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CIEM, Trung tâm Thông tin – Tư liệu VIỆN NC QUẢN LÝ KINH TẾ TW TRUNG TÂM THÔNG TIN – TƯ LIỆU THÔNG TIN CHUYÊN ĐỀ KHỦNG HOẢNG KÉP: KHỦNG HOẢNG NỢ CÔNG VÀ KHỦNG HOẢNG TIỀN TỆ ĐÁNH GIÁ RỦI RO ĐỐI VỚI VIỆT NAM TWIN CRISES: PUBLIC DEBT CRISIS AND MONETARY CRISIS – ASSESSING RISKS FOR VIETNAM 1 2012 SỐ CIEM, Trung tâm Thông tin – Tư liệu VIỆN NC QUẢN LÝ KINH TẾ TW TRUNG TÂM THÔNG TIN – TƯ LIỆU KHỦNG HOẢNG KÉP: KHỦNG HOẢNG NỢ CÔNG VÀ KHỦNG HOẢNG TIỀN TỆ ĐÁNH GIÁ RỦI RO ĐỐI VỚI VIỆT NAM TWIN CRISES: PUBLIC DEBT CRISIS AND MONETARY CRISIS – ASSESSING RISKS FOR VIETNAM TRUNG TÂM THÔNG TIN – TƯ LIỆU Tel – Fax: 04 – 37338930 E-mail: vnep@mpi.gov.vn Hà Nội, tháng 2/2012 CIEM, Trung tâm Thông tin – Tư liệu TWIN CRISES: PUBLIC DEBT CRISIS AND MONETARY CRISIS – ASSESSING RISKS FOR VIETNAM I- SOME THEORETICAL ISSUES ON PUBLIC DEBT CRISIS AND THE RELATIONSHIP BETWEEN PUBLIC DEBT CRISIS AND MONETARY CRISIS 1.1. Budget deficit is a common economic phenomenon in most of countries in the world Government budget deficit occurs when the expenditures of a government exceed the revenues collected by the government. There are two types of budget deficit: structural deficit and cyclical deficit. The impact of budget deficit on the economy is positive or negative that mainly depends on measures used by the government to finance deficit. In general, almost countries will apply some following measures on dealing with budget deficit: (i) printing money; (ii) borrowing; (iii) raising revenues for the state budget; and (iv) minimizing the amount of budget expenditures. Basically, there are two main measures on financing budget deficit including money-financed deficits and non-monetised deficits. The first measure is often considered the key root of high inflation in some historical crises and has been no longer used by most of countries. Selling bonds to finance budget deficit often has impacts on interest rates that also affects inflation. 1.2. Public debt and criteria for safety of public debt Depending on economic and political institutions, definition on public debts in each country differs. According to the World Bank (WB), pubic debts are debt liabilities of the public sectors including the central government, local administrations, central banks and independent organizations (with capital allocation from the state budget or 50 per cent of their capital belonging to the state ownership and in the case of their bankruptcy, the state have to pay their debts). In Vietnam, the Law on Public Debt Management enacted in 2009 stipulates that public debts cover those of the government, those guaranteed by the government and those of local administrations. CIEM, Trung tâm Thông tin – Tư liệu Some criteria being often used to evaluate a national public debt situation include: public debt to GDP ratio, foreign debts/GDP, foreign debt liabilities to import and export turnover, government debts to revenues of the state budget, etc. 1.3. Sovereign debt default and sovereign debt restructurings Sovereign debt default is a situation when an independent country can not fully meet its debt obligations as committed (the principal and/or interest payments are not paid when they are due). When a goverment is unable to meet its debt obligations, it has to implement sovereign debt restructuring process. Sovereign debt restructuring is adjusting conditions and articles in the sovereign debt contracts signed between creditor and debtor countries. A common form of sovereign debt restructuring is devaluating bonds or debts, or swaps, i.e. replacing the old bonds with new ones with lower interest rates and longer terms. 1.4. The relationship between public debt crisis and monetary crisis 1.4.1. Fiscal deficit and current account deficit Government savings and current account, ceteris paribus, move towards the same direction, i.e. an increase in the state budget deficit will lead to an increase in current account deficit and vice versa. In another words, the state budget can directly impact the current account via raising (reducing) demand of investment, and goods and service consumption or raising (reducing) tax revenues. If the government implements an expanding fiscal policy (that increases budget deficit), increasing goods and service consumption and reducing tax will stimulate demand of import. It will result to an increase in