 |
 Welcome to MDE |
| Overview |
| Curriculum |
| Facilities |
| Organization |
| Students |
| Applications |
| Fees, Loans, Scholarships |
| Theses |
| Seminars |
| Services |
| International Cooperation |
| MDE News |
| Alumni |
 |
|
| Tiếng Việt | English |
|
Goto: |
|
|
introduction 1.
Relevance of the study The balance
of payments is one of the most important indicators for policy makers in open
economies, especially in countries where the stabilization program is
emphasized. What happens to a country's balance of payments becomes the focus
of attention. In the
balance of payment, current account (CA) is an important item, because "the current account is what policy makers often refer to as
"intermediate target"; that is, a variable which is both a broad
reflection of the stance of macroeconomic policies and a source of information
about the behavior of economic agents" (Knight and
Scacciavillani,1998, p.4). Movement in the CA reflects all the actions and
expectations of market participants in an economy. There are two reasons for
that. Firstly, since CA reflects transactions between residents and
nonresidents of an economy on goods and services. Secondly, CA determines the
evolution over time of a country's stock of net claims on (or liabilities to) the
rest of the world. It reflects the savings and investments of domestic and
foreign residents. Therefore, the CA is an important macroeconomic variable and
we need to explain its movements, assess its sustainability, determine policies
to adjust it . The
CA deficit or surplus mirrors the saving and investment behavior of the
domestic economy. Any change in country's CA position (e.g. a larger surplus or
smaller deficit) must necessarily be matched by increases in domestic savings
relative to investment or be financed by either liquidating foreign assets or
increasing liabilities to nonresidents. However, the current account deficit
can not be financed indefinitely by increasing foreign borrowing since doing so
leads to growing interest and amortization outflows making debt[1]
unsustainable. In the past
decades, many Asian countries have relied on foreign savings to accelerate
economic growth (Wong and Carranza, 1998, p.16). In addition to substantial
benefits, large capital inflows confront recipient countries with new
challenges that require careful management to ensure those benefits are
realized. Recent experience of Asian and Latin American countries clearly shows
that persistent large current account deficit may bring about sudden reversals
in capital flows and has spurred renewed interest in question of CA deficit
sustainability. Since 1989,
Vietnam has transformed from an economy dominated by central planning to an
economy increasingly guided by market principles with high economic growth
fueled by foreign savings. High economic growth has been fueled by foreign
savings, so Vietnam witnesses persistent CA deficit. The large
current account deficit reached a peak at 10.4 percent of GDP in 1996 and it
was considered as alarming level. Since late of this year, government
introduced import controls to narrow it. However, narrowing the CA deficit by
import restrictions contributed to the slow-down in economic growth. The matter
here is the sustainability of CA deficit but not its level because one country
can run large CA deficit financed by foreign savings while still has capacity
to reimburse the debt in the future. The World
Bank (1997) recently concerns about Vietnam's CA deficit unsustainability and
structure of its less healthy financing. Whether the large deficit CA threatens
the country's external position is a central policy concern of the Vietnamese
Government. Therefore, close examination of Vietnam's CA deficit and the
factors underlying its long term development is necessary, especially in light
of the recent regional Asian crisis and its repercussions in markets throughout
the world. 2. Objectives and
Focus of the thesis There are
few studies discussing the current account deficit sustainability so far. Fry
(1997) stated that Vietnam's double-digit CA deficit is sustainable in the
foreseeable future because it is financed almost entirely by foreign direct
investment. This conclusion needs more consideration because foreign investment
involves substantial loans at commercial terms (the State Bank of Vietnam).
Shishido (in IMF 1996) analyzed the structure of CA deficit financing and some
macroeconomic indicators. He concluded that the CA deficit of Vietnam was
sustainable. This conclusion also needs more consideration because since 1994
commercial loans have changed the size and pattern of Vietnam’s CA deficit
financing, especially in late 1997 and 1998, when FDI disbursements have gone
down due to the Asian crisis. Nguyen Thi Thanh Huong (1996) studied Vietnam's
external debt and CA deficit sustainability using Jaime De Pine's dynamic debt
model for the period of 1989-1994.
Huong reported a downward trend in the debt-to-export ratio that implied Vietnam's external debt
and CA deficit was sustainable. It also needs more consideration because variables
used in Jaime de Pine's model like
export and import growth rate, debt-to-export ratio and interest rate have
changed, especially when Vietnam has been impacted by Asian Crisis. This thesis
attempts to assess the CA deficit sustainability of Vietnam in the 1989-1998
period that is still a central concern of Vietnam government. To obtain this
objective, the thesis analyses the evolution of CA deficit and analyses
comprehensively the capital account to find potential risks of running
persistent large CA deficit, then assesses its sustainability in relation with
debt sustainability. All these analyses focus on answering four research
questions for the case of Vietnam: Q1. What
are the characteristics of the CA deficit? Q2. In what
ways has the CA deficit been financed? Q3. Has the
CA deficit been sustainable? Q4. What
policies are advisable to manage CA deficit sustainability? Typically,
the thesis specifies the maximum amount of imports called as warranted imports
that ensures CA sustainability during 1989-1998. Moreover, the thesis
introduces some scenarios of the CA deficit sustainability up to the year 2005
based on projections by the WB and the IMF to find warranted imports in each
year. 3. Research
Methodology of thesis In view of
the fairly short experience in economic renovation, economic time-series for
Vietnam is not meaningful. That is why I do not intend to utilize econometric
for my thesis, but instead employ descriptive and comparative methods. For
assessing the current account deficit sustainability, the Jaime De pine's
dynamic debt model is used for
quantitative analysis. 4. The structure of
the thesis The thesis
will be divided into four chapters, plus an introduction and conclusion. The first chapter is a literature review.
