INTRODUCTION
Rationale
Government debt serves as a crucial source of capital for financing economic growth in developing countries While debt can positively or negatively impact economic stability, effective debt management is essential for national development Conversely, poor debt management can result in long-term issues such as increased taxation for domestic consumers and uncontrolled inflation.
In recent years, the issue of foreign debt has emerged as a critical challenge for developing countries, particularly highlighted by the Latin American debt crisis of the early 1980s, known as "The Decade of Loss." This crisis destabilized the economies of low-income nations, which had initially experienced significant growth through large-scale external borrowing aimed at enhancing domestic industries and infrastructure However, by the 1980s, countries like Brazil, Argentina, and Mexico struggled with overwhelming debt obligations, as public debt to financial institutions and the World Bank surged from USD 75 billion in 1975 to over USD 315 billion by 1983 The annual public debt-to-GDP ratio exceeded 20% during this period, with interest and principal payments escalating from USD 12 billion in 1975 to USD 66 billion in 1982, exacerbated by the global crisis of 1979.
In the 1980s, developing countries in the OECD, particularly in Latin America, struggled to sustain high economic growth rates, leading to foreign debt surpassing their earnings This resulted in a significant decline in actual income and living standards, contributing to the fall of dictatorships in nations like Brazil and Argentina The Latin American crisis persisted for several years but began to resolve in the early 1990s, when countries officially marked the end of the "decade of loss," emerging from the debt crisis and entering a new era of economic recovery.
Vietnam, facing a high demand for loans to support socio-economic and infrastructure projects, must heed the lessons from the public debt crises that plagued Latin America in the 1980s The significant rise in Vietnam's public debt post the 2007-08 global financial crisis—soaring from about 40% of GDP in 2007 to 56.3% by 2010—raises concerns about sustainable growth Despite a slight reduction to 54.9% in 2011, external debt also increased from 32% to approximately 42% of GDP, highlighting ongoing challenges in public debt management This situation underscores the urgent need for comprehensive fiscal policy reforms to restore budget balance and ensure long-term economic stability By examining the causes and resolutions of past debt crises, Vietnam can gain valuable insights to effectively manage and minimize public debt, thereby mitigating the risks of a potential debt crisis Our study focuses on "Public Debt Crisis in Latin America in the 1980s and Lessons Learned for Vietnam" to address these critical issues.
Literature review
Following the debt crisis in the 1980s, there was intensive research on determinants of a sovereign debt crisis According to the study of Schclarek and Ramon- Ballester
(2005), the data of 20 Latin American and Caribbean nations in five years during 1970 –
2002 were separated seven periods which includes every five years.
As the global economic crisis unfolds, researchers are increasingly examining the non-linear relationship between national indebtedness and economic growth Classical economists, including Smith, Ricardo, and Mill, have historically argued that public debt negatively impacts a country's economy The Ricardian Equivalence theory suggests that financing public expenditure through taxation and borrowing is fundamentally equivalent, as governments must eventually repay borrowed funds, likely through future tax increases When governments incur deficits to fund additional spending, taxpayers anticipate future tax hikes, prompting them to save more and reduce current consumption Consequently, the overall effect on aggregate demand mirrors that of immediate taxation, leading to a neutral impact of public debt on economic growth.
In the IS-LM model, Keynesian economists assert that an increase in government debt from deficit-financed fiscal policy can boost income levels, transaction demand for money, and prices They argue that private sector decisions may result in inefficient macroeconomic outcomes, necessitating active public sector intervention This includes monetary policy measures by the central bank and fiscal policy actions by the government to stabilize output throughout the business cycle.
Harmon (2012) investigates the effects of public debt on key economic indicators—inflation, GDP growth, and interest rates—in Kenya from 1996 to 2011 Utilizing a descriptive research design and simple linear regression models, the study reveals a weak positive correlation between public debt and inflation, whereas it identifies negative relationships between public debt and both GDP growth and interest rates.
Ahmad (2012) highlights that inflation poses a significant challenge, particularly in less developed countries Their study employs OLS regression to analyze the impact of domestic debt on inflation in Pakistan from 1972 to 2009 The findings indicate that both domestic debt and its servicing contribute to rising price levels in the country Notably, the research reveals that floating debt, primarily through treasury bills, constitutes a substantial portion of total domestic debt, while the interest rates associated with domestic borrowing are key factors driving inflation.
Limited research has explored the effects of public debt within the ASEAN region, with notable contributions including Muhammad (2017) Other studies have concentrated on specific countries, as seen in the works of Muhammad (2008), Pham (2011), and Lee & Ng.
Lau and Baharumshah (2005) examined fiscal sustainability in a panel of 10 Asian countries—India, Indonesia, Korea, Malaysia, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, and Thailand—covering the period from 1970 to 2003 Their study utilized panel unit root tests and revealed a mean-reverting behavior among the Asian-10 countries, indicating some degree of fiscal sustainability However, employing series-specific unit root tests showed that only four countries—Korea, Malaysia, Singapore, and Thailand—exhibited stationarity, suggesting limited evidence of fiscal sustainability in the broader region.
In a study conducted in 2010, researchers utilized panel unit root and co-integration techniques alongside a dynamic ordinary least squares (DOLS) model to assess the sustainability of fiscal policies in five Asian countries—India, Pakistan, Philippines, Sri Lanka, and Thailand—over the period from 1974 to 2001 The findings revealed that government revenue and expenditure in these nations were non-stationary and co-integrated, with the co-integration coefficient significantly below unity, indicating 'weak' fiscal sustainability and suggesting that policy interventions are necessary to enhance public finance stability Additionally, Syed et al (2014) investigated fiscal policy sustainability across ten Asian countries, while Bui et al (2015) focused on Vietnam, highlighting that the country's public debt and fiscal policy exhibit no sustainability and pose potential risks.
Research on public debt management in Vietnam reveals that while it poses significant challenges for the government, there is a lack of optimal solutions This evaluation of public debt management techniques aims to identify their strengths and weaknesses, providing valuable recommendations for a more effective and sustainable management system.
Objectives of research
- Public debt crisis in Latin America in the 1980s
- Current situation of public debt and public debt management policy in Vietnam
Methodology
- Collect data and information published on the media
- Collect data from professional reports for the period of 2010 - 2017
This study employs qualitative research methods to analyze data sourced from the World Bank, IMF, and the Ministry of Finance By processing this information, we aim to derive specific conclusions regarding the current state of public debt in Vietnam.
Scope of the research
- Research on a national level in Latin America in the 1980s
- Research on a national level in Vietnam
- Research issues related to the current state of public debt in Vietnam
Research structure
This paper is organized into several key sections: Section 2 covers the foundational concepts and theories surrounding public debt, its management, and crises In Section 3, we analyze the causes and consequences of the Latin American public debt crisis, alongside government responses, to extract valuable lessons for Vietnam Section 4 begins with an examination of the current fiscal deficit and rising public debt in Vietnam, assessing their negative effects on critical macroeconomic indicators such as economic growth, inflation, interest rates, exchange rates, and trade deficits The section also evaluates the risks and sustainability of Vietnam's public debt from various perspectives, including solvency and macroeconomic stability, to identify potential crises and future sustainability Finally, the research proposes policy options aimed at enhancing transparency and the management of public debt to ensure sustainability in Vietnam's economic future.
