subject economic development 2 current situation of foreign debt in vietnam

RATIONALE External debt is the driving force of Vietnam's economic development as it accounts for the majority of Vietnam's investment capital.. Indicators of Foreign Debt Sustainability

MINISTRY OF EDUCATION AND TRAINING ae

NATIONAL ECONOMICS UNIVERSITY

Subject: Economic Development 2

TOPIC:

Current situation of foreign debt in Vietnam

Group 1 Class: Development Economics 62 Teacher: Dr Newyén Quỳnh Hoa

Các thành viên:

Trần Phương Anh Nguyễn Thị Vân Anh

Đổ Minh Anh Nguyễn Ngân Hà

Nguyễn Thuý Hằng

Bui Minh Ngoc Phan Xuân Nhất Hanoi, November 2022

Contents

RATIONALE 1

L Foreign debt 2

MA on aAA 2

2 Indicators ofForelgn Debt Sustainability - 5272222222222 zss°2 2

3 Type offorelen debt L0 1201120111211 121 1121111115221 11 1112811111 3

4 Determinants ofexternal debt - ác c1 S2 2919 11H11 ng 4

II The impact of foreign debt on economic #FOW{Ì se se see 6

`" 6

PM .a n4 6

3 Impact of foreign debt on Vietnam's economic ørowth - - 7 III Foreign debt in Vietnam 10

1 Foreign debt 1n VietNam - 2 1 21 1221112211111 111122 11k 10

2 The 1ssues of foretgn debt 2 1 2210110111111 111 1111112111111 22 II 2.1 Enterprise: thin capitaÌ situafIon - 2 22: 2220111221211 1 1s csey 11 2.2 State: slow disbursement of ODA loans - nhe 12

IV Solutions 14

V Conclusion 17 REFERENCES 18

RATIONALE External debt is the driving force of Vietnam's economic development as it accounts for the majority of Vietnam's investment capital Vietnam is in the position of a developing country that needs a large amount of capital to invest in infrastructure, public utilities serving people's lives such as education, health care, electricity, water Although it is necessary, when there is capital in hand, the disbursement and use are not effective Based on the report of the Ministry of Finance, as of October 2022, there are still 14 ministries and localities disbursing 0 dong, 17 units requesting to return nearly 7,000 billion ODA capital According to the Ministry of Finance's monitoring, the rate of disbursement (in the form of revenue and expenditure) of investment plans, ODA, and foreign preferential loans in the first eight months of 2022, on average, only reached 15.48% assigned capital plan is very low

In which, the average disbursement rate of localities is 11.5% of the capital plan, the disbursement rate of ministries and branches is 22.94% of the capital plan

Or, the status of ODA projects, typically: the Cat Linh - Ha Dong urban railway project is identified as a project with important national criteria, but the capital is adjusted from VND 8,770 billion to VND 18,001 billion dong without reporting to the Prime Minister for consideration and direction to ask for the National Assembly's policy

So what is the cause, what is the solution, has not been carefully considered by the agencies

Therefore, the team decided to carry out this study with the aim of pointing out the limitations of foreign loans that Vietnam is facing, thereby pointing out the necessary solutions to improve the efficiency of the use of foreign loans

I Foreign debt

1 Definition

Foreign debt is money borrowed by a government, corporation or private household from another country's government or private lenders Foreign debt also includes obligations to international organizations such as the World Bank, Asian Development Bank (ADB), and the International Monetary Fund (IMF) Total foreign debt can be a combination of short-term and long-term liabilities

2 Indicators of Foreign Debt Sustainability

The International Monetary Fund (IMF) and the World Bank maintain that foreign debt sustainability can be achieved if a country meets its current and future obligations of foreign debt without debt rescheduling and comprising growth

According to the IMF and the World Bank, reducing the net present value of foreign public debt to around 150% of the export of a country or 250% of the taxes of the country would help to overcome the obstacle

Although each offers its own benefit and uniqueness in dealing with particular circumstances, economists have no consensus opinion on a single indicator

Debt-to-GDP, government debt-to-fiscal revenue, and foreign debt-to-export are some ratios that can be used to manage foreign debt burden The metrics also contain the composition of outstanding debt, including short-term debt, foreign debt portion, and concessional debt in overall debt stock

External debt to GDP ratio

Foreign debt as a percentage of a country’s Gross Domestic Product or GDP is the ratio between the amount owed by a country to foreign lenders and its nominal GDP Government debt-to-fiscal revenue

General government debt-to-GDP ratio measures the gross debt of the general

government as a percentage of GDP

Foreign debt-to-export

Weaknesses of these indicators

- These indicators are problematic if import growth outpaces export growth

- Unless the external debt is issued in domestic currency, the foreign exchange needed will only result from a current account surplus

- Not all types of debt carry the same risk features

Foreign debt indicator in Vietnam in 2021

In 2021, Vietnam's debt ratios are still well controlled, in which foreign debt to GDP accounts for only 39%

The targets on foreign debt management are still maintained within the safe threshold approved by the National Assembly

Accordingly, the goal set by the Government is to maintain the debt targets at the current level, with a vision to 2030, public debt to GDP is 60%, of which government debt to GDP accounts for only 50% and the rest The country's external debt relative to GDP is controlled at 45%

Not only receiving positive domestic reviews, many experts from the International Monetary Fund and the World Bank recognized Vietnam's efforts in managing external debt in particular and public debt in general

However, there are still some shortcomings in debt management, although the debt balance 1s safe but still high, the situation of self-borrowing and self-paying foreign debt is still at an average level Besides, the disbursement of public investment capital, including ODA loans and foreign preferential loans of the Government, is still slow

