Tiểu luận tài chính công ARGENTINAS2001DEBTCRISISANDPROPOSALSFORVIETNAM

ARGENTINA’S 2001 DEBT CRISIS AND PROPOSALS FOR VIETNAM Table of Contents I CAUSES AND CHRONOLOGY OF ARGENTINA ECONOMIC CRISIS IN 1998-2002 CAUSES OF ARGENTINA ECONOMIC CRISIS IN 1998-2002 CHRONOLOGY OF THE DEBT CRISIS IN ARGENTINA II ARGENTINE ECONOMY IN 2002-2016 OVERVIEW OF ARGENTINA ECONOMY AFTER THE 2001 DEFAULT 1.1 PERIOD 2002-2007 1.2 PERIOD 2008-2009 1.3 PERIOD 2010-2016 (THE ARGENTINIAN 2014 DEFAULT) ARGENTINA ECONOMIC OUTLOOK IN 2016 AND ECONOMIC FORECAST 6 10 10 III PROPOSALS FOR VIETNAM 12 VIETNAM’S CURRENT DEBT SITUATION VIETNAM’S CURRENT PUBLIC DEBT STATUS VERSUS ARGENTINA’S IN 2001 PROPOSALS FOR VIETNAM 12 13 14 Introduction In the first decades of 20th century, Argentina was one of the wealthiest country in the world However, since the end of World War II, Argentina experienced several economic and political crises which caused Argentina to lose its high position on the world stage In the early 1990s, Argentina struggled with soaring inflation up to thousands percent, however, the new administration addressed it and drove Argentina economy to the new period of development Nevertheless, after a decade, Argentina announced the default of its external debt in December 2001 Moreover, Vietnam’s current public debt issue is drawing close attention from its citizens, therefore, studying the case of Argentina might provide a better knowledge on the issue of Vietnam With that in mind, in this thesis, we will dictate the causes of Argetina’s debts crisis, have a brief outlook on its economic over 15 years after the default as well as a simple comparison between Vietnam’s current debts status and Argentina’s debts crisis in the early 2000s, and then propose some measures for Vietnam to keep its debt ratio in safe zone I Causes and chronology of Argentina economic crisis in 1998-2002 Causes of Argentina economic crisis in 1998-2002 Under the President Alfonsin’s administration, Argentine austral was issued as a new currency to pay foreign debts However, the 1989 hyperinflation led to Austral devaluation When Carlo Menem took office as Argentina’s President in 1989, he brought some political stability and significant economic growth as he carried out a number of strong measures to restructure the economy, including promoting trade liberalization, building competitive market economy without the state’s interference, privatizing state-owned enterprises and sell them to foreign owners… On one hand, the reforms levered foreign investment inflow to Argentina, which was an important source of foreign currency for the Government to pay off previous debts In 1991, Argentina’s Government adopted the Convertibility Plan Among the most important contents were the following:     The establishment of the currency board; The issuance of the new currency called Peso to replace Austral, in which Peso = 10,000 Austral; Setting the exchange rate between Peso (ARA) and USD: ARA = USD; i.e pegging with the Dollar Strictly control of the money issued to ensure amount of the peso in circulation is in line with the amount of dollars in circulation.; which in practice officially promoting dollarisation The Convertibility Plan can temporarily control the inflation, from more than 3,000% in 1991 to 10% in 1993 and 4.7% in 1994, making Argentina one of the most favorite emerging market on Wall Street (Figure 2) As a result, the country was able to borrow relatively cheap in USD this period, causing the country increasingly dependent on foreign capital Furthermore, the banking system also witnessed high level of dollarization as it lent in dollars at the traditional interest rate Figure Dollarization of the Financial System (in %), 1991-2001 Source: Central Bank of Argentina Figure Inflation and Unemployment in Argentina, 1980-2002 Source: IMF As the result of the reform, the Argentine economy entered a period of economic growth between 1991 and 1997 (Figure 3) Only in 1995 output growth was negative, due to the socalled Tequila crisis in Mexico The quick return of high economic growth in 1996, however, suggested that the Argentine economy was strong enough to counter external shocks This further strengthened the confidence in the implemented policies, including the Convertibility Plan Figure GDP Growth in Argentina, 1980-2006 Source: World Bank Nevertheless, in 1998, Brazil’ real encountered a strong depreciation, making