1

Dissertation

Foreign debt and its effects on the economic growth: The observation

from Vietnam

Table of Content

List of Figures 1

List of Tables 4

Table of Content .................................................................................................................................. 1

Chapter 1. Introduction .................................................................................................................. 5

1.1 Rationale for chosen topic ......................................... Error! Bookmark not defined.

1.2 Research aim and objective ......................................................................................... 6

1.3 Research scope ........................................................... Error! Bookmark not defined.

1.4 Research methodology ............................................... Error! Bookmark not defined.

1.5 Research structure ........................................................................................................ 6

Chapter 2. Literature Review......................................................................................................... 8

2.1 General theory about foreign debt ............................................................................... 8

2.1.1 Definition and foreign debt restructuring ...................................................................... 8

2.1.2 Classification of external debt ..................................... Error! Bookmark not defined.

2.1.3 Criteria for foreign debt evaluation.............................. Error! Bookmark not defined.

2.1.4 Factors affecting debt and cost of using debt ............................................................... 10

2.2 Relationship between foreign debt and economic growth ......................................... 10

2.2.1 Theoretical studies ....................................................................................................... 10

2.2.2 Empirical studies .......................................................................................................... 12

2.3 Summary .................................................................................................................... 12

Chapter 3. Methodology .............................................................................................................. 13

3.1 Research Approach .................................................................................................... 13

3.2 Research Model ......................................................................................................... 13

3.3 Data collection ........................................................................................................... 13

Chapter 4. Results and Discussion .............................................................................................. 14

4.1 Overview about foreign debt of Vietnam .................................................................. 14

4.1.1 Scale ............................................................................................................................. 14

4.1.2 Structure ....................................................................................................................... 14

4.1.3 Indexes to assess ability of debt payment of Vietnam ................................................. 14

4.1.4 Risks to increase foreign debt of Vietnam ................................................................... 14

4.2 Empirical results ........................................................................................................ 14

4.2.1 Unit root test ................................................................................................................ 14

4.2.2 Cointergration test ........................................................................................................ 14

4.2.3 Granger Causality Test results ..................................................................................... 14

4.3 Summary .................................................................................................................... 14

Chapter 5. Conclusion and Recommendation ............................................................................. 15

References 15

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List of Figures

Figure 2-1 Components of external debt ............................................................................... 8

Figure 2-2 Structure of capital inflow ................................................................................... 9

Figure 2-3 Classification of foreign debt .............................................................................. 9

Figure 2-4 Laffer curve ....................................................................................................... 11

Figure 2-5 “Threshold effect” between debt and growth .................................................... 11

Figure 3-1 Step in secondary research ................................................................................ 13

Figure 4-1 Total foreign debt, debt payable, GDP, GDP growth rateError! Bookmark not

defined.

Figure 4-2 Total foreign debt, debt payable per year, and exportError! Bookmark not

defined.

Figure 4-3 Foreign debt structure of Vietnam categorized by borrowersError! Bookmark

not defined.

Figure 4-4 Foreign debt of Government and foreign debt guaranteed by Government

.................................................................................................. Error! Bookmark not defined.

Figure 4-5 Commitment – Contract – Disbursement of ODA fromError! Bookmark not

defined.

Figure 4-6 Total ODA for Vietnam in 2010-2011 ($150.4 million)Error! Bookmark not

defined.

Figure 4-7 Foreign loans of the locations (Unit: %) ........... Error! Bookmark not defined.

Figure 4-8 Foreign debt of Government categorized by creditors and currencies ...... Error!

Bookmark not defined.

Figure 4-9 Short-term and long-term debt ratio of Vietnam Error! Bookmark not defined.

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List of Tables

Table 2-1 Criteria for evaluating level of foreign debt ......................................................... 9

Table 4-1 Criteria to assess the ability of foreign debt payment of Vietnam ............. Error!

Bookmark not defined.