THEORETICAL BASIS
General theory about Public debt
Public debt refers to the financial obligations incurred by a government, and its interpretation varies based on the objectives, scope, and practices of each country's debt management Different nations may define and manage public debt in unique ways, reflecting their specific economic contexts and fiscal strategies.
* According to the International Monetary Fund (IMF):
Public debt encompasses all financial obligations of the public sector, including those of the government, local authorities, central banks, and independent organizations where the state holds significant ownership In a more specific context, public debt refers primarily to the liabilities of the central government, local governments, and independent entities that are backed by government guarantees.
According to the IMF framework, public debt is categorized into two sectors: the financial public sector and the non-financial public sector However, the total public debt reported includes only the debts guaranteed by the government, omitting central bank debt and non-government-guaranteed debts from public sector institutions This exclusion results in an inaccurate representation of the overall public debt figures.
* According to the World Bank (WB):
Public debt is understood as the debt obligation of 4 groups of subjects including:
(1) Debt of the Central Government and central ministries, agencies
(3) Debt of the Central Bank
The government holds over 50% ownership in independent organizations, which results in them being accountable for the debts of these entities In the event of a default, the state is obligated to cover these debts on behalf of the organizations.
Thus, we can see the concept of public debt of the World Bank is the concept of public debt most fully.
*According to the Law on public debt management issued by the Vietnamese government in 2017:
"Public debt prescribed in this Law includes government debt, guaranteed government debt and local government debt." In which the Law stipulates:
- Government debt is a debt arising from domestic and foreign loans which is signed and issued on behalf of the State and on behalf of the Government.
- Government-guaranteed debt is a loan guaranteed by the State's policy-making enterprises or policy banks.
- Local government debt is a debt incurred by the provincial People's Committee.
Vietnam's Public Debt Management Law 2017 defines public debt more narrowly than the definitions provided by the IMF and World Bank, excluding central bank debt and state-owned enterprise debt As a result, discrepancies arise when comparing Vietnam's public debt reports with those from international organizations.
2.1.2 Economic nature and impact of Public debt on the economy
Public debt arises when a government's total revenue falls short of its total expenditures, leading to a budget deficit To address this issue, the government can either reduce spending or enhance budget revenues While cutting spending is a challenging short-term solution, governments typically opt to increase revenue to manage the deficit effectively.
The government enhances its budget revenue primarily through tax increases, which serve as the most significant and direct source of income However, raising taxes may negatively impact consumption and labor dynamics, potentially resulting in an economic recession Additionally, the government may opt to borrow funds from domestic and foreign sources via the central bank, issuing shares or bonds to investors, which can escalate public debt and contribute to a budget deficit.
From the economic nature of public debt, we consider the impact of public debt on the economy in two directions: positive and negative.
Public debt plays a crucial role in meeting domestic capital demands and ensuring social security, especially during the early stages of development when foreign loans can supplement private investment for socio-economic growth Additionally, it provides a timely solution for government budget overspending, as tax increases and spending cuts require significant time to implement, while foreign loans can quickly address budget deficits Moreover, the issuance of bonds or government shares serves as a mechanism for the government to regulate monetary policy, facilitating investment and enhancing a country's integration into the global capital market without compromising domestic investment or expenditure.
Public debt can destabilize macroeconomic conditions, leading to increased volatility during crises Excessive foreign loans may weaken a nation's international standing and cause domestic exchange rate fluctuations Additionally, domestic borrowing can elevate interest rates, raising investment costs and diminishing incentives, which may trigger an economic recession The resulting high interest rates, inflation, and exchange rate instability can exacerbate trade deficits Ultimately, an unsustainable level of public debt risks triggering a public debt crisis, which can escalate into a monetary and economic crisis, impacting not just the affected country but also regional economic unions and potentially spreading globally.
Public debt can be categorized into domestic and foreign loans, reflecting both geographical factors and cash flow movements In many countries, including Vietnam, there is often a lack of focus on domestic debt during statistical evaluations, leading to an overemphasis on foreign debt This oversight can result in inaccuracies in public debt calculations, complicating the ability of managers to effectively control and address emerging financial issues.
According to Vietnam's Public Debt Management Law (2017), public debt has been divided into three categories:
Government debt encompasses various forms of financial obligations, including debt instruments issued by the government and loans secured through domestic or international agreements This includes central budget debt, which is borrowed from the state's financial reserves, as well as funds from the state budget and off-budget financial sources.
- Debts guaranteed by the Government include: Debts of enterprises guaranteed by the Government; the liabilities of the State policy bank are guaranteed by the Government.
Local government debts encompass various financial obligations, including those arising from municipal bond issuances, loans sourced from the State policy bank, provincial financial reserve funds, and the state budget, as well as other legally compliant loans Additionally, these debts include liabilities from the on-lending of Official Development Assistance (ODA) and concessional loans.
To maintain a stable economy, it is crucial for the government to manage the public debt ratio effectively This requires debt and budget managers to excel in forecasting and planning, which contribute to macroeconomic stability A thorough understanding of the factors influencing public debt is essential to proactively address and mitigate any instability issues that may arise.
Public debt is intricately linked to the budget balance, as evidenced by the relationship between budget deficits and the value of a country's public debt When the deficit gap decreases, it leads to a reduction in loans, ultimately resulting in a decrease in public debt.
Market interest rates significantly influence government debt, as fluctuations in these rates can alter the value of loans When interest rates rise, it becomes more challenging for the government to secure loans, which may hinder its ability to repay debts punctually Conversely, a decrease in interest rates can ease the burden of government borrowing.
Public debt Management
Public debt management involves creating and implementing a strategy to effectively manage government debt, aiming to secure necessary funding at minimal cost while balancing risk Additionally, it seeks to fulfill other objectives set by the government, such as fostering a robust market for government securities.
2.2.2 The importance of Public debt management
The first role is to make sure that debt can be serviced under a wide range of circumstances, including economic and financial distresses, provided meeting debt’s cost and risk objectives.
In the realm of public policy, it is essential for debt managers to align their priorities with those of fiscal and monetary policy authorities Key considerations include maintaining debt sustainability, understanding government financing needs, and managing borrowing costs effectively.
The second role involves making policy choices related to preferred risk tolerance, government balance sheet management, contingent liabilities management, and ensuring sound governance in debt management The primary objectives of these choices are to minimize vulnerability to contagion and financial shocks.