Argentine export declined significantly as Brazil is Argentina’s major trading partner Trade deficit was inevitable when export and import grew at about 8%/ year and 25%/year respectively in the period 1990-1998 In addition, the USD appreciated and reached its highest level in 15 years while Argentine central bank could not apply monetary or exchange rate policy to response to the growing economic issues, making it fall into crisis in 1998 Consequently, foreign investors lost their confidence in the Argentina economy, causing the sharp increase in borrowing costs This way, the country had remarkably lost its access to the international financial markets in 2001 Chronology of the debt crisis in Argentina Time Event March, 2000 IMF agreed a 7.2 billion USD loan for Argentina in three years on condition that the country tightened its finance and achieved GDP growth of 3, 5% in 2000 May, 2000 Argentine government announced a billion USD budget cut with the that "financial responsibility" could restore confidence in the economy December, 2000 President De La Rua’s administration, successor of Carlo Menem, announced the need for a 40 billion USD package of assistance from the IMF January, 2001 As the Argentine economy continued to decline, IMF increased its March 10, 2000 lending to billion USD as part of a 40 billion USD package This loan was supposed to ensure the country's GDP will grow at a rate of 2.5 percent in 2001 June, 2001 Peso was depreciated by 7% to USD with the expectation of improving its international trade competitiveness July, 2001 Argentine Congress adopted a "Zero Deficit Law", requiring a balanced budget in the fourth quarter of 2001 September, 2001 Basing on Argentina's commitment to enforce the “Zero Deficit Law”, IMF increased its loan commitments to $ 7.2 billion November, 2001 The Government changed 60 billion USD of bonds at the average interest rate of 11-12% per year for longer term bonds at the interest rate of only 7% Consequently, people rushed to withdraw money from commercial banks, making the reserves of the central bank reduced about billion USD per day President De La Rua imposed a personal withdrawal limit of 1,000 USD per month December, 2001 IMF refused to lend 1.24 billion USD on the grounds that Argentina was unable to meet its financial targets Later on, Argentina announced its inability to repay its foreign debt January, 2002 Congress-chosen President Eduardo Duhalde decided to implement the Law of Public Emergency and Reform of the Exchange Rate Regime, marking the end of the Convertibility Plan At first, the peso is devalued from peso per Dollar to 1.4 peso per Dollar Later on, the exchange rate will become fully floating, which allows the peso to depreciate even further.1 II Argentine economy in 2002-2016 Overview of Argentina economy after the 2001 default 1.1 Period 2002-2007 The economic recovery began in the second quarter of 2002, following a damaging recession, and continued until the world economic slowdown and recession of 2008-2009 As can be seen from the chart, Argentina’s real GDP reached its pre-recession level after three years of growth, in the first quarter of 2005 Figure Argentina’s quarterly real GDP level, 1993-2007 Source: DNCN, INDEC Wiel, I (2013) The Argentine crisis 2001/2002 Retrieved from https://economics.rabobank.com/publications/2013/august/the-argentine-crisis-20012002-/ Figure Argentina’s selected employment and social indicators Source: INDEC The impact of this rapid and sustained growth can be seen in the labor market and in household poverty rates The chart shows the evolution of unemployment and poverty rates during the recovery Unemployment fell from 21.5 percent in the first half of 2002 to 9.6 percent for the first half of 2007 The employment-to-population ratio rose from 32.8 percent to 43.4 percent during the same period And the household poverty rate fell from 41.4 percent in the first half of 2002 to 16.3 percent in the first half of 2007 These are very large changes in unemployment, employment, and poverty rates Figure Argentina’s main economic indicators, 2002-2007 Source: MECON, BCRA, INDEC A number of government policies seem to have contributed to Argentina's rapid and robust recovery Perhaps the most important of these policies was the government's exchange rate policy At the beginning of 2002, the exchange rate became fully floating, which allow the pesos to depreciate rapidly from