Table 4-2 Estimate some ratios related to Vietnamese foreign debt of IMF and WB Error!

Bookmark not defined.

Table 4-3 Estimate some Vietnamese foreign debt ratios of EIUError! Bookmark not

defined.

Table 4-4 Percentage of savings and investments to GDP . Error! Bookmark not defined.

Table 4-5 Results of stationarity of variables ..................... Error! Bookmark not defined.

Table 4-6 Cointegration grade test results .......................... Error! Bookmark not defined.

Table 4-7 Johansen normalization restriction imposed ....... Error! Bookmark not defined.

Table 4-8 Granger test results based on VECM .................... Error! Bookmark not defined.

Chapter 1. Introduction

1.1 Research Background

Vietnam is the country with a poor agricultural economy that suffers from the negative

consequences of the long-term war against the imperialists, and therefore, potential resources

related to the capital, the technology, the people, as well as the status of Vietnam in the

international arena are relatively low (Tran, 2010). The year 1986 was considered to be an

important milestone for Vietnam’s economy which moves from the centrally planned

economy to the market economy. Since then, the Party and the State have constantly built and

developed the policies, the legal framework, and the infrastructure for the general

development of the country. According to Nguyen et al. (2010), in order to achieve the

success in the process of the national reforms and development, capital is considered to be

the key factor that our country is still lacking in. Vietnamese government has to borrow the

capital from the individuals, domestic as well as foreign organizations in order to compensate

for the shortfalls. In particular, most of them are foreign debt.

All assessment indicators about Vietnam’s foreign debt are under the safety standards of

the WB and there is no worry about them; however, in fact, Vietnam’s foreign debt reduction

is due to the debt reduction of the creditors, instead of using the internal resources to pay the

debt. For the question “Whether Vietnam is insolvent or not when there is no debt reduction”,

may people will certainly say yes. Therefore, if we do not look back, and inscribe that unique

opportunity at the beginning of the transition phase, we will face many difficulties in the

payment. Currently, Khan (2010) reported that foreign debt is increasing in Vietnam, and

also, the risks to increase foreign debt remain hidden; meanwhile the economic growth is not

equivalent to the debt rate, and thus, it can easily lead to the increase in financial risks.

As a developing country, foreign capital in general and foreign debt in particular has

played an important part in Vietnam’s economy (Nguyen et al., 2012). In recent years, there

have been concerns about Vietnam’s foreign debt and especially the effects of this factor on

the development and growth rate of the nation (Dang, 2012). In fact, comprehensive

understanding of these effects in the specific situations of the country is very necessary to

plan the management policies of foreign loan activities in the most effective way, in literature

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(Sussangkarn, 2012; Fletcher and Webb, 2012; Westphal and Rother, 2012; Bordo et al.,

2009). Having seen the importance of this subject, the topic:

“Foreign debt and its effects on the economic growth: The observation from

Vietnam”

is selected for the dissertation

1.2 Research aim and objective

The aim of this study is the evaluation on foreign debt situation and the exploration of the

relationship between foreign debt and economic growth rate in Vietnam. Accordingly, the

objectives of this study are listed as following:

To overview the current situation of foreign debt of Vietnam

To understand the relationship between foreign debt and economic growth in

Vietnam

To propose some recommendations of the policies related to Vietnam’s foreign

debt issue

1.3 Research Significance

The study focuses on the foreign debt situation and the quantitative analysis of the

relationship between foreign debt and economic growth in Vietnam since 1986 when the

economy started to open up till the end of year 2011. The significances of the study are

included:

An overview about foreign debt of Vietnam in terms of scale and structure as well

as awareness of the risks of increasing foreign debt of Vietnam

Empirical analysis on the relationship of foreign debt and economic growth, in

case of Vietnam.

Possibility of employing research method proposed to other countries.

1.4 Research structure

Apart from the list of abbreviations, graphs and figures, references and appendix, the

subject consists of three main parts:

Literature Review: General documents about foreign debt and the relationship between

foreign debt and economic growth.