Poorly structured debt portfolio often leads to crises For example:
An excessive emphasis on potential cost savings from debt issuance often leads to an increased reliance on short-term or floating rate debt When a country's creditworthiness fluctuates, this type of debt requires refinancing, resulting in heightened exchange rate and monetary pressures.
- A debt portfolio that is robust to shocks places the government in a better position to effectively manage financial crises.
Government debt portfolio is usually the largest financial portfolio with complex and risky structure, thus has substantial risk to overall financial stability Hence, sound risk management practices are essential.
Effective macroeconomic policies are crucial, as risky debt management practices can heighten an economy's susceptibility to financial shocks While government debt management may not be the primary cause of economic crises, factors such as the maturity structure, interest rate, and currency composition of the debt portfolio, along with significant explicit and implicit contingent liabilities—particularly in the financial sector—have intensified the impact of these crises.
Public debt crisis
The public debt crisis occurs when a government's debt escalates beyond manageable levels, making regulation and repayment increasingly difficult Unpaid debts, compounded by interest, exacerbate the situation, while prolonged budget deficits can trigger severe economic recessions.
2.3.2 Causes of Public debt crisis
* Double liabilities and poor management
The primary driver of the public debt crisis is the accumulation of unpayable debt, where new debts are consistently piled onto existing ones, resulting in interest compounding on interest This escalating debt burden continues to grow, leaving debtors with no viable options to lower interest rates or extend repayment terms, making it increasingly difficult to manage and repay their obligations.
During the 1960-1970 period, poor management by governments and local authorities in Western countries was evident, particularly in their inability to control loans and public spending This issue was exacerbated in poorer, low-governance countries, where corruption prevailed among certain groups, prioritizing their interests Consequently, these nations experienced a significant outflow of money, as loans were often tied to export priorities, leading to a situation where money flowed out of the country far more than it flowed in.
Government loans often lack public support and may stem from inherited debts from previous administrations Many developing nations began their journey to independence burdened by substantial debts incurred during conflicts.
Economic decisions, contracts, treaties, and international organizations play a crucial role in shaping globalization, primarily benefiting wealthy nations While many countries struggle with poverty and debt, affluent nations enjoy substantial wealth, often at a significant cost Although rich countries also face indebtedness, they possess greater resources and strategies to mitigate risks compared to their poorer counterparts.
2.3.3 Consequences of Public debt crisis
The consequences of the debt crisis will not only affect the target countries of the borrowing countries, but will also affect the lending countries.
The debt crisis acts as a seismic shock to a nation, leading to a recession characterized by high inflation, declining GDP, stagnant production, and rising unemployment rates.
Economic instability in developing countries often results in political instability, increasing their reliance on capitalist nations This dependence can lead to foreign intervention in local governance, undermining economic sovereignty and exacerbating poverty levels Ultimately, these dynamics push many individuals into extreme poverty.
During the debt crisis, capitalist economies face significant challenges as major debtors declare bankruptcy and default on their obligations, leading to substantial losses for governments and hindering economic growth This situation highlights the European Union's ongoing efforts to support Greece, the largest debtor Additionally, indebted borrowers often resort to cutting spending and reducing imports, which negatively impacts capital revenues and contributes to rising unemployment.
When a debtor faces a debt crisis, reduced liquidity can freeze the circulation of goods in the market This situation becomes critical if the debtor's debts constitute a significant portion of their economy, potentially triggering a domino effect of bankruptcies Such a chain reaction can lead to the collapse of international organizations and ultimately result in a global economic crisis.
LATIN AMERICAN PUBLIC DEBT CRISIS IN THE 1980S
Causes of Latin American Public debt crisis
The Latin American crisis has been a focal point for economists and politicians due to its extensive scale and significant consequences Researchers have identified various causes for this crisis, and in this essay, we will summarize the key factors that have had the most substantial impact on the public debt crisis in Latin America.
*Inefficient economic structure and the foreign capital dependence
In the 1980s, Latin American countries, characterized by low GDP and reliance on oil exports, initially experienced economic growth due to soaring oil prices However, inefficient domestic economic models and poor macroeconomic policies led to unmet development expectations and a public debt crisis The government's protectionist approach stifled self-motivation in key sectors, resulting in slow growth and ineffective loan usage The stagnant financial markets increased demand for bank loans, while low interest rates set by state banks distorted supply and demand dynamics Consequently, governments resorted to foreign borrowing to satisfy this demand The misguided focus on industrialization, requiring imports of materials and equipment, shifted these nations from trade surpluses to deficits, exacerbating their current account issues Ultimately, excessive government intervention in a non-competitive market hindered economic progress, leading to negative growth and significant foreign debt rather than the intended economic improvement.
Figures 3-1: Latin American external debt and reserve.
From the weak economic governance that led to high demand for foreign debt, Latin American countries became too dependent on foreign investment Since World War
Between 1975 and 1980, foreign investment in the region increased from 19% to approximately 23%, primarily driven by short-term investments However, as the economy began to decline in the early 1980s, there was a significant exit of foreign capital, leading to a drop in the foreign investment rate to 17% by the 1990s This reliance on borrowing left Latin America vulnerable, resulting in rising risks of default and economic instability.
Figures 3-2: Latin American Total debt, Total debt service and Interest
*The impact of export deficit
The public debt crisis in Latin America surged due to increased borrowing for government purchases and private sector needs, but this was not the sole factor In the 1970s and 1980s, Latin American countries relied heavily on oil exports for income Following the initial oil price shock, importing nations implemented trade protection policies that restricted imports to boost domestic production and consumption These measures significantly impacted the volume of oil exports from Latin America, particularly affecting Mexico.
Figures 3-3: Mexico Crude oil prices from 1861 to 2011.
In the early 1980s, Latin American exports were severely impacted by international trade policies and rampant inflation, which stemmed from many countries pegging their currencies to the USD As the USD rose due to the US deficit, Latin American currencies followed suit, with Mexico experiencing a staggering inflation rate of 27% in 1981 This inflation significantly affected export revenues, leading to a decline in income and exacerbating current account deficits Consequently, these countries struggled to rely on foreign currency earnings to service their debts, resulting in increased repayment difficulties and a widespread public debt crisis as several nations declared insolvency.
*The wrong investment decision of the Europe and the USA
The influx of foreign capital into Latin America inadvertently triggered a public debt crisis in the region Following the initial shock of rising oil prices, OPEC countries experienced significant current account surpluses, channeling their substantial oil profits into European and U.S banks These banks targeted Latin America for investment, drawn by the potential high returns from major oil-exporting nations However, they overlooked the underlying economic structures and development challenges facing these countries, which became evident in the late 1960s Misguided microeconomic policies and ineffective loan utilization led to budget deficits and insolvency The assumption that governments in transitioning economies, like those in Latin America, were immune to insolvency proved false As banks hastily withdrew capital at the first signs of economic decline, they exacerbated the crisis, leaving these emerging economies vulnerable and deepening the public debt issue.