pesos/USD to 3.6 pesos/USD in May 2002 The devaluation had caused a significant increase in inflation, which then running at more than 25 percent annual rate Thus, it was important for the government to stabilize the nominal exchange rate, not only to help stabilize inflation but also the financial system This was done primarily through interventions in the foreign exchange markets (selling dollars), and also by restricting the outflow of pesos from the banking system By the second half of 2002, the government was intervening in the opposite direction, buying dollars to slow the appreciation of the peso In 2003 the government began to conduct what would become the central bank's exchange rate policy for the rest of the recovery, that of maintaining "a stable and competitive real exchange rate." The policy contributes to the predictability of important prices for producers to consider in their investment decision, as well as allows domestic producers of tradable goods and services to compete in world markets Figure Argentina’s reserves and exchange rate Source: World Bank Another important policy concerns the default and renegotiation of the government's external debt In 2005 after a delay of more than three years, a supermajority of creditors (about 76 percent2) accepted a debt swap that took $67.3 billion of foreign debt off the books This was a record 65.6 percent "haircut" and was very important to Argentina's recovery3 On the contrary, the default appears to have been necessary for the country to change its macroeconomic policies so as to restore economic growth Before the default, the government was focused on tightening its fiscal and monetary policies in an attempt to restore credibility among its creditors, an effort that included maintaining the convertibility system The debt swap enabled the government to pursue a new set of successful macroeconomic policies, for example labour market and social measures4 Dhillon, A., Garcia-Fronti, J., Ghosal, S., & Miller, M (2006) Debt restructuring and economic recovery: analysing the Argentine swap Retrieved from https://www2.warwick.ac.uk/fac/soc/economics/staff/mmiller/esrcproffellows/pub/argswap.p df Weisbrot, M., & Sandoval, L (2007) Argentina’s economic recovery: policy choices and implications Retrieved from http://cepr.net/documents/publications/argentina_recovery_2007_10.pdf International Institute for Labour Studies (2011) Argentina - Case study of past crises ECIILS Joint Discussion Paper Series No 1.2 Period 2008-2009 The global financial crisis hit Argentina in late 2008 after the country’s economy had been enjoying a prolonged recovery from its 2001-2002 economic crisis, however the impacts were relatively modest and short-lived The crisis started to have an impact on the Argentine economy at the end of 2008 (Q4) and beginning of 2009 (Q1), as quarterly GDP fell by 1.1 and 0.4 per cent respectively The goods production sector was the hardest hit, in particular subsectors related to construction and foreign trade Exports declined by 19 per cent reduction during the first semester of 2009 mainly through declines in sales from the automotive sector Growth at the end of 2009 proved stronger (1.3 percent), thanks to the revival of growth in some of Argentina’s export markets, notably to Brazil and China In particular, the rebound was strong in manufacturing and agriculture according to International Labour Office Figure Argentina Quarterly GDP Source: OECD Data International Institute for Labour Studies (2011) Argentina - Case study of past crises ECIILS Joint Discussion Paper Series No 1.3 Period 2010-2016 (the Argentinian 2014 default) During the period 2010-2016, Argentine economy saw a downturn in GDP growth rate Notably, for the second time in 13 years, Argentina was “imminent in default” in 2014 after not being able to reach an agreement with holdout investors7 which would have allowed debt-restructured bondholders to be paid In 2005 and 2010, Argentina tried to make a negotiation with the holders of its 2001 defaulted debt in which they offer new “exchange bonds” that paid about 35 cents on the dollar of the original ones Eventually, 93 percent of the old bondholders accepted the new ones The other percent was mostly US hedge funds (holdout investors) that bought debt cheaply after Argentina's economic crisis and wanted to have full repayment They took the case to the US court and won, but Argentina appeals the