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 .ii TABLE OF CONTENTS .iii LIST OF FIGURES. v LIST OF ABBREVIATIONS. vi CHAPTER ONE. Significance of the Study.
Definition of Key Terms. Sovereign Debt Crisis. European Sovereign Debt Crisis. Overview of the European Sovereign Debt Crisis.
Evolution of the European Sovereign Debt Crisis. Causes of the European Sovereign Debt Crisis. 9 Bui Thu Thao ATCA – K12 iv 2. Impacts of the European Sovereign Debt Crisis on Its Countries.
Impacts of the European Sovereign Debt Crisis on FDI, ODA and Remittances to Developing Countries. IMPACTS OF THE EUROPEAN SOVEREIGN DEBT CRISIS ON FDI, ODA AND REMITTANCES TO VIETNAM. Impacts of the European Sovereign Debt Crisis on FDI to Vietnam. Impacts of the European Sovereign Debt Crisis on ODA to Vietnam.
Impacts of the European Sovereign Debt Crisis on Remittances to Vietnam.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 .2: Financial Integration of the Eurozone (1998 – 2007).3: Government Deficits of European Countries (2011) .4: EUR/USD Exchange Rate (2007 – 2013) .5: GDP Change in some European countries and the US (2008- 2012).6: European Trade Balance (2009 – 2012) .7: Unemployment of Europe, the Eurozone and some European countries (2010 – 2012) .8: Youth Unemployment in Europe, the Eurozone and some European countries (2010 – 2012) .1: FDI in Vietnam by countries and territories (by December 2009) .2: FDI in Vietnam by number of projects (by December 2009) .3: FDI in Vietnam by registered value (by December 2009) .4: Vietnam FDI inflows (2006 – 2011) .5: Share of EU’s committed ODA for Vietnam (2009 – 2011).6: Total Committed ODA for Vietnam (2009 – 2012) .7: Remittances to Vietnam by continent of origin (2009) .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 1 CHAPTER ONE. 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 2 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”.
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. Research Questions To achieve the aforementioned purposes, the following questions are raised in this graduation thesis: 1. How has the European sovereign debt crisis spread in Europe? 2. Why has it happened and what are its effects on European countries? 3.
To what extent has it influenced the flows of FDI, ODA and remittances to Vietnam? 1. 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 3 1.
Research Structure The thesis is formed of four main chapters. Chapter One is a presentation of the thesis topic, together with its significance, purposes, questions and research methods. Then, the Literature Review chapter provides a general understanding of key terms and an overview of the European sovereign debt crisis, including its evolution, causes and impacts. Subsequently, the third chapter looks into the impacts of the European sovereign debt crisis on FDI, ODA and remittances to Vietnam, in which figures and charts are analyzed so as to fully perceive the degree of impact.
Finally, in the last chapter, the conclusions are drawn and some suggestions for improvements are proposed. Bui Thu Thao ATCA – K12 4 CHAPTER TWO. Definition of Key Terms 2. Sovereign Debt Sovereign debt (also known as public debt, government debt or nation debt) is the accumulation of the past borrowing of a government from its creditor to finance its budget deficit.
This may include sovereign debt borrowed by government of any level, from central to local. Sovereign debt increases when government spending is larger than the amount it collects in taxation. It is often measured compared to Gross Domestic Product (GDP). Sovereign Debt Crisis A sovereign debt crisis occurs when there is a dramatic rise in the interest rate faced by a government due to the fear of failure to redeem its debt.
Governments are most exposed to a sovereign debt crisis when they rely on using short-term bonds to finance its deficit due to a maturity mismatch between their short-term bond financing and the long-term asset value of their tax base. Another risk is currency mismatch in which they may be unable to issue bonds in their domestic currency, so that if the value of it falls, it will be excessively expensive to redeem their foreign-denominated bonds. European Sovereign Debt Crisis The European sovereign debt crisis is a period of time in which several European countries face the breakdown of financial institutions, high government debt and rapidly rising bond yield spreads in government securities. The crisis started in 2008, with the collapse of Iceland's banking system, and spread primarily to Greece, Ireland and Portugal during 2009.
It led to a crisis of confidence for European businesses and economies. (Investopedia, no date) Bui Thu Thao ATCA – K12 5 2. FDI According to WTO’s definition, Foreign Direct Investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the purpose of managing that asset. The management dimension is what distinguishes FDI from portfolio investment in foreign stocks, bonds and other financial instruments.
In most instances, both the investor and the asset it manages abroad are business firms. In such cases, the investor is typically referred to as the “parent firm” and the asset as the “affiliate” or “subsidiary”. On her article “The Importance of Foreign Direct Investment” on The Sunday Times, Nimal Sanderatne has pointed out that there is a strong relationship between foreign investment and economic growth, in which larger inflows of FDI are needed for a country to achieve a sustainable high course of economic growth. For example, for the economy to grow by 7 to 8 per cent a year, there is a need to invest around 35 to 40 per cent of GDP.
National savings fall far short of this by nearly 10 per cent. This is where foreign borrowing and foreign investments play their roles in meeting this investment-savings gap. ODA As stated in OECD’s Glossary of Statistical Terms (2003), ODA is the flows of official financing administered with the main objective of promoting the economic development and welfare of developing countries, and which are concessional in character with a grant element of at least 25 per cent (calculated at a fixed discount rate of 10 per cent). Conventionally, ODA flows comprise contributions of donor government agencies, at all levels, to developing countries (“bilateral ODA”) and to multilateral institutions.
ODA receipts comprise disbursements by bilateral donors and multilateral institutions.