*The increase several times of real value of the loan due to the appreciation of the dollar.
Many Latin American countries faced significant public debt challenges as their debts were primarily denominated in dollars with floating interest rates linked to LIBOR By 1978, a rising US budget deficit caused LIBOR rates to soar from 9.5% to 16.6%, resulting in a higher USD price and escalating the real value of dollar-denominated credits Consequently, interest rates surged, exacerbating the debt burdens on these nations and ultimately prompting several governments to declare insolvency.
Progressions of the Latin American Public debt crisis
In the 1970s, two significant oil price shocks led to current account deficits in many Latin American countries, while oil-exporting nations experienced surpluses During this period, the U.S government encouraged large money-center banks to act as intermediaries, offering a secure and liquid environment for the funds of exporting countries, which were then lent to Latin American nations.
The surge in oil prices during the 1970s prompted numerous Latin American countries to seek additional loans to manage escalating costs Even oil-producing nations incurred significant debt for economic development, banking on sustained high prices to facilitate repayment Consequently, lending from US commercial banks and other creditors to Latin America saw a marked increase, with total foreign debt rising from $29 billion at the end of 1970.
In 1978, foreign direct investment (FDI) in Latin America surged to $159 billion, escalating to $327 billion by 1982 By that time, nine major US money-center banks had significantly contributed to the debt of Latin America and other less-developed countries, which constituted 176% and 290% of their total capital, respectively.
Figures 3-4: Total Debt and Public Debt by Region
In 1979, rising interest rates in the US and Europe led to increased debt payments for borrowing nations, complicating their ability to repay loans Additionally, the depreciation of local currencies against the US dollar further strained Latin American governments, exacerbating their financial challenges.
2 FDIC (1997), The LDC Debt Crisis, An Examination of the Banking Crises of the 1980s and Early 1990s, Federal Deposit Insurance Corporation
In the early 1980s, Latin American countries faced severe economic challenges, including significant depreciation of their national currencies and a loss of purchasing power Concurrently, global nominal interest rates rose, contributing to a worldwide recession in 1981 This combination of factors led these nations to recognize that their debt burdens were unsustainable.
In August 1982, a significant crisis erupted when Mexico's Minister Jesus Silva Herzog announced the country's inability to service its $80 billion debt, leading to a sharp decline in new lending from commercial banks to Latin America The short-term nature of many loans meant that when refinancing was denied, billions of dollars became immediately due, exacerbating the situation This crisis quickly spread to other countries, including Argentina, Bolivia, Brazil, and Ecuador, creating a widespread debt crisis throughout the Latin American region.
The 1980s, known as the "lost decade" for many Latin American countries, marked a significant public debt crisis that severely impacted both debtor and creditor economies Major creditors, primarily European and American state banks and governments, faced heightened credit risks, leading to turmoil in their financial systems This crisis not only crippled Latin America's economy but also restricted their future borrowing capabilities, as global banks categorized these nations as high-risk lenders Additionally, Latin American countries endured substantial losses in international trade due to sanctions imposed by creditors through economic protection policies, asset blockades, and confiscations abroad.
Impacts of the Latin American Public debt crisis
3.3.1 Impacts on the Latin American countries
The peso experienced a nearly 50% devaluation against the US dollar during the debt crisis, leading to soaring inflation rates that reached 100% and plunging the economy into a recession In 1982, the economy contracted by 0.6%, followed by a more significant decline of 4.2% in 1983, with real GDP per capita decreasing by 3% and 6% in those respective years Over the next five years, the total decline in real GDP per capita amounted to 11%, while real wages fell by approximately 30% Unemployment surged, particularly in rural areas, as investment and consumption contractions further hampered economic growth in 1982.
Following the peso devaluation in February 1982, Mexico experienced a significant increase in net exports, which became the sole positive factor for economic growth However, in the five years post-crisis, the country's terms of trade plummeted by 42.2%, and by the end of 1986, Mexico was burdened with a foreign debt equivalent to 78% of its GDP, alongside an inflation rate exceeding 100% The collapse of global oil prices in the same year further hindered economic performance From 1983 to 1988, Mexico's real GDP grew at an average rate of only 0.1% annually, leading to the characterization of the 1980s as the "lost decade."
Figures 3-5: Decomposition of economic growth (Source: OPEC)
4 Buffie, E.F (1989), Mexico 1985-86: From Stabilizing Development to the Debt Crisis
The 1982 debt crisis marked the most significant economic turmoil in Latin America's history, leading to a sharp decline in incomes and imports This period saw stagnated economic growth, soaring unemployment rates, and inflation that severely diminished the purchasing power of the middle class Over the subsequent decade, these challenges profoundly impacted the region's economic landscape.
In 1980, urban real wages declined by 20 to 40 percent, significantly impacting the economy Furthermore, funds that could have been allocated to tackle social issues and poverty were redirected towards debt repayment.
Years of accumulating external debt, rising global interest rates, a worldwide recession, and sudden peso devaluations have led to a sharp increase in external debt payments Since November 1982, various debt restructuring strategies, including the Baker and Brady plans, have been implemented The Brady plan specifically involved US banks absorbing losses on Mexican debt, while the IMF provided three financial packages that were paired with necessary structural reforms.
3.3.2 Impacts on the global economy
The 1980s crisis revealed that despite having a more sophisticated international financial architecture, Latin America struggled under the burden of external debt, leading to overly restrictive macroeconomic policies This public debt crisis not only impacted the region but also had significant repercussions on the global economy.
In the 1980s, Western banks, particularly in the US and UK, risked bankruptcy if Latin American nations halted their debt payments, prompting the IMF and later the World Bank to provide bailout loans This marked a historic shift, as Latin American countries did not resort to defaulting to address their debt crises Jose Antonio Ocampo, former Colombian finance minister, criticized this approach, stating it effectively managed the US banking crisis but poorly addressed the Latin American debt crisis.
5 Ferraro, Vincent (1994) World Security: Challenges for a New Century
The current situation in Europe indicates that, rather than learning from past experiences, those in authority are prioritizing the protection of banks, even at the expense of broader societal impacts.
Latin America is not alone in experiencing the boom-bust cycle attributed to "unfettered global finance," as described by economics professor Stephany Griffith-Jones Africa endured a significant debt-driven depression throughout the 1980s, 1990s, and into the 2000s Additionally, the late-1990s Asian financial crisis was succeeded by similar turmoil in Russia, leading up to the current financial crises in the US and Europe.
The reactions and solutions of Latin American countries to the crisis
3.4.1 The reactions of Latin American countries to the crisis
* Phase 1 (From before the crisis - 1985)
During this period, significant macroeconomic changes occurred as economists and policymakers anticipated a short-lived crisis, believing it would end with signs of economic recovery Efforts were made to establish a union among regional creditors, notably during the 1984 conference in Cartagena, Chile, which later became known as the Cartagena Consensus Following this conference, Bolivia and Ecuador saw their debts postponed, while larger debtors like Mexico, Brazil, and Venezuela continued direct negotiations with banks, and Argentina remained inflexible This lack of consensus among countries, with many preferring to address their debts independently, contributed to a deepening crisis in Latin America.