The second chapter surveys Vietnam's
economic development and then examines the evolution of the CA deficit
before and after 1989. Chapter 3 will investigate the current
account deficit as the savings and investment gap. The patterns of the CA deficit
financing are discussed to find out whether Vietnam faces the risks when
running the large and persistent CA deficit. Chapter 4 analyzes the current account deficit and debt
sustainability. In this chapter, Jaime De Pine's dynamic debt model is used to
analyze debt sustainability during 1989-1998. Then future scenarios for the
current account and debt sustainability of Vietnam over 1999-2005 are examined. chapter 1 theoretical framework I.
Definitions and concepts Some
economists have argued that different definitions imply at different theories
of the current account. There are four different ways to describe or to
understand it. as follows: Firstly, the current account measures
the economy's trade in goods and services with the rest of the world taking
into account all unilateral transfers including private remittances and
government transfers. Secondly, the
current account may be conceived as income minus absorption. Thirdly, the current account may be described as national savings
net of investment. Fouthly, the current account is seen as the change in net foreign assets with
respect to the rest of the world. The debate among the various schools of
thought has been generally fruitless, as all conceptualizations of the current
account are equally true and are linked together by accounting identities. The choice of concept
depends upon the purpose of the analysis being undertaken. At
present, Vietnam has no legal document defining the CA and the balance of
payments. However, Vietnam has been measuring the balance of payments according
the fourth edition of the IMF
Balance of Payments Manual (1993). In terms of transactions accounting, the CA
of Vietnam consists of the balance on goods and services, net factor income
from abroad and net transfers from abroad. In this
chapter, theories about the role of foreign savings in financing CA deficit
(section II), determinants of CA (section III), balance of payments adjustments
(section IV) and CA deficit sustainability (section V) are discussed. Following
is the different approaches to assess CA deficit sustainability and model used
in the thesis. V. Sustainability of the Current account deficit and Jaime
De Pine's dynamic debt model The first
approach relies on solvency condition. For an
economy to be solvent, the ratio of debt-to-GDP or export can not grow without
bound. It gives suggestion that an indebted country must keep ratio of
debt-to-GDP constant to ensure its solvency. In this context, sustainability of
CA deficit is insured if debt is sustainable. However, defining the
sustainablity of CA deficit by
measuring debt-to-export or GDP ratio have some shortcomings. Firstly, although
it provides a long-run condition for stability of the ratio of external
debt-to-GDP, it does not define whether that ratio appropriate or
"optimal". Secondly, one country with low level of debt wants to
accelerate high economic growth should not aim at keeping debt-to-GDP or
debt-to-export constant. It is not necessary that a country with high debt-to-export
or high debt-to-GDP make its debt
unsustainable. Because many countries have high debt-to-GDP ratio but they can
pay back while some countries have low debt-to-GDP ratio can not reimburse. Thirdly, solvency in this
context does not take unwillingness to lend on current terms in to account. Some
economists argue that external crisis can occur because stock imbalance and
capital market factors like interest rate. These shortcomings call for a more
comprehensive set of capital account and financial indicators, in addition to
the CA. By this way, the sustainabilty of CA deficit is assessed not only by
solvency condition but also by external crisis riks involed in capital account.
The
second approach relies on a set of macroeconomic, financial, and
external indicators that involve the risk of external crisis. Proposed
indicators are economic growth, rate of investment, export performance,
openness to trade that closely to the ability of a country to generate future
trade surplus to repay foreign debt. Moreover, indicators such as rate of
growth in private credit, health of the banking system (such as level of
non-performing loans, quality of supervision), terms of trade volatility, ratio
of M2 to reserves, exchange rate...are included. The
difficulty faced by this approach is how to "rank" these indicators
and how to translate them to into an overall measure of CA deficit
sustainability. It is relevant for me to analyze
solvency condition and more comprehensives of the capital account to find risks
of running CA deficit to examine the CA deficit sustainability of Vietnam.
There are some reasons for that. Firstly, although the CA deficit has been
financed mainly by FDI but FDI in
Vietnam involves a substantial amount of FDI-related loans. In fact, these
loans are borrowings from foreign countries at commercial term (the State Bank
of Vietnam). Indeed, the CA deficit has been financed mostly by external borrowings. Secondly, it is difficulty to
"rank" indicators in
second approach and to translate them to into an overall measure of CA deficit
sustainability. To assess
Vietnam's solvency condition quatitatively, Jaime De Pine's Dynamic Debt Model
is used. Following is Jaime De Pine's Model. Jaime
de pine's dynamic debt model Based on
BOP identity, Jaime De Pine found the formula to calculate dynamic
debt-to-export ratio as follows:
According
to equation (12), the debt-to-export ratio (dt) is determined by two
parameters: the interest rate to exports ratio (a) and the growth rate of
import to export growth rate (b).
Two initial predetermined variables: initial debt-to-export ratio (do)
and initial import to export ratio or non-interest CA (vo). The
parameter (a) and (b) determines future evolution of debt-to-export ratio.