Research Methodology: Present the relevant research methodologies used in this dissertation

in order to achieve the study purposes.

Results and Discussion: Present results and discussion on current foreign debt situation and

quantitative analysis of the relationship between foreign debt and Vietnam’s economic

growth.

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Chapter 2. Literature Review

The overall introduction of this dissertation was presented in previous chapter. This

chapter aim to provide the literature review on the theoretical and empirical studies related to

foreign debt and economic growth as well as theoretical frame work of this dissertation.

2.1 General theory about foreign debt

2.1.1 Definition and foreign debt restructuring

Source: web.worldbank.org

Figure 2-1 Components of external debt

Figure 2-2 Structure of capital inflow

Source: web.worldbank.org

Figure 2-3 Classification of foreign debt

Table 2-1 Criteria for evaluating level of foreign debt

Capital Inflow

Official

Development Assistant

Private

Capital Flow

Official

Development Aid

Other Official

Development Assistant

Direct

Investment

Securities

Investment

Private

Loans

Commercial Loans

Commercial Credit

Capital Transfer of Non-

Governmental Organizations

Non-

Refundable

Aid

Refundable

Aid

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No. Indicator Severity Difficulty Normal level

1 Percentage of total external debt to GDP ≥ 50 30 – 50 ≤ 30

2 Percentage of total external debt to exports

of goods and services. ≥ 200 165 – 200 ≤ 165

3 Percentage of debt obligations to exports

of goods and services. ≥ 30 18 – 30 ≤ 18

4 Percentage of debt obligations to exports

of goods and services and to GDP ≥ 4 2 – 4 ≤ 2

5 Percentage of interest payment obligations

to exports of goods and services. ≥ 20 12 – 20 ≤ 12

Unit: %

2.1.2 Factors affecting debt and cost of using debt

Table 2: Credit score rating

Standard Investment Grade Speculative Grade

High quality Average quality Poor quality Very poor quality

S&P AAA AA A BBB BB B CCC CC C D

Moody’s Aaa Aa A Baa Ba B Caa Ca C D

2.2 Relationship between foreign debt and economic growth

2.2.1 Theoretical studies

Source: Pattillo et al. (2002)

Figure 2-4 Laffer curve

Source: Pattillo et al. (2002)

Figure 2-5 “Threshold effect” between debt and growth

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2.2.2 Empirical studies

2.3 Hypothesis Development

Through the literature review on related theories and empirical studies investigated in the

field of foreign debt and economic growth, the following questions are developed for this

dissertation:

What is the current status of foreign debt of Vietnam?

What are risks observed through recent trend of increasing foreign debt in Vietnam?

Is there any relationship between foreign debt and economic growth in Vietnam

2.4 Summary

Chapter 3. Methodology

To complete the subject, the following methods are used: information collection, synthesis

and data analysis from the Internet, the articles, and the researches. Econometrics methods

are also used to find out the quantitative relationship between foreign debt and economic

growth of Vietnam in the transition period.

3.1 Research Design

Figure 3-1 Step in secondary research

3.2 Research Model

3.3 Data collection

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Chapter 4. Results and Discussion

4.1 Overview about foreign debt of Vietnam

In order to make an assessment about the situation of Vietnamese foreign debt, we can

rely on different aspects such as: the scale, the structure, and the indexes related to solvency.

4.1.1 Scale

4.1.2 Structure

4.1.3 Indexes to assess ability of debt payment of Vietnam

4.1.4 Risks to increase foreign debt of Vietnam

4.2 Empirical results

4.2.1 Unit root test

4.2.2 Cointergration test

4.2.3 Granger Causality Test results

4.3 Summary

Chapter 5. Conclusion and Recommendation

Learning Statement

5.1 General opinion

5.2 Experience

5.3 Development

5.4 Contribution

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