3 Type of foreign debt

According to the lender:

+ Bilateral external debt: Bilateral financing is a type of financing where funding is provided by a foreign government or agency (including central banks), a public sector institution or an export credit agency

+ Multilateral external debt: These creditors are multilateral institutions such as the IMF, WB and other multilateral development banks

Based on the borrower

+ State debt (government debt): borrowed or guaranteed by the State and its agencies (Government includes (i) units of Government at all levels, central or local within a national economy; (11) all social insurance funds operate at all levels; (111) all non- profit, non-market organizations controlled and funded by Government entities

(Corporations and public enterprises are not classified as government sector but are classified in the public sector) Governments often rely on foreign capital to cover budget deficits

+ Private debt: debts borrowed by private enterprises without state guarantee (banks, financial corporations, other credit institutions) Usually large, reputable businesses and famous brands

Based on loan term

+ Short-term and medium-term debts: including loans with a term of less than 3 years These loans usually account for a small percentage (less than 10% - 20%) of the total debt

+ Long-term debt: includes loans from 3 years or more and usually accounts for a large proportion (about 80-90%) of the total debt

Based on loan interest rate

+ Loan with fixed interest rate: is a loan in which the debtor must pay the creditor an amount of interest each year equal to the outstanding balance multiplied by the fixed interest rate specified in the contract

+ Loan with variable interest rate: is a loan in which the debtor must pay the creditor

an amount of interest each year at the free market rate

+ Loan with LIBOR interest is a loan where the debtor has to pay the creditor an interest based on the LIBOR interest rate and plus a surcharge of 0.5% - 3% (the creditor's income is provided by them) debtor services) determined by the lending banks

According to the purpose of using capital

+ Borrowing to cover the shortage of domestic consumption

+ Borrowing to invest 1n socio-economic infrastructure or in service of production and business

+ Borrow to offset international balance of payments

4 Determinants of external debt

The three-gap model of Bacha (1989): Bacha, Solimano and Taylor's model of "three holes" is: "savings investment gap", "trade gap" and adds financial institutions as a third gap "deep hole" budget deficit” due to insufficient budget revenues

4

These three "holes" are the three defects of developed as well as developing economies They naturally form during the upward development of each country and national governments need to take measures to close the gap of gaps On the other hand, these gaps affect each other, so when making a specific policy, governments need to compare the gap between the gaps For example, when the trade gap is larger than the budget gap, governments should prioritize increasing revenue by tax measures while increasing exports and reducing imports to narrow the trade gap When the budget deficit gap is larger than the investment gap, the response from government policies is to reduce government spending, increase investment at a slow pace along with an increase in people's savings in consumption Determining the correlation of the distance between the holes that have top priority policies is not an easy job; In order to

do so, experts and economic analysts must have in-depth studies with the aim of drawing conclusions and providing the most accurate information for the government, especially for policy makers

Six important variables are based on the three-gap model of Bacha (1989): economic growth, exchange rate, gross fixed capital formation (a proxy for investment), trade openness (a proxy for imports and exports), inflation, and government expenditure (a proxy for government consumption) Developing countries have low domestic savings, and lack sufficient foreign exchange to finance the investment needed to boost economic growth and capital goods The low savings and lack of foreign exchange compel governments of these countries to acquire foreign funding Other reasons for over-dependence on borrowing are higher imports and exchange rates In Asian developing and transitioning economies, the domestic currency always depreciates against the dollar and this leads to a high cost of imports compared with the low earnings from exports As a result, the imports-exports gap increases, as export earings are usually insufficient to generate enough foreign currency to finance imports Therefore, developing countries tend to borrow to finance imports which, in turn, influences debt

II The impact of foreign debt on economic growth

1 Positive impacts

Increasing foreign debt will increase economic growth:

- High foreign debt increases investment, leading to higher economic growth Output reaches its optimum in the long run mainly through capital accumulation in the economy

- Besides, foreign loans are a way to access international capital markets as well

as increase abundant investment capital for the economy

- On the other hand, with a large capital source is an opportunity for developing countries to invest in infrastructure to attract foreign investment capital to invest more effectively on the basis of learning experiences and foreign technology

- Through this process to accumulate capital to reinvest in the economy, gradually reducing the dependence on external resources

- Therefore, high debt discourages investment activities and slows down capital accumulation for the economy

- At the same time, there is no incentive for governments to implement fiscal reform, which is the foundation for developing countries to maintain high economic growth rates in order to realize the United Nations’ millennium goals

- Another argument: if the expected level of foreign debt exceeds the country's ability to repay, it will affect national output because foreign creditors will tax domestic investment gains, leading to an increase in domestic economic growth slowed down

- The government will use the wrong tools to increase revenue to meet debt obligations, resulting in investment and growth decline

At a certain threshold of foreign debt, foreign borrowing will positively affect investment and economic growth However, crossing this threshold will have the opposite effect

3 Impact of foreign debt on Vietnam's economic growth

Model: GDP= f (EXD, OPE, M2, EX, CPI)

GDP= a0 + alEXD + a2CPI + a30PE + œ4M2 + œ4EX + ut

CPI is the consumer price index in the economy, quarterly data (“), reflecting the impact of inflation on economic growth

EX is the real exchange rate in the economy, expressed as the % change between this study period compared to the previous study period

Based on the regression analysis of the previous study's linear model, the impact of foreign debt on Vietnam's economic growth can be drawn as follows: