STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty ---------- GRADUATION THESIS THE EUROPEAN DEBT CRISIS AND ITS IMPACTS ON THE VIETNAM ECONOMY Lecturer : Nguyen Phuong Lan (M.A) Student : Truong Bao Ngan Class : K14-ATCC Student Code : 14A7510166 20th May 2015 -2- ACKNOWLEDGEMENT I am deeply indebted to my thesis advisor, M.A Nguyen Phuong Lan, for her great interest and assistance in the preparation of this thesis. Special thanks are also given to all lecturers in Faculty of Foreign Languages, for having taught and instructed me since I was a freshman in Banking Academy. I am grateful for a number of mates in supporting me to start the work, persevere with it, and to publish it. Finally, I would like to acknowledge with gratitude, the support of my beloved family – my Father, Mother and Brother.
They all kept me going, and this thesis would not have been possible without them. Truong Bao Ngan – K14ATCC -3- DEDICATION It was once said that: “Every challenging work needs self efforts as well as guidance of elders, especially those who were very close to our heart”. I dedicate my graduation thesis to my family, whose affection, love, and prays make me able to achieve such success and honor. This humble work is also dedicated to my dearest mate, Hoang Van Long, who has been next to me and encouraged me ever since we became friends.
Truong Bao Ngan – K14ATCC -4- ABSTRACT In spite of the substantial amount of critical work that has been produced on European debt crisis, misconceptions remain to be around. Based on knowledge and actual information related to finance in general and public debt in particular, this thesis conducts a study of the debt crisis in Europe with a view to examine the events happening during the crisis and how it influenced global economy. Especially, it focuses on consequences to Vietnam economy, reflected by economic elements and thus pointing out solutions from the Government to deal with the situation. Having analyzed figures and summarized opinions from different points of thinking, the research brings out recommendations which hopefully might be useful in identifying targets and strategies for Vietnam economy in short-term future.
There are four chapters in the research: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Research methodology and data analysis Chapter 4: Recommendations and conclusions Truong Bao Ngan – K14ATCC -5- TABLE OF CONTENTS ACKNOWLEDGEMENT. 4 TABLE OF CONTENTS. 5 LIST OF TABLES AND FIGURES. 7 LIST OF ABBREVIATIONS.
Current problem statement. Objective and research questions. Scope and limitations. 11 CHAPTER 2: LITERATURE REVIEW.
Definition of public debt. Classification of public debt. Features of public debt. Factors affecting public debt.
Impacts of public debt. Summary for literature review. 20 CHAPTER 3: RESEARCH METHODOLOGY AND DATA ANALYSIS. Debt crisis in Europe.
Development of the crisis. 22 Truong Bao Ngan – K14ATCC -6- 3. Causes of the crisis. Consequences to the globe.
Effects on the Vietnam economy .1 Context of Vietnam economy .2 Impacts of European debt crisis on Vietnam economy.3 Solutions of the Government and results. 46 CHAPTER 4: RECOMMENDATIONS AND CONCLUSIONS. Recommendations for Vietnam Government. 54 Truong Bao Ngan – K14ATCC -7- LIST OF TABLES AND FIGURES List of tables Table 3.1: Public debt and budget deficit in PIIGS group (2006-2011) 22 Table 3.2: Public debt in European countries over years 25 Table 3.3: Basic economic indicators in EU nations before and after global 32 financial crisis Table 3.4: Basic interest rate of four different nations ( 2010) 37 List of figures Figure 3.1: Vietnam’s export markets (2013) 34 Figure 3.2: Vietnam’s inflation rate (2004-2012) 35 Figure 3.3: Example of W-shaped recovery 36 Figure 3.4: Example of V-shaped recovery 36 Figure 3.5: Global gold price (2000-2015) 39 Figure 3.6: USD/EUR exchange rate in 2012 40 Figure 3.7: Debt/GDP ratio in Vietnam (2003 – 2014) 42 Figure 3.8: Vietnam’s CPI (January 2010 – June 2011) 44 Truong Bao Ngan – K14ATCC -8- LIST OF ABBREVIATIONS WB World Bank IMF International Monetary Fund GDP Gross Domestic Product ICOR Incremental Capital Output Ratio ODA Official Development Assistance OECD Organization for Economic Cooperation and Development EU European Union USD United States Dollar EUR Euro JPY Japanese Yen VND Vietnamese Dong ECB European Central Bank FED Federal Reserve System PIIGS Economies of Portugal, Ireland, Italy, Greece and Spain VAT Value-Added Tax WTO World Trade Organization CPI Consumer Price Index FDI Foreign Direct Investment FPI Foreign Portfolio Investment FTA Free Trade Area Truong Bao Ngan – K14ATCC -9- CHAPTER 1: INTRODUCTION 1.
Current problem statement Nowadays, globalization undoubtedly has a beneficial influence on our lives. It promotes international economic integration, broadens communications, and strengthens cooperation and specialization. It is considered to be an important strategic target which needs to be highly concentrated and appreciated in every nation, region in particular and around the world in general. On the other hand, nobody could deny devastating consequences of globalization, when the happenings in a nation could be a reason concussing another one’s economic fortress due to their reciprocal relationship.