verdict The US courts have blocked interest payments, which already deposited by the Argentinean government in New York, to debt-restructured bondholders until agreement with the holdout investors is reached Thus, Argentina did not pay on due date to debt-restructured bondholders and theoretically defaulted Figure Argentina’s GDP Growth (annual %) Source: World Bank Argentina economic outlook in 2016 and economic forecast Argentina recorded a government debt equivalent to 54.20 percent of the country's GDP in 2016, a 0.7 percentage point rise from 2015 when it was 53.5 percent of GDP This amount is the 64th highest government debt to GDP according to Ieconomics.com and its projection for 2017 is 61.1 percentage.8 BBC (2014) Argentina defaults for second time Retrieved from http://www.bbc.com/news/business-28578179 The investors, also known as "hold-outs", are US hedge funds that bought debt cheaply after Argentina's economic crisis They never agreed to the debt swap accepted by the majority of bondholders Ieconomics (2017) Argentina - Government debt to GDP Retrieved from https://ieconomics.com/argentina-government-debt-to-gdp Figure 10 Argentina government debt to GDP Source: TrandingEconomics.com Figure 11 Argentina economy data Indicators 2012 2013 2014 2015 2016 GDP per captital (USD) 13,885 14,540 13,133 14,854 12,507 GDP (USD bn) 579 614 560 641 545 Economic Growth (GDP, %) -1.0 2.4 -2.5 2.6 -2.2 Consumption (%) 1.1 3.6 -4.4 3.5 -1.4 Investment (%) -7.1 2.3 -6.8 3.8 -5.1 Unemployment Rate 7.2 7.1 7.3 7.1 8.4 Exchange Rate (vs USD) 4.92 6.52 8.46 12.94 15.86 Inflation Rate (CPI, %) 10.0 18.4 38.0 26.7 41.2 Source: FocusEconomics Argentina’s economic activity started to pick up in the second half in 2016, driven by strong exports in the agriculture sector, helped by recent reforms such as the elimination of export taxes Private consumption was held back 2016 witnessed a rapid fall in investment from 3.8 to -5.1 percent of GDP Though Argentina unemployment rate fluctuated substantially in recent years, it tended to decrease through 1996 - 2016 period ending at 8.4 percent in 2016 Despite the fact that Argentina’s government expected the annual inflation rate to be between 35.0 percent and 36.0 percent in 2016, inflation increased significantly by 41.2% in 2016 Figure 12 Argentina: Demand, output and prices Source: OECD Economic Outlook 101 databases Argentina’s economic growth is projected to rebound strongly in 2017 and 2018 as recent reforms gain traction and exports strengthen Investment will be a key driver of growth, supported by stronger infrastructure investment, an improving business climate and rising capital inflows Exports will benefit from recent reforms, such as the removal of export taxes, and the improving outlook in trading partners, especially Brazil Private consumption will pick up, driven by increases in real wages, as the labor market improves and inflation falls III Proposals for Vietnam Vietnam’s current debt situation By the end of 2016, Vietnam’s public debt stood at 64.73 per cent of GDP, up from 62.2 percent in 2015 and 50.1 per cent in 2011, while government debt and foreign debt stood at 53.6 percent and 44.3 percent of GDP, respectively (Figure 13)9 State expenditures reached 28 percent in 2016 and was forecasted to be the same in 2017 Figure 13 Vietnam’s external debt by years External Debt 2012 2013 2014 2015 2016 39.5 38.5 39.3 41.7 44.3 (% of GDP) Source: Focus-economics Than, X (2017) Dư nợ cơng Việt Nam khoảng 64.73%GDP tính đến cuối năm 2016 [Vietnam’s public debt is about 64.73% by the end of 2016] Retrieved from http://vov.vn/kinh-te/du-no-cong-viet-nam-khoang-6473gdp-tinh-den-cuoi-nam-2016584200.vov Until the end of 2016, Vietnam has just issued international bonds for times to mobilize capital from the international financial market with the total value of $2.75 billion (Figure 14) Figure 14 Vietnamese government international bonds Issue size ($USD million) Maturity (years) date Coupon 2005 750 10 6.875% 2010 1000 10 6.750% 2014 1000 10 4.800% Source: MoF’s Statistics Vietnam’s current public debt status versus Argentina’s in 2001 In the comparison with Argentina in 2001, Vietnam’s debt scenario is still more brightening According to Moody’s Investors Service- a bond credit rating business- rank Vietnam B1 positive, a safety position Vietnamese economy has still been in a high-growth period with the average economic growth rate