Impacts of the european sovereign debt crisis on fdi, oda and remittances to vietnam,graduation thesis

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING ACADEMY OF VIETNAM Faculty of Foreign Languages GRADUATION THESIS IMPACTS OF THE EUROPEAN SOVEREIGN DEBT CRISIS ON FDI, ODA AND REMITTANCES TO VIETNAM Supervisor: Le Thi Minh Que (M.A) Student: Bui Thu Thao Student ID: 12A7511160 Class: ATCA K12 Hanoi, May 2013 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING ACADEMY OF VIETNAM Faculty of Foreign Languages GRADUATION THESIS IMPACTS OF THE EUROPEAN SOVEREIGN DEBT CRISIS ON FDI, ODA AND REMITTANCES TO VIETNAM Supervisor: Le Thi Minh Que (M.A) Student: Bui Thu Thao Student ID: 12A7511160 Class: ATCA K12 Hanoi, May 2013 i ABSTRACT Since its first outburst, the European sovereign debt crisis has been leaving repercussions that impact the world economy on a global scale The effects have already reached Vietnam, a developing and vulnerable country whose economy somewhat depends on foreign sources such as foreign direct investment (FDI), official development assistance (ODA) and remittances The current study is to grasp the impacts of this crisis on these capital inflows to Vietnam by analysing data collected from reliable secondary sources This paper also points out to what extent the flows of FDI, ODA and remittances have declined during the period of the crisis, as well as putting forward some suggestions for a better attraction for foreign capital inflows Key words:  European Sovereign Debt Crisis  Vietnam  FDI, ODA and Remittances Bui Thu Thao ATCA – K12 ii ACKNOWLEDGEMENTS First and foremost, I would like to express my deepest appreciation to all my lecturers in the Banking Academy of Vietnam, who have provided such huge support throughout my four-year learning process My special gratitude goes to Mrs Le Thi Minh Que for her useful guidance, comments, remarks and engagement in helping me with my graduation thesis Without her this thesis would not have been possible Last but not least, I would like to thank my family and all my friends, who have been by my side the entire time Their love and support are one of my biggest encouragements Due to limited time, my graduation thesis may not be free from certain shortcomings Thus, in order to improve the thesis, I am eager to receive feedbacks from the lecturers Bui Thu Thao ATCA – K12 iii TABLE OF CONTENTS ABSTRACT i ACKNOWLEDGEMENTS .ii TABLE OF CONTENTS iii LIST OF FIGURES v LIST OF ABBREVIATIONS vi CHAPTER ONE INTRODUCTION 1.1 Significance of the Study 1.2 Research Purposes 1.3 Research Questions 1.4 Research Methods 1.5 Research Structure CHAPTER TWO LITERATURE REVIEW 2.1 Definition of Key Terms 2.1.1 Sovereign Debt 2.1.2 Sovereign Debt Crisis 2.1.3 European Sovereign Debt Crisis 2.1.4 FDI 2.1.5 ODA 2.1.6 Remittances 2.2 Overview of the European Sovereign Debt Crisis 2.2.1 Evolution of the European Sovereign Debt Crisis 2.2.2 Causes of the European Sovereign Debt Crisis Bui Thu Thao ATCA – K12 iv 2.2.3 Impacts of the European Sovereign Debt Crisis on Its Countries 11 2.2.4 Impacts of the European Sovereign Debt Crisis on FDI, ODA and Remittances to Developing Countries 17 CHAPTER THREE IMPACTS OF THE EUROPEAN SOVEREIGN DEBT CRISIS ON FDI, ODA AND REMITTANCES TO VIETNAM 19 3.1 Impacts of the European Sovereign Debt Crisis on FDI to Vietnam 19 3.2 Impacts of the European Sovereign Debt Crisis on ODA to Vietnam 23 3.3 Impacts of the European Sovereign Debt Crisis on Remittances to Vietnam 25 CHAPTER FOUR CONCLUSIONS 28 4.1 Conclusions 28 4.2 Policy Recommendations 29 4.3 Limitations of the Study and Suggestions for Further Research 30 LIST OF REFERENCES 32 Bui Thu Thao ATCA – K12 v LIST OF FIGURES Figure 2.1: Timeline of the European Sovereign Debt Crisis Figure 2.2: Financial Integration of the Eurozone (1998 – 2007) 10 Figure 2.3: Government Deficits of European Countries (2011) .12 Figure 2.4: EUR/USD Exchange Rate (2007 – 2013) .13 Figure 2.5: GDP Change in some European countries and the US (2008- 2012) 14 Figure 2.6: European Trade Balance (2009 – 2012) 14 Figure 2.7: Unemployment of Europe, the Eurozone and some European countries (2010 – 2012) 15 Figure 2.8: Youth Unemployment in Europe, the Eurozone and some European countries (2010 – 2012) .16 Figure 3.1: FDI in Vietnam by countries and territories (by December 2009) 19 Figure 3.2: FDI in Vietnam by number of projects (by December 2009) 20 Figure 3.3: FDI in Vietnam by registered value (by December 2009) 20 Figure 3.4: Vietnam FDI inflows (2006 – 2011) .21 Figure 3.5: Share of EU’s committed ODA for Vietnam (2009 – 2011) .23 Figure 3.6: Total Committed ODA for Vietnam (2009 – 2012) 24 Figure 3.7: Remittances to Vietnam by continent of origin (2009) 25 Figure 3.8: Remittance Flows to Vietnam (1999 – 2012) 26 Bui Thu Thao ATCA – K12 vi LIST OF ABBREVIATIONS FDI Foreign Direct Investment ODA