One of the most apparent and typical disadvantages of this trend is the explosive power of global economic crisis. The year 2008 opened a dark period of global economy by a serious financial crisis caused by the US’ “real estate bubble”; and only one year later, in 2009, the world’s economic system once staggered because of the European debt crisis. Having first boomed in Greece, the crisis’ domino effect soon suffused to EU members and other different regions, warning of a disturbing question in long-term run. To tackle this problem, many financial organizations, namely: IMF, ECB, etc.
had provided urgent bailouts to minimize the risk of insolvency among these countries. But still, there are potential risks that might become more widespread and turn into a global debt crisis. This issue did not only affect negatively to nations which were in the debt spiral, but also became a considerable concern of numerous governments from those in developed countries to developing or even underdeveloped ones, and Vietnam was not an exception. Since then, it is much necessary to study about European debt crisis and how it affected on our economy, thus learning from experience about both debt management and economic development for Vietnam in the years to come.
Truong Bao Ngan – K14ATCC - 10 - 1. Objective and research questions 1. Objective The objective of this study is to understand about how European debt crisis was going, and its devastating consequences to the world. Also, the main target is to have a deeper view on Vietnam’s economy under impacts of the problem and how Vietnam’s government dealt with this situation.
By the lessons to be learnt, the thesis hopefully could give several recommendations in restructuring Vietnam’s economic system. Research questions The thesis should be able to answer the following questions: How did the European debt crisis occur? What were consequences on Vietnam economy from the crisis? What did Vietnam government do to tackle the problem? What can be learnt from the crisis? 1. Scope and limitations The research mainly concentrates on European debt crisis’ events, from the reasons, actions taken by nations’ governments and international financial organizations, to its impacts to worldwide economy. As well as this, the study points out different fields in Vietnam which were influenced by the crisis.
Finally, there were recommendations mentioned to help securing Vietnam economy. However, the thesis does not give a forecast in Europe and plans for Vietnam in the future. Truong Bao Ngan – K14ATCC - 11 - 1. Research methodology Analysis, synthesis and evaluation of information from different sources and materials: newspapers and magazines, specialized journals, specialists’ talks, the Internet, previous research and economists’ points of view.
Comparison and dialectical materialism. Truong Bao Ngan – K14ATCC - 12 - CHAPTER 2: LITERATURE REVIEW 2. Definition of public debt Public debt is a fairly complicated concept. In general, most of recent approaches assume that public debt is a debt which a nation’s government must be responsible for paying.
Therefore, the term “public debt” is considered to be the same meaning with “national debt”, “government debt” or “sovereign debt”. In fact, public debt is absolutely different from national debt. National debt is the total debt in a country, including two parts: government debt and personal debt (of enterprises or individuals). Therefore, public debt is only a part of national debt.
According to the World Bank (WB) and International Monetary Fund (IMF), public debt, in a broad sense, is the debt obligations of the public sector, involving responsibilities of central government, local authorities, central bank and independent organizations (where operation capital is provided by national budget or over 50% of the equity is owned by the state and in case of bankruptcy, the state must be responsible for paying the debt). In a narrow sense, public debt includes debt obligations of the central government, local authorities and individual organizations guaranteed for payment by the government. The Debt Management and Financial Analysis System (DMFAS) of United Nations Conference on Trade And Development (UNC-TAD) also has similar point of view as that of World Bank, which includes four entities: (1) Debt of central government, central ministries and departments; (2) Debt of local authorities; (3) Debt of central bank; and (4) Debt of independent organizations in which government owns more than 50% of the capital, or budgeting decisions must be approved by government or government must be responsible for payment in case that organization goes bankrupt. Depending on the economic and political regimes, the concept on public debt in every nation has differences.
According to Vietnam laws, public debt includes three Truong Bao Ngan – K14ATCC - 13 - main groups: government debt, debt guaranteed by the government and local authorities’ debt. Government debt is the debt incurred from domestic and foreign loans, signed and issued on behalf of the state, government people and other loans signed, issued or authorized to issue by the Finance Ministry following regulations and laws. Government debt does not involve debt issued by the State Bank of Vietnam for implementation of monetary policy in each period. Debt guaranteed by the government is the debt of enterprises, financial and credit institutions in domestic and foreign regions and guaranteed by the government.
Local authorities’ debt is the debt signed, issued or authorized to issue by People’s Committees in provinces and cities (also called Provincial People’s Committees). As can be clearly seen, the definition of public debt in Vietnam laws’ perspective is viewed to be narrower than that of international practice. In most countries in the world, the Public Debt Management Law confirms: public debt includes government debt and debt guaranteed by the government. Besides, in other nations and regions, public debt also includes local authorities’ debt (in Taiwan, Bulgaria, Romania, etc.), non-profit state enterprises’ debt (in Thailand, Indonesia, etc.
In general, it can be understood that public debt (as known as government debt or national debt) is the total sum of money which all levels of government, from central to local, borrow to cover the budget deficit. As a result, government debt, in other words, is the budget deficit accumulated up to a certain point of time. To assess the size of government debt more easily, these debts are often measured by the percentage of gross domestic product (GDP). Classification of public debt 2.
Based on term Short-term debts: those having short maturity of payment (no longer than 1 year). This kind of debt is often for the purpose of covering temporary budget deficit. Truong Bao Ngan – K14ATCC - 14 - Medium-term and long-term debts: those having long maturity of payment (longer than 1 year). These debts are for investment and development of the economy.
This way of classification enables an easier management of payment ability in the future, in order to find proper solutions for payment.