around 6-7 percent annually, in 2016 and 2017, its economic growth rate are 6.2 percent and 6.7 percent-forecasting, respectively These indicators are better than these in Argentina By early 2000s, its economic growth rates were negative, Argentina’s GDP growth rate in 1999 was -4 percent High economic growth rate enables Vietnam to repay loans for creditors; and thus, Vietnam repaid $12billion USD to creditors by 2016 In addition, due to the fact that Vietnamese political status is more stable than Argentina in 2000s, there is little chance that potential conflicts will provoke in Vietnam As a positive result, if Vietnam economy faces a financial risk the government will not be disturbed by any opposing forces; and therefore, it will focus heavily to find out solutions for challenges Vietnam’s foreign debts mainly are ODA loans with preferential conditions According to Department of Debt Management and External Finance, 98 percent of Vietnam’s foreign loans in recent years are in the form of ODA with preferential conditions Interest rates average only from to 1.5 percent per annum Moreover, there is another reason of Argentina bankrupt announcement in 2001 It is in the 1990s, as Argentina is received positive rates from international bond credit rating businesses like Moody’s, S&P, Fitch Ratings, its government issued government bonds to take money from foreign investors in order to pay for internal social welfare expenditures When the economic downturned, the government revenue declined dramatically, Argentina no longer has sufficient liquidity to meet its loans repaid demand and at the end, it had to announce default In contrast, by the end of 2016, Vietnam has just mobilized capital from the international financial market with the total value of $2.75 billion The figure is tiny in the comparison with its current foreign reserve about $45 billion by 2017 In the local financial market, at the end of 2016, the average maturity of the government bond portfolio was 5.71 years and in 2016, the average interest rate of bonds was 6.49% per year Furthermore, the current Vietnamese foreign exchange rate regime is more flexible than Argentina’s in the early 2000s when it pegged its currency, the peso, to the American dollar: every peso in circulation had to be backed by a dollar in reserves Today, Vietnam applies daily reference exchange rates, which depends on fluctuations of the average inter-bank exchange rate, on a basket of eight hard currencies, and on dollar supply and demand on the domestic market, macro-economic issues like inflation and interest rates also affect the daily average inter-bank exchange rate This new foreign exchange rate measure enables the foreign exchange regime more flexible depending on daily movements of hard currencies in the world but still keep it under control of State Bank of Vietnam in order to stabilize the foreign exchange market and the economy, support domestic production and businesses activities It also helps Vietnam more actively to cope with potential risks from the international financial market Figure 15 Contrasting Vietnam in the period 2014-2017 with Argentina from 1999 to early 2000s Vietnam, 2014-2017 Argentina , 1999-2000s Economic growth rate 6.4% Negative Unemployment rate 3% >15% Foreign debt (% of GDP) 41.8% 50% Bond credit rating B1 - Foreign exchange rate system Managed floating rate system Fixed exchange rate system Source: self-research Proposals for Vietnam As a good result, Vietnam is less likely to be hit by a debt crisis like the case of Argentina in 2001 However, Vietnam should not be subjective as Vietnam’s debt indicators are at high level Therefore, Vietnam should implement some measures to keep its debt ratio in safe zone, as following: Firstly, continuing to implement a tightened fiscal policy, with savings and restructuring expenditures, including capital expenditure and recurrent expenditure, as well as to not promulgate new policies that increase or decrease State revenues Secondly, the allocation of capital investment should be in a concentrated and efficient manner, while prioritizing capital for investment in key infrastructures, promoting public-private partnerships and non-State investment, and strictly implementing the medium-term financial budget plan to allocate State budget in order of priority Over the past few years, although the Government has made efforts to promote publicity and transparency