Official Development Assistance GDP Gross Domestic Product WTO World Trade Organization OECD Organization for Economic Co-operation and Development IFAD International Fund for Agricultural Development IMF International Monetary Fund ECB European Central Bank EU European Union DAC Development Assistance Committee MPI Ministry of Planning and Investment GSO General Statistics Office Bui Thu Thao ATCA – K12 CHAPTER ONE INTRODUCTION 1.1 Significance of the Study Recently, the world economy is facing one of the worst crises in history – the European sovereign debt crisis It dates back to when the European Union was established and the Euro was first introduced and implemented toward the goal of a whole Europe with trade benefit and sustainable economic growth Till now, 17 countries have joined the organization, sharing the same currency, following one common monetary policy However, that same monetary policy, when combined with different fiscal policies set by its members, has revealed its flaw and exposed its inflexibility and structural weaknesses This had led to the outbreak of the Eurozone debt crisis, in which governments had to be in serious debt positions, countries were downgraded in their credit ratings, leading to a gloomy economy with rising unemployment rates and political instability Such measures as bailouts and austerity planning were taken, but the consequences have been too deep and created a bleak prospect for the global market Foreign capital inflows such as foreign direct investment (FDI), official development assistance (ODA) and remittances have been playing an important role in the Vietnam economy As stated by Mr Bui Quang Vinh, Minister of Planning and Investment in a meeting in March, foreign investment has been an active factor in Vietnam’s development and international economic integration In details, they are significant additional investment in social capital, encouraging economic restructuring, production capacity, technology innovation, high-quality labours and the opening of international markets Additionally, remittance, with its noteworthy scope, has been a stable source of financial inflow, which helps fostering economic stability and supports the administration of monetary policy in Vietnam Bui Thu Thao ATCA – K12 The European sovereign debt crisis has had contagious impacts on many aspects of both the economy and the society inside and out of Europe; and Vietnam, as well as the country’s FDI, ODA and remittance inflows, is no exception Hence, realizing the significance of this issue, this graduation thesis is conducted under the topic “Impacts of the European sovereign debt crisis on FDI, ODA and remittances to Vietnam” 1.2 Research Purposes This graduation thesis is aimed at first giving a general review of the European sovereign debt crisis, including its evolution, causes and impacts; then, probing the extent of its influence on the recent trend of Vietnam’s foreign capital inflows, namely FDI, ODA and remittances; and finally putting forward some implications to improve the situation 1.3 Research Questions To achieve the aforementioned purposes, the following questions are raised in this graduation thesis: How has the European sovereign debt crisis spread in Europe? Why has it happened and what are its effects on European countries? To what extent has it influenced the flows of FDI, ODA and remittances to Vietnam? 1.4 Research Methods The thesis is the application of methods such as synthesis, analysis and comparison It uses trustworthy secondary data sources, specifically statistics, reports and research studies conducted by well-known organizations, articles from dependable websites as well as chart illustrations in order to draw a conclusion on the research topic Bui Thu Thao ATCA – K12 19 CHAPTER THREE IMPACTS OF THE EUROPEAN SOVEREIGN DEBT CRISIS ON FDI, ODA AND REMITTANCES TO VIETNAM As two sides of a coin, the European sovereign debt crisis has had both positive and negative impacts on the FDI, ODA and remittance inflows to Vietnam However, due to the lack of secondary data relating to the analysis of the crisis’ positive influences, the thesis will only focus on the negative aspects of the impacts 3.1 Impacts of the European Sovereign Debt Crisis on FDI to Vietnam Firstly, it is important to analyze the significance of Europe as an FDI contributor to Vietnam The graphs below illustrate the proportions of FDI flows to Vietnam accounted for by European countries by December 2009 in terms of countries and territories, number of projects and registered value Figure 3.1: FDI in Vietnam by countries and territories (by December 2009) 30 25 27 27 Asia Europe 21 20 15 10 5 Oceana Africa South America North America Number of investing countries and territories (Source: MPI) Bui Thu Thao ATCA – K12 20 Figure 3.2: FDI in Vietnam by number of projects (by December 2009) 3% 1% 10% 10% Oceana Africa North America Asia Europe 76% (Source: MPI) Figure 3.3: FDI in Vietnam by registered value (by December 2009) 2% 0% 13% 10% Oceana Africa North America Asia Europe 68% (Source: MPI) It can be easily observed from figure 3.1 that 27 countries and territories, which made up about one-thirds of all FDI investors for Vietnam, are from Europe Bui Thu Thao ATCA – K12 21 Additionally, figures 3.2 and 3.3 indicate that although Europe was not the biggest FDI contributor, it stayed in the top three major sources of FDI flows to Vietnam, with 10% and 13% of the number of projects and registered value, respectively That is to say, any increase or decrease in the amount of Vietnam’s FDI provided by Europe would result in the gain or loss of our total FDI inflows Indeed, largely due to the European sovereign debt crisis, it was reported that the share of registered FDI from European countries to Vietnam had dropped from 18% in 2009 to 11% in 2011 Consequently, a fall in Vietnam’s FDI in this period was within expectations Figure 3.4: Vietnam FDI inflows (2006 – 2011) (Source: GSO of Vietnam) From 2006 to 2008, prior to the debt crisis in Europe, Vietnam had enjoyed an upward trend in FDI inflows, with the amount reaching its peak in 2008, in which a hefty 71.7 billion USD was promised to be invested to Vietnam through Bui Thu Thao ATCA – K12 22 FDI projects, over three times the previous year’s The implemented amount in 2008 was also the highest in the period, which was 11.5 billion USD However, the serious situation that Europe fell into since 2009 has, somewhat, brought negative changes to Vietnam’s FDI inflows, reflected in a dramatic decline of FDI (registered value) to merely 23.1 billions USD in 2009, which continued to drop until 2011 when a slight recover occurred The change was less dramatic when it comes to the implemented FDI, although it did suffer from a fall of 1.5 billion USD between 2008 and 2009 The decrease in FDI inflows to Vietnam can undoubtedly be partly explained as the aftermath of the Eurozone ongoing debt crisis, which has resulted in tightening fiscal policies among European countries, and thus, the hesitation and withdrawal of investors from Europe Additionally, Vietnam, as a developing country with low level of advancements as compared to developed ones, cannot enjoy anything from the shift of FDI flows to Europe Furthermore, another explanation for this may be found in the internal problems faced by Vietnam with our slowness in FDI distribution, the imbalance among sectors and regions receiving FDI and the inefficiency of using FDI due to cross-cultural and policy barriers These factors have been affecting our competence, especially in this hard time of the debt crisis in Europe and the global crisis Bui Thu Thao ATCA – K12 23 3.2 Impacts of the European Sovereign Debt Crisis on ODA to Vietnam As stated in the 2012 Blue Book published by the European Union to Vietnam, EU is still one of Vietnam’s leading ODA providers However, figures in recent years have indicated a downward trend in the region’s share of committed ODA inflows to Vietnam Figure 3.5: Share of EU’s committed ODA for Vietnam (2009 – 2011) (Source: CG Meetings 2008-2010/ODA Stat 2010/Blue Book 2008-2010) Figure 3.5 shows that from 2009 to 2011, the proportion of committed ODA inflows from European countries fell into two stages, first marginally from 18.10% to 17.50% in the 2009-2010 period and then more remarkably to only 11.10% in 2011 Indeed, it was reported that between the years 2010 and 2011, the ODA amount promised by EU dropped from 1.082 to 0.972 billion USD Bui Thu Thao ATCA – K12 24 Figure 3.6: Total Committed ODA for Vietnam (2009 – 2012) 8.063 7.3 7.9 6.846 committed ODA for Vietnam (billion USD) 2009 2010 2011 2012 (Source: Vietnam Economics News) Figure 3.6 illustrates the change in total committed ODA for Vietnam from all foreign countries, in which the number gradually dropped from 8.063 to 6.846 billion USD in 2012 Furthermore, it has been reported that in the year 2013, Vietnam is promised to receive 5.485 billion USD of ODA, meaning another decrease in this kind of aid inflow This is understandable since there has been reduction in aid spending in several European countries’ budget, leading to stark reductions in their ODA outflows Inevitably, the total committed ODA for Vietnam in the period had to suffer from the consequences Contributors’ hesitation may also be due to factors from the country where the aids flow in In the last Vietnam Consultative Group Meeting of Donors which took place in late 2012, the Head of Mission from EU, Mr Franz Jessen, has expressed their concern that in Vietnam’s 2013 budget plan, there is a lack of budget for restructuring or acting as a cushion in case of unexpected risks Such drawbacks faced by Vietnam, together with the stricter ODA outflow planning of