Jaime De Pine stated that if the
debt-to-export ratio are on upward trend, both debt and CA deficit are
unsustainable. Conversely, if debt-to-export ratios are on a downward trend,
the debt and CA deficit are sustainable and the debt country solvent. Typically,
the Model emphasizes “excess import restraint” that is synonymous with
overadjustment. In this sense, the excess import restraint is different between
actual and warranted imports. Warranted
imports are the maximum amount of imports that make the debt-to-export ratio
decline. The concept of overadjustment can be used to ask how much imports can
grow while keeping the debtor solvent as well as its CA sustainability. It
measures the amount of extra credit or extra the CA deficit to finance imports that a debtor country could borrow and pay. Chapter 2 the Evolution of the Current
account deficit in Vietnam, 1989-1998 I.
the Economic background Vietnam
has transited from a central planned economy to a market-oriented one in the
time that involved many changes in external environment. Both economic reforms
and changes in external economic environment have influenced substantially on
trade as well as external position of Vietnam. Highlighted achievements Vietnam
enjoyed in the past decades are high economic growth, moving from rice importer
to the world's second largest
exporter of rice...However, there are still some outstanding issues need to be
concerned. Among them, large CA deficit is center of policy concern in
macroeconomic management. Before assessing the CA deficit sustainability, it is
necessary to review briefly its evolution before 1989. II. the Current account and
the external debt before 1989 Before
1989, domestic production only meets 80 to 90 percent of internal consumption,
so Vietnam had to rely fully on foreign savings to meet investment
requirements. At that time,
transactions on goods and services were mainly with CMEA, so financing sources
for CA deficit was borrowings mostly from non-convertible area. External
borrowings had played an important role in financing the CA deficit until 1988
because at that time FDI was discouraged. Since 1988, structure of the CA financing has changed with the emergence
of FDI. However, for the whole period of 1985-1989, both FDI and
the external borrowings have not been sufficient to finance the CA
deficit, the large source was come from arrears accumulation. Iii the Current account
deficit in the 1989-1998 period Vietnam's
external transactions have undergone dramatically since economic reform. The CA
deficit has reduced rapidly between 1989 and 1992 because traditional sources
of financing from the former Soviet Union dried up when new one has not been
found. Since 1993, Vietnam has found financing sources from countries other
than CMEA group to finance the CA deficit. From that year, the CA deficit has
widened year by year until 1996.
In 1997-1998, it was narrowed due to import restrictions and Asian crisis's
impacts on Vietnam economy. Compared
with other Asian countries, Vietnam has run much larger CA deficit in term of
GDP. While the indicator of the CA deficit as percent of GDP is always used in
cross-country comparisons, it hidden quite a bit some important information about
characteristics of CA. Is the explanation for the deficit found in a trade deficit or in high interest payment on
foreign debt? and does a given CA deficit result from high investment level or
low savings? The answers for these two questions vary substantially across
countries. The following part is
investigation of the evolution of trade balance, service, net factor income as
well as transfers from abroad in Vietnam during 1989-1998. 1. The trade balance Trade
balance changed by each period. In
1989-1992, the trade deficit was very modest, about USD 50 million
per year. Since 1993, trade deficit has been deteriorated until 1996 with
imports increasing more rapidly than exports and reached at alarming level
(13.7 percent of GDP). However, the deficit was lower in 1997 because from late
1996, Government took a number of import restrictions to dampen the pace of
import growth, then counter the trade and CA deficit. The argument here is that
when Vietnam is member of AFTA (and eventually WTO), significant trade
liberalization is committed, therefore, using import restrictions seem to be
not relevant in the coming years. 1.1.
Composition of Trade: 1.1.1.Export
composition : Vietnam's
merchandise exports have been dominated by agricultural, natural resources and
industrial products confirming the background of Vietnam economy. Two
traditional items that occupied largest share in total export are crude oil and
rice. Since 1994, there was a significant shift in the export composition of
Vietnam. Exports of textile and
cloth have emerged and increased rapidly so they cached up with rice. From
1995, textiles have become second largest commodity after crude oil with
revenue of more than USD 1
billion. Besides above major exports, other goods such as rubber, coffee,
cashew nut... have increased substantially and some items have played an
important role in the world market. 1.1.2. Imports
composition A large
part of import's payments spends on capital goods like machinery, equipment,
auxiliaries, material and fuel. These goods accounted for 80-90 percent of
total imports while consumer goods occupied only 10-17 percent. However, the
value of consumer goods may be under recorded because smuggle goods are
existing in Vietnam. An unofficial data
estimates that the value of smuggled goods through the borders with
China, Cambodia and Lao was 15
percent of total import value. This is not surprise because many kinds of
consumer goods from these countries came to domestic market like garments,
shoes...and they crowded out the domestic goods. 1.2.
Direction of trade The most
significant change in Vietnam's trade partners since 1989 was a decline in the
importance of Former Soviet Union as a traditional trade partners and raise in
the share of Asian as well as other countries in total trade value. Trade
with Asian countries has increased
from over 60 percent during 1991-1994 to nearly 80 percent of total trade
during 1995-1998. 2. Non-factor services The revenue
from non-factor services are mainly related to tourism, post, transportation,
insurance...During 1990-1995, this item had little surplus but since 1995, due
to rapid increase in imported goods, the payments for freight, insurance has
increased substantially. In term of shares in total export of goods and
services, non-factor services accounted for 18 percent in 1992, went to 27
percent in 1996 and stayed at over 20 percent in 1997-1998. 3. Net factor income
from abroad. Investment
income has mainly come from interest on deposits of Vietnamese residents with
non resident banks. However, this value is very small because foreign assets of
Vietnam are not much. In contrary, payment of this item has increased steadily
in recent years as a result of
rising scheduled interest payments on external debt. Due to huge amount of
external debt, Vietnam has to pay interest on this debt about some hundred USD
per year. In addition, profit remittance has increased in the past years when
FDI projects have been implemented after some years. Both increases in interest
payments and profit remittance had made net factor income item negative. 4. Transfers The size of
the CA deficit has been reduced by high positive net transfer. From small
surplus at USD 90 millions in 1991, this item jumped to USD 1,200 millions in
1996 and USD 885 millions and USD 1,122 millions in 1997, 1998 respectively and
contributed significantly to financing resources of the trade deficit. The overall
picture of the CA in term of sub-items during 1989-1998 has been mentioned
above. It can be said that trend of the CA and the trade balance are the same
but the CA deficit has not closed to trade deficit because substantial changes
in non-factor services and net factor income from abroad as well as transfers.