in the management of the State budget, but in reality, compared with international practice, the announcement of the state of Vietnam’s State budget is still backward, simplistic and lagging behind Meanwhile, the access to and identification of budget issues at local levels is still weak In order to shorten this gap, it is necessary to continue to improve the legal framework, guide the implementation of the relevant legal bases, and enhance the accountability of the person who makes financial decisions, as well as attaching personal responsibility to the financial consequences, including in the State-owned enterprise sector Along with the renewal of policies and regulations on public expenditure and public debt, the effective management, use and distribution of the scarce resources is critical for ensuring that the national socio-economic development objectives are met and ensuring the national financial security Conclusion In conclusion, we sum up main points that my group found out First of all, as being one of the largest economy in the Latin America in terms of polulation and GDP, the fixed exchange rate system in which Argentina pegged its currency in USD dollar helped Argentina managed rising inflation and made it as one of the most competitive economy in the Latin America In this period, Argentina’s government paid hight rate of interest on its bonds, therefore, the investment poured into this Latin country increased dramatically, contributing to the impressive economic growth in the 1990s However, in late 1990s, Argentina faced with the competition from Brazil, which devaluated its currency to boost exports, led to the reduction of Argentina’s budget revenue In addition, as Argentina fixed its currency in USD dollars, in the late 1990s, the overvalued of USD made Argentina’s goods missed its competition in the global market As a bad result, its government lost the ability to repay to international creditors who holding Argentina’s bonds with high interest rate of return For these reasons, Argentina had to announce default in 2001 In the second part of this paper, we point out the recovery of Argentina after the 2001 terrible debts crisis In the period of 2002-2016, we divided Argentina’s economy development into three periods The first period of 2002-2007 saw the quick recovery of Argentina’s economy The next stage of 2008-2009, the global financial crisis hit this South America countries in short term as sharp decline in exports, contributing to the negative GDP growth rate from Q3-2008 to Q3-2009 In the last term from 2010 to 2016, Argentina economy saw a downturn in GDP growth rate from roughly 10% to -2% in 2016 So far, Argentina’s economic growth is projected to get better in the following years as government’s efforts to reform the economy In the last part of this article, we take a brief comparison between the current debts status of Vietnam with the early 2000s debts in Argentina and recommend some measures for Vietnam authority to use foreign borrowed capital more efficiently Based on figures that we analyzed as well as the economic development status of Vietnam currently, we assume that there is a limited level of ability to cause a debt crisis as the 2001 in Argentina in following years in Vietnam REFRENCES: BBC (2014) Argentina defaults for second time Retrieved from http://www.bbc.com/news/business-28578179 Dhillon, A., Garcia-Fronti, J., Ghosal, S., & Miller, M (2006) Debt restructuring and economic recovery: analysing the Argentine swap Retrieved from https://www2.warwick.ac.uk/fac/soc/economics/staff/mmiller/esrcproffellows/pub/arg swap.pdf Ieconomics (2017) Argentina - Government debt to GDP Retrieved from https://ieconomics.com/argentina-government-debt-to-gdp International Institute for Labour Studies (2011) Argentina - Case study of past crises ECIILS Joint Discussion Paper Series No Than, X (2017) Dư nợ cơng Việt Nam khoảng 64.73%GDP tính đến cuối năm 2016 [Vietnam’s public debt is about 64.73% by the end of 2016] Retrieved from http://vov.vn/kinh-te/du-no-cong-viet-nam-khoang-6473gdp-tinh-den-cuoi-nam-2016584200.vov Weisbrot, M., & Sandoval, L (2007) Argentina’s economic recovery: policy choices and implications Retrieved from http://cepr.net/documents/publications/argentina_recovery_2007_10.pdf Wiel, I (2013) The Argentine crisis 2001/2002 Retrieved from https://economics.rabobank.com/publications/2013/august/the-argentine-crisis20012002-/