The debt crisis progressed to its second phase with the launch of the first Baker Plan in Seoul, aimed at reforming lending laws and introducing a supportive credit package However, the initial bailout proved insufficient to fully resolve the crisis Over the following two years, the second Baker Plan was implemented, which introduced innovative measures for debt repurchasing and exchange, as well as enabling the issuance of low-interest bonds.
*Phase 3 (starting in March 1989, almost seven years after the start of the crisis)
Phase 3 began with the Brady Plan, which involved reducing the debt balance, along with facilitating the Latin American region to borrow from international private sources. This was the last stage of the crisis, and Latin American countries also gradually recovered their economy However, a decade of crisis recession reduced the region's contribution to world GDP by 1.5%, along with a regional GDP per capita of 8% lower than that of industrialized nations and 23% compared to the average of whole world
3.4.2 The measures of Latin American countries to the crisis a) Short-term measures
Commercial banks implemented bridge loans as a key preventive measure, allowing countries to continue paying interest on their loans despite being unable to repay the principal These loans effectively served as new financing for sovereigns to meet their interest obligations To maintain fairness, each bank contributed a predetermined percentage of its outstanding loans to the debtor nation, thus safeguarding their interests This arrangement enabled banks to classify these loans as assets on their balance sheets, as borrowing nations had not fully defaulted Without this provision, banks would have to label loans as "nonperforming" if interest payments were over ninety days late, which could negatively impact their financial health.
During the 1982 debt crisis, nine major commercial banks were heavily exposed, having loaned out 250% of their capital to sovereign nations To avoid defaults that could jeopardize their own financial stability, these banks found it crucial for debtor nations to continue making at least interest payments on their loans Consequently, many large banks responded to the crisis by extending new loans to these countries, aiming to mitigate their losses and prevent a total financial collapse.
In the face of falling economic growth rates and rising inflation, the “Baker plan” was implemented in 1982, proposed by US Treasury secretary Baker (Van Wijnbergen,
In 1991, high-debt countries were promised new access to medium-term loans and the rollover of old loans in exchange for implementing economic reforms The Paris Club, an informal group of financial officials from Western economies, rescheduled Mexico's sovereign debt in June 1983, aiming to provide debt relief and restructuring Despite the restoration of access to capital markets, Mexico experienced increased capital outflows, soaring inflation, and a decline in investment, resulting in no economic growth from 1982 to 1988 By 1987, Mexico's external debt had risen to 78% of GDP, highlighting the failure of the reform efforts.
In September 1989, the "Brady Plan" was established, legitimizing debt relief for Latin American countries and ensuring that US banks could manage anticipated losses on this debt This plan compelled banks to accept debt reduction by providing a more manageable solution for commercial creditors, ultimately facilitating a more sustainable financial environment.
11 Van Wijnbergen (1991), Mexico and the Brady Plan, Economic Policy, World Bank.
In 1990, Tammen discussed the precarious nature of sovereign lending and its implications for the Brady Plan, highlighting a safer payment stream provided in exchange for unsustainable original claims (FDIC) An agreement was reached between the Mexican government and the Bank Advisory Committee, which represented commercial bank creditors, to restructure approximately USD 49.8 billion of Mexico's external debt from 1989 to 1992 This restructuring primarily focused on long-term debt with commercial banks, affecting about half of the total debt (Van Wijnbergen, 1991) The commercial banks involved were presented with three options for addressing this situation (Odubekun, 2005).
1 Banks could exchange old loans for new bonds at a discount of 35% of their face value, keeping interest rates at market levels (equivalent to LIBOR + %)
2 Banks could exchange old debt for face-value new bonds (called par bonds) bearing fixed interest rates of 6.25%
3 Banks could provide additional loans over the next three years equivalent to 25% of the banks’ initial medium- and long-term loans, which implied no debt relief but the provision of new money
Most banks preferred the par bond option (47%), indicating a reduction in interest rates, while 40% opted to decrease the principal, and 13% provided new loans Additionally, an agreement was established with the Paris Club, which represents creditor governments, to cover USD 2.6 billion in principal and interest payments due from 1989 to 1992 The implementation of the "Brady plan" significantly enhanced Mexico's capacity to manage its external debt by lowering both interest and principal payments.
In December 1982, Mexico implemented extensive structural reforms as a prerequisite for obtaining an IMF loan These reforms encompassed fiscal austerity measures, the privatization of state-owned enterprises, the reduction of trade barriers, and the deregulation of industrial sectors.
In 1983, the budget deficit significantly decreased from 17.6% to 8.9% due to the implementation of strict fiscal discipline and austerity measures This fiscal restraint was paired with a rigorous monetary policy, contributing to the overall stabilization of the economy amidst foreign investment liberalization.
Mexico implemented significant trade reforms, reducing import quotas on domestic (non-oil) tradable production from 100% in 1984 to under 20% by 1991, while also lowering maximum import tariffs Consequently, non-oil merchandise exports increased dramatically, accounting for two-thirds of total exports by May.
1989, foreign investment regulations were considerably relaxed and made more transparent.
The tax system underwent significant reforms aimed at encouraging capital inflows and increasing penalties for tax evasion, while the government initiated financial market liberalization by removing ceilings on commercial banks' deposit interest rates The forced allocation of commercial credit to favored sectors was abolished, and credits were privatized for commercial banks nationalized in 1982 However, delays in banking sector reforms persisted, and Mexico continued to face inadequate banking sector supervision, despite government guarantees on deposits and liabilities.
Firstly, Latin American countries have had reasonable public debt treatment.
Developing countries must establish rational economic structures, prioritize capital investment, and implement clear repayment plans to manage debt effectively It is crucial to avoid borrowing for inefficient projects and to refrain from excessive reliance on short-term loans, as these can lead to rapid capital withdrawals by investors when risks arise Such volatility can create significant economic imbalances, making over-reliance on public debt a perilous strategy for sustainable growth.
Secondly, they improve foreign currency loans and inflexible exchange rate policy.
Achieved result
Developing countries are often characterized by high levels of debt, as noted by Moore & Thomas (2010) When government debt is utilized effectively, it can significantly enhance a country's productive capacity, leading to positive economic growth Their meta-analysis reveals a strong positive correlation between debt and economic growth, highlighting the potential benefits of strategic debt management.
Egbetunde (2012) conducted a study on the relationship between public debt and economic growth in Nigeria from 1970 to 2010 using a Vector Autoregressive (VAR) model The findings revealed a bi-directional causality between public debt and economic growth, indicating that each can influence the other The author emphasized that this relationship is positive only when the government manages the borrowed funds responsibly and transparently for economic development purposes.