Generally, except nearly balance in 1991-1992, the CA has been deficit
persistently. As mentioned in chapter 1, running the high CA deficit is not
necessary a bad thing. But how to manage it to ensure of sustainability. In
analyzing the balance of payments and in particularly, the sustainability of any
specific CA deficit situation, it is important to consider the capital flows
that are emphasized in new thinking about CA. Following part is investigation
the CA as savings gap and discuss on the pattern of the CA deficit financing,
1989-1998. Chapter 3 The pattern of the current account deficit financing in
Vietnam, 1989-1998 I. The Current account
deficit as savings and investment
gap Among the
most pressing issues facing Asian countries is the large gap between savings and
investment or the large CA deficit. However, the same size of large CA deficit
expresses different behavior of savings and investment among countries. What
information hides behind the large persistent CA deficit in Vietnam during this
decade? Low savings or high investment? 1. Recent development
in savings and investment While
Vietnam's savings are low, it still has reached high economic growth in the
past years. Robust output and export growth has been supported by investment
that has increased significantly since 1990. In 1998, investment dropped
sharply because FDI that contributed to increase domestic investment decreased
due to the Asian Crisis. The level
of savings was very low compared with high investment, so the CA deficit has
been widened, especially it reached a peak of 11.8 percent of GDP in 1996. It
is similar between Vietnam and other Asian countries that the current account
deficit is large but savings and
investment of these countries are much higher than those of Vietnam. So in term
of savings and investment Vietnam is in situation that involves more risk than
above countries. If savings have not been fostered to meet the high investment
requirements, running large current account deficit may create burden of debt
and then threaten the economy in the future. Therefore, finding ways to change savings and investment
behavior should be focused. But what sector's savings and investment gap should
be center of policies? 2. Savings and
investment by government and non-government sector Savings and
investment gap of a national economy aggregate those of different sectors in
economy (government and non-government or private sector). In Vietnam, both
sectors bring savings gap but private sector's savings gap is larger than that
of government sector. To ensure CA deficit sustainability over the medium term,
promoting private savings is required, particularly financial sector should be
developed, to improve the CA deficit or narrow the savings and investment gap. II- the Pattern of the Current
account deficit financing in Vietnam, 1989-1998 Large
savings and investment gap or large CA deficit reflects the net capital
inflows. According to balance of payments accounting, net capital inflows are
recorded in capital account that is counterpart of deterioration of the CA
deficit. When
Vietnam started to open its economy, savings gap required a surplus in the
capital account. However, due to the huge amount of capital inflows in terms of
FDI and external debt, the profit remittance and interest payments that have
increased over recent years. These outflows will increase in the coming years.
As a result, capital account
causes the deterioration of the CA in the future. Therefore, to manage
CA, the macroeconomics policy should deal directly with capital inflows. 1. Level of capital inflows The net
capital inflows into Vietnam have increased very sharply since 1992 and reached
a peak in 1996. It is not surprised to the case of Vietnam because capital
tends to flow to region where potential investment return is high (typically to
high growth countries) and/or where the market mechanism has to begin to take
roots (Wong and Carraza, 1998). Nevertheless, large capital inflows involve
risk of external shocks. It is true for the case of Vietnam. In 1997-1998, due
to Asian crisis, FDI disbursements and commercial borrowings decreased
that induced lower economic
growth. Since early
of this decade, Vietnam enjoys accessing to various types of foreign capital
inflows to finance the CA deficit (see Table 3.4). Table 3.4 shows that
averagely FDI (net) accounts for nearly 80 percent of capital requirements for financing the CA deficit during
1989-1998. Share of FDI in total CA financing source is much higher than that
in other ASEAN countries. Averagely medium and long-term loan (net) and
negative short-term loan (net) bring no surplus because Vietnam has to pay not
only principal on old debt but also new debt. Table 3.4: The Pattern of Capital Flows,
1989-1998 ( in
million of USD and percent)
Source:
Data are taken from Appendix VI and author's calculation In some years,
disbursements of medium and long-term loan are not enough to pay scheduled
amortization. Although net on
borrowings do not bring much surplus to finance CA deficit. This does not
explain the declining role of external borrowings in financing CA deficit
because disbursements of loans during this period have been increasingly and
Vietnam accumulates external debt continously. Besides
thes sources, other sources such as use of Fund credit, arrears accumulation,
debt relief have been used to finance the CA deficit during 1989-1998. Total
financing sources are not only enough to cover the CA deficit but also bring in
an increase in international reserve,
about some hundred millions of
USD per year. This creates pressures on the monetary policies management
as well as exchange rate and choosing an optimal level of capital inflows
should be considered. Moreover, financing CA deficit by arrears accumulation
will erode the creditwothness of Vietnam in international market. The level
of capital inflows only mentions the size of capital inflows comes into
Vietnam. The more important thing is that the same size of capital inflows may
have different cost and involve different risk depending on the composition of capital inflows
(combination of FDI, external borrowings). Following is the composition of
capital inflows of Vietnam in 1989-1998. 2. Composition of
capital inflows 2.1.