European countries, have accordingly weakened our competitiveness in attracting ODA inflows Furthermore, in the press conference after the same Bui Thu Thao ATCA – K12 25 meeting, according to World Bank’s Country Director for Vietnam, Ms Victoria Kwakwa, World Bank was planning to promote aids support monitoring project to increase the efficiency of the committed ODA usage in Vietnam 3.3 Impacts of the European Sovereign Debt Crisis on Remittances to Vietnam Remittances, with their increase both in size and importance, have been playing a remarkable role in fostering the stabilization of the economy Figure 3.7: Remittances to Vietnam by continent of origin (2009) (Source: Human Development Report, 2009) As recorded by the United Nation’s Human Development Report of 2009, Europe, as a continent of origin, took up nearly one-fifth of the total remittances inflows to Vietnam, outweighed considerably by North America The same situation applied to its percentage as a continent of destination for Vietnamese migrants These figures proved a noticeable, although not dominant, contribution of remittances flowing from Europe to Vietnam Bui Thu Thao ATCA – K12 26 The unsoundness in the Eurozone has somewhat made an impact on our annual remittances from overseas As reflected in figure 3.8 below, it is not difficult to notice that after rapid rises between the years 1999 and 2010, there was a sudden drop from about to billion USD in 2009, the same year the European sovereign debt crisis started to unfold Although it then recovered, the two following years were a stagnant period when the remittance flow kept at slightly under billion USD, before continuing to grow in 2012 Figure 3.8: Remittance Flows to Vietnam (1999 – 2012) (Source: talkvietnam.com) However, it is undeniable that the level of remittances sent to Vietnam is still high, if not among the highest It is reported that in 2012, Vietnam ranked 7th in overseas remittance with over 10 billion USD Thus, a conclusion can be drawn that although the debt crisis did affect our remittance inflows, the impact was not excessively substantial It is because the inflow mainly came from over four million Vietnamese living overseas, especially Bui Thu Thao ATCA – K12 27 400,000 guest workers in the Republic of Korea, Japan, Malaysia, Taiwan and the Middle East Besides, our overseas workers tend to save certain amounts of their salary in order to send back home, regardless of the current ill situation of the economy Bui Thu Thao ATCA – K12 28 CHAPTER FOUR CONCLUSIONS 4.1 Conclusions Since the establishment of the Euro in 2002, it has revealed several significant drawbacks for which the outburst of the European sovereign debt crisis has appeared to be the most convincing proof It is not easy to grasp all the dynamics and effects, both short-term and long-term, of the crisis; however, there is no doubt about the fact that the crisis, with its contagious nature, has created a enormous impacts on not only the continent’s economic systems and the lives of millions of its people but also those outside, including developing countries like Vietnam “Austerity packages introduced by European governments are likely to weaken demand for developing country exports and might lead to cuts in aid spending Moreover, high unemployment rates associated to weak economic activity in developed countries may translate into fewer remittances directed to developing economies”, pointed out on the Guardian UK in 2012 Similarly, as has been found and analyzed in this thesis, the crisis has had significant impacts on FDI and ODA; while for remittances, it was less remarkable, though still noticeable Consequently, it has certainly constituted an impediment to Vietnam’s process of economic and human development Possessing a certain degree of exposure to the crisis and such limited ability to respond, altogether with our large dependence on foreign capital inflows, namely FDI, ODA and remittances, Vietnam is challenged to diminish the consequences stemmed from the Eurozone debt crisis, which require appropriate approaches to tackle the situation However, it can somewhat create opportunities for Vietnam to focus more on relying on our strength by boosting our domestic productivity, thus, becoming less dependent on external sources Bui Thu Thao ATCA – K12 29 4.2 Policy Recommendations The European sovereign debt crisis and its impacts on Vietnam’s FDI, ODA and remittance inflows are inevitable yet there are solutions to be taken in order to protect the country from the effects and keep the inflow figures from getting in worse positions To deal with the situation in the short-term and to prevent its consequences over the long haul, it is necessary for the country to strengthen our competitiveness in the international environment in order reduce the level of effect from any unexpected negative events over the world