Al-Zeaud (2014) investigates the effects of public debt on the Jordanian economy from 1991 to 2010, revealing that public debt significantly contributes to economic growth, while population growth has a negative impact The study employs OLS estimation to demonstrate that for sustained economic growth, the Jordanian government should leverage the positive effects of public debt and mitigate the adverse effects of population growth.
On the 10th anniversary of the debt crisis, observers are now hesitant to dismiss the past decade as a lost opportunity Jaime Pellicer, a debt expert at the Center for Latin American Economic and Monetary Studies, emphasizes that this period has served as a time of preparation and learning, providing Latin America with a renewed foundation for future economic growth.
16 Moore, W., & Thomas, C (2010) A meta-analysis of the relationship between debt and growth.
17 Al-Zeaud, H.A (2014) Public debt and economic growth: An empirical assessment.
Governments have discovered the importance of prioritizing and delegating responsibilities to private enterprises, enabling them to govern effectively without controlling the entire economy This approach allows for more efficient use of resources while achieving desired outcomes with limited financial investment.
Latin American officials emphasize that a new growth model centered on exports and driven by private initiative is proving effective, with tangible results emerging Notably, manufactured goods now represent over 50% of Mexico's exports, a significant increase from just 20% in 1983.
Workers in export-oriented industries are showing signs of improvement, though their purchasing power remains significantly lower than it was a decade ago In Mexico, while the minimum wage continues to fall short of keeping pace with inflation, there has been a positive trend in unionized worker contracts over the past three years President Carlos Salinas de Gortari emphasized that unlike the wages of 1981, which were funded by foreign debt and proved unsustainable, current wages are supported by domestic savings, making them more viable in the long term.
In order to empirically examine the highly disputed the nexus between sovereign debt and economic growth for 20 developed countries over the periods 1954 – 2008 and
From 1905 to 2008, Lof and Malinen (2014) utilized panel vector autoregressions (panel VAR) to analyze the relationship between public debt and economic growth Their findings indicate that public debt does not significantly affect growth, even at elevated levels Conversely, they discovered a notable negative effect of economic growth on public debt, suggesting that higher growth rates may lead to a reduction in public debt levels.
Puente-Ajovin and Sanso-Navarro (2014) investigate the causal relationship between national debt—including public, non-financial corporate, and household debt—and economic growth in 16 OECD countries from 1980 to 2009, utilizing a bootstrap methodology to analyze their findings.
18 Lof, M., & Malinen, T (2014) Does sovereign debt weaken economic growth?
19 Puente-Ajovin, M., & Sanso-Navarro, M (2014) The causal relationship between debt and growth: evidence from OECD
Granger causality test, the estimated results show government debt does not cause the growth of real GDP per capita Furthermore, the economic growth negatively influences government debt
Zouhaier and Fatma (2014) conducted an empirical study using a dynamic panel GMM estimator to analyze the impact of debt on economic growth in 19 developing countries from 1990 to 2011 Their findings reveal a significant negative relationship between debt levels and economic growth in these nations.
The impact of the world recession on developing countries was significant, with a 1 percent decline in export value during the 1981-1982 period, according to William R Cline from the Institute for International Economics This decline occurred alongside high Eurodollar interest rates averaging 15 percent, contrasting sharply with the robust growth of 23 percent in developing country exports from 1976 to 1980, when Eurodollar interest rates were only 9 percent.
Latin American economies experienced a modest growth of only 1.6 percent last year, as reported by a recent Inter-American Development Bank survey Mr Kuczynski aptly noted, "The music has stopped," highlighting the challenges faced in the current economic climate.
The 1982 debt crisis marked the most severe economic downturn in Latin America's history, leading to significant declines in incomes and imports, stagnated economic growth, and soaring unemployment rates Inflation further eroded the purchasing power of the middle class, resulting in a staggering 20 to 40 percent decrease in real wages in urban areas over the following decade Instead of being allocated to tackle social issues and poverty, investment funds were diverted to debt repayment, exacerbating the region's economic challenges.
VIETNAM PUBLIC DEBT AND LESSON FROM LATIN AMERICAN
Current situation of Vietnam public debt
In a developing country like Vietnam, borrowing serves as a crucial mechanism for financing capital, addressing investment needs, and fostering production growth, especially during times of low economic accumulation However, if debt is mismanaged and borrowed funds are allocated inefficiently, it can lead to significant future burdens, jeopardizing the sustainability of the economy.
With the development of the economy, Vietnam's public debt rose up very fast in
2010 – 2016, but tends to decrease in the recent years.
Figures 4-6 Total public debt of Vietnam period 2010 - 2018
Between 2010 and 2012, Vietnam's public debt declined from 56.3% to 50.8% of GDP, according to a report by the Ministry of Finance However, by 2016, public debt rose significantly to 63.7% of GDP, nearing the National Assembly's ceiling of 65% In 2017, this figure slightly decreased to 61.3% of GDP.
Year Public debt Year Public debt
Tables 4-1 Total public debt of Vietnam (billion VND)
The scale of public debt in 2017 was more than 3.130 million billion VND, nearly 3 times in 2010 (1.12 million billion), nearly 8 times in 2006 and 18 times more than the year
Between 2011 and 2015, the average annual growth rate of public debt was 16.3%, nearly tripling the economic growth rate Notably, the marginal rate of public debt showed a decline, with a 3% increase in 2014 and a reduced increase of 2.7% in 2015.
Figures 4-7 Public debt in Asian developing countries
Vietnam's public debt calculation differs from global standards, leading to variations in reported figures, especially as the debt-to-GDP ratio fluctuates due to factors like exchange rate changes According to IMF data, the scale of Vietnam's public debt is significant, highlighting the complexities in accurately assessing its financial status.
In 2014, Vietnam's public debt reached over 60% of GDP, the highest among developing countries in the region, while most maintained their debt below this threshold Notably, Indonesia's public debt remained low at around 25% of GDP From 2010 to 2017, Vietnam's public debt rose by 5%, from 56.3% to 61.3%, whereas Cambodia's debt increased by only 1.6%, and other countries like Malaysia and Thailand saw modest increases The Philippines experienced a significant rise of 11.9% Although ad-hoc measures and privatization receipts may help keep Vietnam's debt below 65% in the near to medium term, the lack of further consolidation efforts could lead to a breach of the debt limit in the coming years.
In Vietnam, public debt is primarily composed of government debt, accounting for 85.6%, and government-guaranteed debt, which represents 13.5% as of 2018 While local government debt has shown a slight upward trend, it remains relatively low at approximately 1% of the total public debt Overall, the proportion of government debt within the total public debt has remained stable, typically fluctuating around 80% with a slight increasing tendency.
Figures 4-8 Structures of total public debt
Along with the increase in public debt, the structure of Vietnam’s public debt has also changed
The proportion of domestic debt to total public debt increased from 44.4% in 2010 to 55.4% in 2018.