Foreign direct investments Looking at
the size of FDI in total capital inflows, it can be said that composition of
capital inflows of Vietnam in 1989-1998 is very advantageous because FDI
accounted for largest part. However, it is early to give confirm statement like
that. For the precise evaluation, it is necessary to see cost of FDI, and its
linkages with CA. 2.1.1.Components of FDI
and its link with external debt. According
to The Foreign Investment Law, total investment of one project includes at
least 30 percent of authorized capital that is contributed by both sides.
Vietnamese side usually contributes in form of land use. In fact, most of
licensed projects have minimum authorized capital. The rest is borrowings (may
borrow from omestic and foreign
creditors). However,
seeking capital in domestic market is not easy because Vietnam is still in
shortage of capital situation. Almost joint ventures have to find sources from
their parent companies and other foreign creditors. As a result, FDI inflows in
Vietnam have recently involved a substantial loan (see figure 3.3) with high
interest rate compared with ODA interest rate. Therefore, FDI may allow
investors to repatriate earnings even low profitability of joint ventures. In
such situation, advantages of FDI may be eroded in the case of Vietnam.
Source:
Data are taken from Appendix VI 2.1.2. Foreign direct
investment and its link with the current account. Since 1989,
FDI inflows have increased substantially that create a surplus in the capital
account. In some following years,
it put negative impacts on the CA. There are some seasons for that. With low
share in total exports and higher share in total imports, trade balance created by FDI sector accounted for
around 30 percent of total trade deficit of the economy. After some years
implemented in Vietnam, some projects have remitted their profit to their home
countries. These remittances have increased recently and accounted for more
than nearly a half of factor payment to abroad in 1998. Moreover, payments of
technical fees, copyright, payment royalties and interest payments of FDI
sector also increased. In
short, FDI has put negative
impacts on the CA during 1989-1998 and also leads to increase of external
borrowings. 2.2.
External debt In the past
years, loan from foreign countries has played an important role in financing
the CA deficit together with FDI. In the context of financing the CA deficit,
external borrowings are expressed in term of flow figure. However, loan coming in Vietnam year by year
will accumulate debt. The same stock of debt will cost differently and involve different risk depending
on composition of debt by maturity, type of loan, currency domination and at
different interest rate. Therefore, the following are discussion on these. 2.2.1 Debt by maturity
Although
new loan from CMEA group has no longer been committed, Vietnam still has huge
amount of outstanding debt in Transferable Rubles. This characteristic made
difficulty in measuring the debt burden because there were no official exchange
rate between Transferable Rubles and USD to convert these debt. Long term
debt accounted for largest part (about 80-90 percent) while short-term
debt and use of Fund credit
occupied 10-20 percent during 1990-1997. Among other countries in the region,
Vietnam's short-term loan is the lowest and involves huge amount of L/C with
deferred payments. Low share of short-term debt implied that the CA deficit has
been financed by almost medium and long-term loan. Knight and Scacciavillani
(1998) stated that the sustainable CA is one that can be financed by long-term
capital flows. From this point of view, with small share of short-term debt,
Vietnam seems not to be threatened by the CA unsustainability in the past
years. However,
risk of composition debt by maturity does not ensure sustainability, degree of
risk sharing with debt contracts also depends on the currency
denomination, interest rates, type
of loans. 2.2.2. Debt by
currency denomination Debt
denominated in Transferable Rubles accounts for large part of total debt of Vietnam
despise it has downward trend along with increase in debt dominated in other
currencies. If the Transferable Rubbles debt is excluded, medium and long-term loan dominated in
USD accounts for almost of Vietnam's external debt. USD is the foreign currency
that Vietnam Dong is linked. Therefore, exchange rate risk will impact on
external debt of Vietnam. One point can be drawn is that when choosing
devaluation to adjust CA deficit it is necessary to consider the impacts of
devaluation on burden of debt, especially the debt services during the time
devaluation was made and then compare with benefit resulted from trade balance
improvement. 2.2.3. Debt by type of
loan (concessional and non-concessional loan) Concessional loan over total debt is
very high, around 70-80 percent during 1994-1997. However, its share tends to
decrease since 1994 when commercial loans have increased. If Transferable Rubbles debt is excluded from
total debt, share of non-concessional debt has increased rapidly. Cost of
external borrowings to finance the CA deficit of Vietnam become more expensive
recently. Moreover, when non-concessional loan increase, it involves more
interest rate risk. Therefore,
Vietnam's external debt becomes more dependent on uncertainties in international
financial market. Considering interest rate become more important for external
debt management of Vietnam in the future.
It is one of important indicators will be taken into account in Jaime De Pine's dynamic debt model discussed in Chapter 4. Managing
the composition of external debt is necessary to insure debt and CA deficit
sustainability. However, to ensure high economic growth as well as high export
growth rate fueled by foreign savings, one thing should be focused on is the
efficiency of capital utilization. The reason is that an increase in investment
does not automatically lead to higher economic growth. Hence, paying too much
attention to investment amount is not enough and capital utilization efficiency
should be concerned. 3. Capital utilization efficiency Measuring
the efficiency of capital utilization by ICOR, Vietnam's productivity of
investment is comparatively high. However, ICOR of Vietnam in the past years
has not reflected fully an increase in efficient capital utilization. Vietnam's
recent growth has been characterized by increasingly capital-intensive
industrialization and by inefficient growing investment, low-return investments
(WB, 1997). Attracting huge amount of foreign capital but utilization of these
sources is not efficient create pressures balance of payments as well as on
capacity of paying debt obligation in the future. Therefore,
the debt should be considered in relation with export growth. However, export
growth may not be enough to assess the sustainablity of debt and the CA deficit
because the important role of import growth rate was not be taken into account.
