BIBIOGRAPHY Nguyen Thi Thanh Ha (2011), An Overview of Public Debt Management in Vietnam, Eighth UNCTAD Debt Management Conference, Geneva, 1416/11/2011 Pham Do Chi (2010), Rút học sớm từ khủng hoảng nợ Châu Âu http://www.thesaigontimes.vn/Home/thegioi/kinhtecacnuoc/35872/ The Guardian - http://www.theguardian.com/business/2012/mar/09/greek-debtcrisis-timeline Ministry of Finance: http://www.mof.gov.vn/portal/page/portal/mof_vn/1857109 Financial Magazine: http://www.tapchitaichinh.vn/Bao-cao-va-thong-ke-tai- chinh/Thu-chi-ngan-sach-nha-nuoc-6-thang-dau-nam-2014/50901.tctc Vietnam express: http://vnexpress.net/infographic/doanh-nghiep/toan-canh-nocong-cua-viet-nam3100733.html Economist: http://www.economist.com/content/global_dept_clock 49