Figures 4-9 Structure of total public debt
In government debt, the proportion of foreign debt decreased, in the period from
2010 to 2016, decreased from 59.8% to 48.1% Because of the increasing demand for capital, while the access to foreign capital is limited, the Government has to rely mainly on domestic loans.
Figures 4-10 Structure of Government debt
In contrast, the foreign debt in the Government-guaranteed loan balance increased,replacing domestic debt.
Figures 4-11 Structure of Government-guaranteed debt
As of the end of 2016, domestic debts in Vietnam were predominantly composed of government bonds, with commercial banks holding 55.4% of these bonds This reliance on government bonds poses two significant risks: first, a potential decline in the sustainability of commercial banks due to sudden drops in bond value, which can adversely affect their asset summaries; and second, it creates challenges for private enterprises, particularly small and medium-sized businesses, in securing affordable credit from these banks Between 2011 and 2013, most government bonds had short to medium terms of three years or less, carrying an average interest rate exceeding 10% for five-year bonds, thereby intensifying payment pressures from 2014 to 2016 Currently, however, all government bonds have maturities exceeding five years, with an average maturity of 13.52 years and a reduced average interest rate of 6.07% per year.
Vietnam's access to international capital markets has primarily relied on ODA and concessional loans from governments and international financial institutions However, since becoming a middle-income country in 2010, ODA loans have seen a decline According to Mr Trương Hùng Long, head of the Finance Ministry’s Department of Debt Management and External Finance, the repayment terms for these loans have been significantly shortened from 30-40 years to 20-25 years, and in some cases, even down to a decade Additionally, interest rates have more than doubled, rising from under one percent to over two percent, intensifying the pressure on ODA loan repayments This shift has led to an increase in private commercial borrowing, particularly among enterprises with foreign direct investment (FDI).
Access to international capital markets in the form of commercial loans is quite limited and mainly through the Government's international bond issuance
4.1.3 The cause of the increase in Vietnam public debt
Vietnam's escalating public debt is primarily attributed to an increasing fiscal deficit, which has been driven by a significant rise in recurrent expenditures and the ineffectiveness of public investment projects executed by state-owned enterprises in recent years.
Figures 4-12 Fiscal balance of Vietnam (%)
Between 2010 and 2019, Vietnam experienced a significant fiscal deficit, where government spending consistently exceeded revenue Despite a steady increase in revenue, the gap between expenditure and income widened, particularly after 2011 The influx of substantial foreign direct investment (FDI) has led to increased fiscal spending on infrastructure to support rapid development However, the sustainability of this expenditure growth is uncertain Additionally, public administration has constituted a significant and growing portion of public spending in recent years.
Over the past few decades, Vietnam's economic structure has undergone significant changes, with agriculture experiencing a decline while the industrial and service sectors have seen substantial growth This shift can largely be attributed to foreign direct investment (FDI), which has enhanced the manufacturing industry's share in the economy Additionally, increased public investment in infrastructure and industrial bases has contributed to higher public expenditures and private borrowing, further driving this transformation.
Until 2012, the Vietnamese government primarily financed its budget deficit through domestic debt, with over 70% of total government debt sourced from domestic resources between 2000 and 2008 However, the global financial crisis and an expanding trade deficit eroded confidence in the currency, prompting significant capital outflows as residents converted their VND assets into foreign currency or gold This led to a sharp decline in international reserves and subsequent depreciation of the exchange rate Consequently, Vietnam’s external debt surged more than 7.5 times, escalating from 19,668 billion VND in 2008 to 1,647,124 billion VND.
2012 Even though, foreign borrowing has already exceeded by 1.75 times compared to domestic borrowing in 2013
Vietnam's public debt rose significantly from about 40% of GDP in 2007 to 56.3% by the end of 2010, largely as a result of the global financial crisis However, this figure saw a slight decline to 54.9% of GDP in 2011.
The debt service principal amount has increased by 3 times from 62.6 trillion VND in 2010 to 187,9 trillion VND in 2014 The volume of rollover was 260.8 trillion VND in
In 2015, the total value of bonds reached 288.7 trillion VND, primarily due to the issuance of short-term bonds with maturities of 1 to 3 years since 2009 As these bonds began maturing in 2011, the total principal payments surged Additionally, the introduction of short-term bills with maturities of 3 to 6 months further contributed to the increase in principal payments Although the National Assembly's Resolution No 78/2014/QH13 aimed to limit government bonds with maturities under 5 years starting in 2015, the demand for long-term bonds remains significantly low.
Tables 4-2 Public debt payment using budgetary expenditure (billion VND)
Interest payments have significantly impacted budget expenditures, rising from 3.2% of total expenditure in 2010 to 6.8% in 2015, effectively doubling during this period This high level of interest expenditure is diverting funds away from development investments, largely due to the increasing public debt ratio Additionally, substantial portions of the budget are allocated to education, pensions, social security, and public administration, with pension expenditures particularly on the rise due to Vietnam's aging population.
4.1.4 The impacts of budget deficit and public debt on Vietnam macroeconomy
Lessons from Latin America debt crisis for Vietnam
The debt crisis in Latin America during the 1980s stemmed from a combination of populist policies characterized by excessive spending and irresponsible borrowing from foreign sources, reflecting significant policy failures This mismanagement left these countries vulnerable to capital withdrawal by investors, leading to a situation where addressing the crisis became increasingly difficult as it unfolded.
Vietnam can learn important lessons regarding government borrowing, particularly the dangers of reckless and ineffective practices that may lead to corruption and sustained budget deficits for excessive spending While a significant portion of Vietnam's current debt comes from favorable long-term Official Development Assistance (ODA), the country’s transition to a middle-income status limits its ability to secure such advantageous terms in the future Consequently, Vietnam must be aware of various risks associated with government borrowing, including long-term liabilities and foreign exchange rate fluctuations.
Effective control of external borrowing is crucial due to its potential to increase vulnerability to external conditions Floating-rate debt can lead to higher debt-servicing costs when foreign interest rates rise, resulting in larger budget deficits Similarly, currency depreciation can exacerbate these financial pressures Additionally, borrowing to cover a growing deficit can create an unsustainable debt burden and significant foreign exchange demands for servicing Although Vietnam's total external debt as a percentage of GDP remains within a safe threshold, lessons from Latin American countries indicate that there is no universally applicable safe external debt limit.
The ongoing crises are largely attributed to deficiencies in the economic structure and mechanisms, evident in several areas: inadequate supervision within the finance and banking system, a lack of transparency in private businesses, and an unclear relationship between the government and major corporations Consequently, restructuring the economy, particularly focusing on the finance and banking sectors, is essential to prevent similar crises in the future.
Maintaining a USD-based fixed exchange rate system requires the nation to prepare for potential economic challenges, as this approach can ultimately result in a balance of payments crisis in the long run.