Moreover, change in international interest rate makes cost of financing CA
deficit different. Jaime de Pine's Dynamic Debt Model will take into account all
these factors. Let's move to the chapter 4 for analyzing the CA deficit and debt sustainability by that model. Chapter 4 The current account deficit sustainability and external debt sustainability I.
Data base The data of
external debt becomes a problem that needs to be considered because Vietnam's
external debt consists of two distinct components: its Transferable Rubles (TR)
debt and its hard currency debt. In term of original data, there were no
difference between data published by the World Bank, the IMF and Vietnam.
However, there are big difference among three sources of data due to different
exchange rates between USD and Transferable Ruble. WB uses the exchange rate of
USD1=0.56 TR, IMF uses the exchange rate of USD1 = 2.4TR while Vietnam expects
the exchange rate of USD 1=5.5 TR. Therefore, the WB databases show that
Vietnam is in severely indebtedness while IMF and Vietnam database show that
Vietnam's external debt is not severe. However, as mentioned in chapter 1,
these critical indicators are somehow arbitrary. The more important thing when
seeing external debt of one country is whether the country is solvent? It depends on its own capacity to
repay debt. In turn, repayment capacity depends on the export growth rate,
import growth rate as well as the change in international interest rate. All
these indicators are taken into account in Jaime De Pine' s debt dynamic model. However, which database should be used
in analyzing CA deficit and debt sustainability by Jaime De Pine's Model? The most
relevant data used in this thesis
is the IMF data. There are some reasons for that. ·
The exchange rate used by World Bank is
the exchange rate used by CMEA members in batter trade. This exchange rate was
not regulated as the exchange rate for debt repayment. ·
Converting Transferable Ruble debt to USD
by the exchange rate of Transferable Rubles 0.56 against USD1 is not realistic.
·
Although exchange rate agreed between
Vietnam and some countries in CMEA is around Transferable Rubles 5.5 against
USD 1, the outstanding debt of Vietnam to these countries is very small.
Therefore, it is not sure that Soviet Union accept this exchange rate. II. the Current account
deficit and Debt sustainability
analysis 1. The period of
1989-1998 Using a series
of economic indicators such as export and import growth, stock of debt,
interest rate on debt during 1989-1998 with base year of 1989, all variables
used in Jaime De Pine Model are calculated and simulated to find debt-to-export
ratio and import restraint at each year. 1.1. Debt-to-export
ratio, 1989-1998 Simulating
with (b) equal 1 and two above cases of (a), the trend of debt-to-export ratio
is indicated in Table 4.1. Table 4.1
shows that the debt-to-exports declined rapidly, from 5 in early of this decade
to 2.09 in 1999. So the conclusion is that the CA deficit and the external debt
of Vietnam are sustainable in this period . Table 4.1: Vietnam:
Debt-to-Export ratio, 1989-1998
Derived from equation 12 and data in Appendix II 1.2. Import restraint or overadjustment,
1989-1998 Actual
import was under warranted imports during 1989-1994 and they nearly matched
each other in 1995. In 1996, actual import was higher than warranted import
(see Figure 4.3). In fact, government had realized its danger and had
introduced measures to narrow the CA deficit. It can be seen clearly that
actual import in 1997 and 1998
felt under the warranted imports. This effort done by Vietnam is
necessary in the context of macroeconomic management. But the actual import
that were under the warranted import remarkably in 1997-1998, has impacted on domestic production. To
promote economic growth, import should be expanded but should be ensured under marginally the warranted import.
Sources:
Data are taken from Appendix IV. The import
restraint or overadjustment can be derived from the warranted imports and
actual imports as presented in Table 4.2. This table shows that Vietnam has
experienced a great deal of overadjustment. In other word, import has been
restrained substantially compared with it could be expanded (except in 1996).
With average interest rate is 3.02 percent per year on external, import could
have been substantially larger than it was and still have kept the debt
to-export ratio on a declining trend. Only in 1996, the actual import should
be restricted USD 627 million. That is why some
economists stated that CA deficit reached at alarming level. If it was not
restricted, import expansion in 1996 will create upward pressure on
debt-to-exports ratio and threaten the CA deficit sustainability. However,
whether import restrictions should be applied continuously in 1997, 1998 is a
question. As indicated in Table 4.2,
import could be expanded more USD 591 million and USD 891 million more than it was in 1997, 1998 respectively.
This point seems to be suitable with criticism of World Bank that the CA
deficit has declined out of necessary. Table 4.2: Vietnam: Import Restraint or
Overadjustment, 1989-1998 (in
million of USD)
Source: Data are taken from Appendix IV This
section has shown the Vietnam's picture of sustainable CA deficit and debt during
1989-1998. It is very important to investigate the evolution of the CA deficit
as well as accessing of its sustainability in current period but the other
important thing is that sound situation of the CA deficit and debt
sustainability can be maintained in the future or not and how to manage them sustainable? 2. The period of
1999-2005. 2.1.
Projection by IMF and WB As World
Bank pointed, a decline in imports can not continue because of its negative
impacts on domestic production. Imports need to increase in the coming years to
meet the requirements for domestic production. The medium-term projections by
IMF show a gradual increase in export of goods growth with higher rate than that of imports. Base on
projections of IMF, it is rational to simulate debt-to-export ratio with
alternative (a) and (b). This section gives two scenarios to find whether are
CA deficit and debt sustainable and
investigate how does
transfers play role in keeping CA deficit sustainable. 2.2.