Several solutions should be adopted, among which are these: When it comes to economic development, policies should be able to ensure both high growth rates and stability, so as to narrow down the development gap between Vietnam and developed countries as well as reducing the vulnerability to changes of the world situation There is also a need for more clarity and appropriateness in our budget planning and foreign aids distribution to encourage better trust, and thus, more contribution from investors Besides, it has been believed that the current policies in Vietnam are somehow making it harder for foreign investors to enter the Vietnam market Hence, the government should adjust our policies towards more favorable terms and a fair playground for domestic and foreign investors to lessen their hesitation to invest Some of the solutions can be to simplify the paperwork procedures for foreign investors or to reduce the level of taxes for them in their first years investing Bui Thu Thao ATCA – K12 30 Regarding our labor export, apart from supporting labors wanting to work overseas and widening the foreign market for labor export, Vietnam should also enhance the ability of our workers in order to improve the efficiency of labor export and our position in the international market 4.3 Limitations of the Study and Suggestions for Further Research The first obvious limitation of this graduation thesis was its sole reliance on secondary data without the approach to primary data Thus, the research was not able to guarantee up-to-date and thoroughly reliable information on the subject Indeed, the study only applied basic analysis based on the limited sources Secondly, within a limited amount of time, the study did not go into detail about the differences of the crisis’s impacts on FDI, ODA and remittances to Vietnam among different sectors and regions such as agriculture, industrial manufacture, services and so on Due to the same reason, the thesis only concentrated on pointing out the crisis’s negative impacts on FDI, ODA and remittances to Vietnam without being compared to those to other countries in the region Also, it did not use a wider range of methods, for example, conducting questionnaire, survey or interviews Therefore, further research studies should focus more on analyzing official documents with more recent statistics as well as having a more in-depth analysis of the crisis’s negative and positive impacts concerning both quantity and quality of the three analyzed foreign capital inflows Additionally, the use of various methods and more detailed effects on specific fields and in comparison with Vietnam’s neighbors would provide the policy makers with a bigger picture of the impacts of the European sovereign debt crisis on FDI, ODA and remittances to Vietnam Bui Thu Thao ATCA – K12 31 Success in taking into consideration those factors would help make better decisions on attracting those foreign capital inflows Bui Thu Thao ATCA – K12 32 LIST OF REFERENCES Bui, Q.V (2013) Meeting “Review of Vietnam’s 25-Year Foreign Investment” Diéz, J.C (2012) Nature and Causes of the Euro Crisis Economist Intelligence Unit (2012) State of the Union: Can the Eurozone survive its debt crisis? Eichengreen, B and Hausmann, R (2005) Other People's Money: Debt Denomination and Financial Instability in Emerging Economies The University of Chicago Press Ferguson, N (2012) How Europe Could Cost Obama the Election Newsweek Magazine International Fund for Agricultural Development (2007) Sending Money Home: Worldwide Remittance Flows to Developing and Transition Countries IFAD Investopedia Definition of The European Sovereign Debt Crisis Investopedia Krugman, P (2009) Revenge of the Glut The New York Times Mankiw, N.G (2010) Macroeconomics (7th Edition) Worth Publishers Massa, I (2011) How the Eurozone debt crisis could affect developing countries Guardian UK 15 April 2013 Massa, I., Keane J and Kennan, J (2012) The Eurozone Crisis and Developing Countries Overseas Development Institute Working Paper 345 Bui Thu Thao ATCA – K12 33 Ngo, C.T (No date) Public Debt and its Impacts on the Economy Nugée, J (2011) The Financial, Economic and Political Consequences of the European Debt Crisis State Street Global Advisors Organization for Economic Co-operation and Development (2003) Glossary of Statistical Terms Rogers, S Eurozone debt crisis: the key charts you need to understand what's happening Guardian UK Sanderatne, N (2011) The Importance of Foreign Direct Investment The Sunday Times SESRIC Report (2011) European Debt Crisis and Impacts on Developing Countries SESRIC Wolf, M (2011) Merkozy failed to save the Eurozone The Financial Times World Bank No date Remittance Market Outlook World Bank World Trade Organization (1996) Trade and Foreign Direct Investment Press Release The United Nations (2002) Monterrey Consensus Bui Thu Thao ATCA – K12