Measures to apply lesson from the crisis in Vietnam’s context
To prevent reckless government borrowing, it is essential to implement the IMF's stringent structural adjustment policies, including contractionary measures that reduce the budget deficit and control public debt A disciplined fiscal policy must be adhered to, utilizing any revenue exceeding annual estimates to pay down debts, with a goal of maintaining the budget deficit at 4% until 2020 and reducing it to 3% thereafter.
The State Bank of Vietnam (SBV) has established a credit growth target of 14 percent for 2019 to sustain low credit growth while prioritizing risk control and economic support To achieve this, the SBV will assign specific credit growth quotas to individual banks based on their financial health, thereby regulating overall credit expansion and aligning with government objectives.
To enhance fund utilization effectiveness amid declining ODA sources and increased reliance on higher-interest commercial loans, it is crucial to modernize the State Budget system Key recommendations include strengthening budget transparency to encourage public participation and accountability, ensuring that State Budget submissions to the National Assembly and Local People’s Councils are disclosed simultaneously for citizen feedback Additionally, enforcing discipline in adhering to approved spending plans is vital, as recent years have seen actual expenditures significantly exceed projections, undermining budget credibility; thus, major changes should require supplemental budget approval Implementing medium-term budgeting, projecting total revenue, spending, and borrowing over three to five years, will help assess the feasibility of development plans Furthermore, consolidating public sector activity reports through comprehensive government financial statements will provide a clearer fiscal policy overview for the government, National Assembly, and citizens Finally, it is essential to monitor risks to the State Budget from extra budgetary funds and state enterprises, as historical crises indicate that significant risks often arise from these sectors.
To effectively manage external borrowing, it is crucial to understand that the sustainability of public debt hinges on both the country's debt levels and its borrowing capacity, where creditworthiness (IIR) is vital in preventing liquidity crises Vietnam has seen a gradual improvement in its creditworthiness, currently rated about 2-3 units below the investment level by leading global credit rating agencies Although specific IIR ratings for Vietnam are not publicly available, its credit ratings can be inferred from independent assessments, placing it among nations with limited access to international capital markets Additionally, the State Bank of Vietnam must bolster foreign reserves to safeguard against potential debt repayment issues and to stabilize the exchange rate.
Vietnam's foreign exchange reserves have increased sharply recently after the State Bank of Vietnam focused on buying foreign currencies from banks.
Figures 4-13 Vietnam's foreign exchange reserves 2016-2019
However, total reserves (% of total external debt) in Vietnam reported since 2010 have been low, despite of slight increase.
To enhance the health of the domestic finance and banking sector, it is crucial to establish an appropriate capital account Additionally, implementing a robust mechanism for monitoring both macro and micro finance is essential for effectively managing the credit of private enterprises and overseeing private borrowing backed by government guarantees.
Thirdly, to avoid risks from USD based – fixed exchange rate system, Vietnam should implement healthy and cautious macroeconomic policies to maintain suitable exchange rate system.
In 2016, the State Bank of Vietnam transitioned from a fixed to a controlled floating exchange rate system, allowing for greater flexibility while still maintaining oversight By the end of 2015, data indicated that the value of the Vietnamese Dong (VND) remained stable; however, the SBV aimed for a more adaptable exchange rate to align with international financial market trends, particularly the fluctuations of the Chinese Yuan (CNY) and U.S Federal Reserve interest rates The previous fixed exchange rate system had left the VND vulnerable to the rising USD and the economic dynamics with China, highlighted by a trade deficit of approximately $3.4 billion in 2015.
Policy recommendation for Public debt management in Vietnam
The primary goal of public debt management is to evaluate risks associated with strategy and debt structure, enabling policy adjustments to ensure the sustainability of public debt in the medium to long term In this section, we propose various policies for discussion aimed at identifying effective methods for managing Vietnam's current public debt and budget deficit.
*Establishing the Public debt Monitoring Committee under the Finance and Budget Committee of the National Assembly
The establishment of the Public Debt Monitoring Committee enhances independent oversight of public debt management by granting access to comprehensive information on public and external debt from various ministries, including the Ministry of Finance and State-Owned Enterprises (SOEs) This access includes critical details such as debt scales, maturities, interest rates, and currencies, enabling effective monitoring and analysis of the public sector's total debt The Committee is tasked with supporting the Finance and Budget Committee in preparing quarterly reports on public debt management for the National Assembly, which will include updated information and discussions on relevant policy and market developments Additionally, the Committee has the authority to collaborate with stakeholders and execute essential administrative processes, including auditing and reporting.
*Establishing a system of debt safety indicators
To enhance fiscal discipline, it is essential to establish a system of indicators that regulate debt limits based on both quantity and repayment flows, expressed in nominal values and as percentages of key macroeconomic variables These limitations should be categorized by debt type, including total public debt, external public debt, domestic public debt, and total external debt Typically, the total debt limit is represented as a percentage of GDP and exports, while debt service limits are tied to total tax revenue and foreign reserves, or the annual debt to capital expenditure ratio It is crucial for the National Assembly to set reasonable limits; overly restrictive limits may impede the government's ability to respond effectively during crises, while excessively high limits render them ineffective Ongoing oversight of fiscal discipline by the Public Debt Monitoring Committee is vital to ensure compliance and effectiveness.
*Debt accounting according to international standards
To effectively evaluate debt management practices and develop suitable strategies, it is crucial to maintain transparency in the accounting of public budgets and debts in accordance with international standards Avoiding off-balance sheet expenditures is essential, while budget deficit measures must exclude unsustainable revenues and property sales, requiring further calculations for a precise assessment of the current fiscal situation Additionally, future budget liabilities, including pension obligations and health insurance costs, should be incorporated into budget deficit forecasts to provide a clearer understanding of the public debt outlook in both the medium and long term.
The debt of State-Owned Enterprises (SOEs) poses potential risks to public debt in Vietnam and must be accurately calculated, analyzed, and reported within the framework of public debt Therefore, the evaluation of SOEs' debt should be an integral component of Vietnam's public debt reporting.
Enhancing the domestic government bond market, both primary and secondary, is crucial for economic growth In the short term, the government may face higher domestic borrowing costs to foster this market's development However, as the market matures and liquidity increases, the government will be able to mobilize capital at lower costs This development will facilitate long-term capital mobilization with fixed interest rates and in domestic currency, thereby minimizing risks associated with interest rates, exchange rates, and rollovers Furthermore, the growth of the secondary government bond market will stimulate the corporate bond market, as government bonds serve as a benchmark for assessing the risk of other debt instruments.
Reforming the tax system is essential to create a sustainable, efficient, fair, and transparent revenue framework It is crucial to reduce the tax burden appropriately, as excessive taxation can lead to tax evasion and inefficient resource allocation A thorough review of the tax and fee structure is necessary to eliminate overlaps and ensure clarity Additionally, taxes should be adjusted to provide social security for low-income individuals, promote savings, and curtail consumption, particularly of imported luxury goods.