Scenario 1: Assessing the CA deficit
and debt sustainability based on non-interest CA excluding transfers With the
base year of 1998 and major indicators projected by IMF and World Bank, the
debt-to-export ratios of the period 1999-2005 are indicated in Table 4.3. Table 4.3
shows that when the import growth is kept under the export growth, the
debt-to-export ratios have declining trend even when interest rate exceeds
export growth (say a=1.03). But when export growth and import growth is the
same, even with interest rate lower than export growth rate, debt-to-export
ratios have gradual upward trend. Table 4.3 : Vietnam: Debt-to-Export ratio,
1999-2005 (Scenario1) (Given initial year
of 1998, do=1.27, vo=1.13)
Derived from equation 12 in Chapter 1
and data in Appendix III A Therefore,
the CA deficit is little unsustainable. When export growth can not exceed
interest rate, the debt-to-export ratio increases more rapidly and will reach up
at 2.56 in 2005 that makes the CA
deficit and external debt becomes more unsustainable. If the import growth
exceeds export growth (b=1.05), even Vietnam can borrow at concessional
interest rate like previous period (i=3.02 percent per year that corresponding
with a=0.96), the debt-to-export ratios still have upward trend, the CA deficit
becomes more sustainable faced by Vietnam in the coming years. To ensure
the CA deficit sustainability, import growth must be kept under the export
growth. The argument here is that when Vietnam still in shortage of capital and
its domestic production depends largely on imported goods (as mentioned in
chapter 2), import growth could be higher than export growth in some coming
years to support domestic production. From this point of view, for ensuring to be out of indebtedness, Vietnam has to ensure
debt-to-export ratio less than 2.75, so it can continue to rely on foreign
capital and import growth rate can be higher than export growth rate until year
of 2002. Since 2003, Vietnam has to keep import growth rate under or equal export growth rate. The
warranted imports in 1999-2005 can be derived and illustrated in Figure 4.4.
Figure 4.4 shows that with assumption Vietnam still borrows at the same
interest rate as previous period, the import as projected by IMF and World Bank
is exceed greatly the warranted
import. Therefore, it is necessary to reduce import to ensure that it is under warranted
level, then the CA deficit and debt sustainability can be reached. However,
this scenario uses a CA definition as difference between export and import of
goods and services. In deed, CA includes a substantial amount of transfers.
Scenario 2 will use more broad concept of non-interest CA. . Source:
Data are taken from Appendix IV 2.3.
Scenario 2: Assessing the CA sustainability and debt sustainability based on
non-interest CA including transfers Including
transfers in total revenue of exports, the debt-to-export ratios of the period
of 1999-2005 are shown in Table 4.4. Table 4.4: Vietnam: Debt-to-Export ratios,
1999-2005 (Scenario 2) ( Given initial
year of 1998 with do=1.16 and vo=1.03)
Data are
derived from Equation (12) and data in Appendix III B Table
4.4 shows that with transfers, the
debt-to-export ratio decreased. However, it still has the increasing trend like
in Scenario 1, but this trend tends
to be gradual, not as rapid as
that in scenario 1. As a result, the CA deficit is little unsustainable in the
case of import growth rate equals the export growth rate and the average
interest rate is up to 5.7 percent per year. The CA deficit become more
unsustainable if import growth
rate can not be kept under the rate of export growth. Argument
like in scenario 1, for ensuring
to be out of indebtedness, Vietnam has to ensure debt-to-export ratio less than
2.75, so it can continue to rely on foreign capital and import growth rate can be higher than
export growth rate until year of 2003. Since 2004, Vietnam has to keep import
growth rate under or equal export
growth rate. Although
the transfers do not help to
change the direction of the debt-to-export ratio trend of scenario 1, transfers still play an
important role to slow the speed of increasing of debt-to-export ratio. With
the support of transfers, the warranted import can be higher than the case of
scenario 1 as presented in Figure 4.5. Therefore, the actual import is close
with the warranted import. This
implies that Vietnam can import nearly the same level as projection of IMF,
even expand a little more than projected imports.
Source:
Data are taken from Appendix V. B In short,
in term of solvency condition, the CA deficit of Vietnam during 1989-1998 was
sustainable with declining trend of debt-to-export ratios. The CA deficit
sustainability is enhanced if patterns
of financing are taken into
account. As mentioned above, debt by maturity, low short-term debt relative to foreign exchange reserve,
debt by types of loan (concessional and non-concesional loan), all are
supported to ensure the CA deficit sustainability of Vietnam. However, In the
coming years if import growth is not kept under export growth, CA deficit
become unsustainable. Sustainability
of CA deficit up to year of 2005 is based on strict condition that interest
rates
on external debt are the same or less than those
of the previous period. If this condition does not hold, the CA deficit may be
more unsustainable. Using Jaime De Pine' dynamic debt model, CA deficit
sustainability can be assessed because all variables used in this model are
known. If it is used for assessing sustainability for the future, the results
may imprecise and CA deficit sustainability becomes based on strict assumptions and projections. In addition, the international environment
changes dramatically, and often changes cannot be anticipated. So projections
by the IMF and the WB may not be relevant anymore. However, the main purpose of
this thesis is to assess Vietnam's CA deficit sustainability in 1989-1999 while
testing some scenarios for future
and therefore can not cover all cases in the future. Conclusion Running a large CA deficit is not surprised to
the case of Vietnam because it is in shortage of capital. However, the level of
CA deficit has become a focus of attention since 1996 when it reached alarming
level and its sustainability is central of policy concern in macroeconomic
management. The level of CA deficit was considered alarming but the alarm was
not based on quantitative analysis. This thesis attempts to assess the
sustainability of the CA deficit
and shows to what extent the CA deficit is exceeds, particularly to what extent
import is exceeds, based on quantitative analysis. The thesis
highlights some main
characteristics in the evolution
of CA deficit in 1989-1998 period. *
There is a big change in direction of
international transactions (shift from non-convertible area to convertible
area) with Asian countries now constituting 70-80 percent of total trade in
Vietnam. Vietnam's economy has become more integrated with the region. *
The
CA deficit of Vietnam is caused by
large trade deficit and deficits on non-factor servieces and factor income from
abroad items while it is narrowed by large surplus in transfers item. *
Running a large CA deficit of Vietnam is
justified as almost imports are capital and imediate goods that constributed to
domestic production. *
The CA deficit is financed mostly by FDI
and foreign borrwoings but in some years IMF credit, arrears accumulation and
debt relief are used *
Vietnam's savings are still fairly low,
it has reached high economic growth thanks to domestic investment fueled by
foreign savings. That is a major cause of the CA deficit and savings and
investment gap. Both government and non-government sectors bring savings and
investment gap but the non-government sector brings larger gap. The thesis
attempts to assess the sustainability of CA deficit during 1989-1998 that is
done in Chapters 3 and 4. The main
findings of the thesis can be summarized as follows: ·
Through analyzing different types of capital,
the thesis found that although net FDI flows contribute a large part of
financing since 1989, this flow involved substantial loans that made debt stock
increase. That is why the thesis examines CA deficit sustainability though
assessing the debt sustainability. ·
By analyzing different aspects (maturity,
currency denomination, concessional condition) of external debt, the thesis found that the CA deficit of
Vietnam during 1989-1998 did not involve immediate risks as it is financed
mostly by medium and long-term loans. Short-term loans are not large and are
mainly related to trade finance. This implies that Vietnam does not face a risk
of sudden outflows. This finding supports the conclusion that the CA deficit is
sustainable. ·
Using Jaime De Pine's Dynamic Debt Model, the thesis investigates
Vietnam's solvency by finding the trend of debt-to-export ratio (i.e. capacity
to create CA surplus to repay debt). Based on declining trend of debt-to-export
ratios, the conclusion is that the
CA deficit during 1989-1998 is sustainable. ·
Vietnam experienced great overadjustment
in past years. That means imports have been restrained in comparision with the
warranted import level. In fact, Vietnam could expand imports (except in 1996)
to achieve higher economic growth. Quantitatively, this thesis found that actual imports in 1996 exceeded warranted imports by USD 627
million. At the end of 1996, the government introduced imports restrictions that reduced imports and eventually the CA deficit. These ad
hoc government measures ensured the sustainability of the CA, but at the cost
of price distortions and stifling economic growth. In 1997 and 1998, actual imports under warranted imports.
Actual imports should be expanded to be
marginally under warranted imports to ensure CA deficit substainability
as well as support to domestic production, and economic growth. ·
The thesis also evaluated CA
sustainability scenarios to the year 2005. By introducing two scenarios
(scenario 1 uses a definition of the CA excluding transfers, and scenario 2
uses the definition of the CA
including transfers), the thesis highlighted the role of transfers in managing
CA deficit sustainablity. à
Scenario 1 shows that if transfers can
not be attracted, Vietnam can obtain CA deficit sustainability only when import
growth rate stays under the export
growth rate. But when imports is
equal or exceed export growth rates, even when the interest rate is lower than
the export growth rate, Vietnam faces problems with CA deficit unsustainability. In this case, actual
imports are much higher than warranted imports. Imports should be reduced but
this harms domestic. However,
Scenario 1 may not hold if Vietnam can attract transfers to finance the
trade deficit, which is the case with Scenario 2. à
Scenario 2 highlights the importance of
transfers. With the debt-to-export ratio decrease and Vietnam can maintain a
sustainable CA deficit when export and import growth rates are the same and the
average interest rate is the same or less than that of previous period. If
average interest increases to maximum rate of the previous period or greater,
the CA deficit becomes unsustainable, but less dramatically than in the case of no transfers.
Although transfers do not help to change the direction of the debt-to-export
trend, they still play an important role to slow the speed of an increasing
debt-to-export ratio. Transfers allow Vietnam to import much more than in the
case of without transfers. Policy
implications The
findings of the thesis have suggested that Vietnam should focus on
policies to ensure CA deficit sustainability, as well as policies to adjust it when
it is unsustainable. Þ While
imports should be expanded in coming years to support domestic production,
export expansion should be
improved to ensure CA deficit sustainability. Þ Should
focus on managing external debt in terms of maturity, currency domination,
interest rate to avoid crisis risks and
on increasing the effectiveness of capital utilization. Þ Import
restrictions policies should not be used as measure to adjust the CA deficit Þ Need
to compare the devaluation's effects on burden of debt with that on the trade balance to justify whether the devaluation is a good way to adjust
the CA deficit or not. Þ Should
focus on narrowing the non-government savings and investment gap rather than
government savings and investment gap, particulary improve savings of this
sector. Þ Should
focus on attracting transfers, especially from Vietnamese overseas to allow
import at higher level. In conclusion,
using Jaime De Pine's dynamic debt model to assess debt sustainability based on current account and looking
more comprehensive at capital account, the thesis gives the answer that the CA
deficit concern generally not warranted, except in 1996. Future projections to
2005 suggest sustainability of CA deficit when import growth rate is kept under
export growth rate. If Vietnam focus on attracting transfers as source of
financing trade deficit, sustainability of CA deficit can be maintained even in
the case of export and import growth rates are the same but with condition is
that interest rate must be lower than export growth rate. In short-term, for
ensuring CA deficit sustainability, Vietnam should not use import restrictions
but instead probably devalue, monitor debt composition and size closely. But in
long run savings should be focused on to narrow the savings and investment gap
and then CA deficit. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| << BACK | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