trade deficit; thereby the current account deficit will increase. All of this will lead to an increase in sovereign foreign debt situation and increase the risk of monetary crisis 1.4.2. Debt and inflation vicious cycle Printing money to offset budget deficit makes the base money increase and prices rise that is the relationship between increased public debt and inflation crisis. This phenomenon can be seen commonly during inflation crises in Latin American countries some past decades. Though this measure has been no longer used to finance fiscal deficit, in fact, there are similar measures such as buying CIEM, Trung tâm Thông tin – Tư liệu government’s bonds by state banks or requiring commercial banks to buy government’s bonds and then discount them at state banks, etc. 1.4.3. Probability of happening public debt crisis and monetary crisis simultaneously On the one hand, a public debt crisis can directly lead to a monetary crisis when short-term loans of the government are refused to extend. Public debt crisis may decrease the growth rate and have negative impacts on trade and employment. Therefore, public debt crisis is considered a reason for an economic recession. In this case, investors would not like to increase credits and want to withdraw most of their investment portfolios that puts the domestic currency under the devaluation pressure or increases risks of monetary crisis. A public debt crisis may also lead to a monetary crisis directly when the government’s budget deficit can not be offset by foreign borrowings and the government has to printing money to finance budget deficit that creates hyperinflation as being often seen in the case of Latin American countries in the past time. On the other hand, a monetary crisis may lead to a debt crisis. When a monetary crisis happens, the government has to face with pressure of devaluating the domestic currency. In case a government chooses to fix exchange rates by increasing short-term interest rates to limit capital outflows and attract capital inflows, it will face with two problems: (i) costs of borrowing increase and risks of debt default increase thereby; and (ii) domestic expenditure as well as investment decrease (due to higher interest rates) following by the economic downturn, decreased budget revenue and increased budget deficit that means risks of debt default increase. In case a government chooses to devaluate the domestic currency, it will also face with two issues including capital outflow and risk of credibility. Again, it will lead to risks of debt default in the future. CIEM, Trung tâm Thông tin – Tư liệu II/ THE CURRENT SITUATION OF PUBLIC DEBT AND RISK OF MONETARY CRISIS IN THE WORLD 2.1. The current situation of public debt in the world The high public debt to GDP ratio in many developed countries is a great challenge to the global economy at present. Solving public debt is now a thorny exercise, especially in the context of the severe public debt crisis in Eurozone. According to the Economist, as of October 25, 2011, the world’s public debt has been over USD 40.5 trillion, in which there are around 30 countries having the public debt to GDP ratio of over 60 per cent and budget deficit of over 3 per cent. The US’s public debt The estimated federal budget deficit of the US is USD 1,500 billion, which is equivalent to 9.8 per cent of GDP and 1 per cent higher than that of 2010. The public debt of the US in 2008 was only 40 per cent of GDP but reached to USD 9,000 billion, which was equivalent to 62 per cent of GDP in 2010. On August 2, 2011, the US Congress officially adopted to raise the debt ceiling from USD 14,300 billion to USD 16,400 billion subject to the condition of reducing more than USD 2,400 billion of budget deficit in the next ten years. According to the estimation of CBO, the US public debt will increase to USD 18,000 billion, equivalent to 77 per cent of GDP by the end of the year 2021. Japan’s public debt According to the IMF’s statistics, Japan is the country having the highest public debt to GDP ratio. Japan’s public debt has reached USD 11,354 billion, which is equivalent to 229 per cent of GDP as of March 2011. However, public debt of Japan is different from those of the US and Eurozone. About 95 per cent of public debt in Japan belongs to domestic investors. Moreover, the interest rates of the government’s bonds are rather low. The highest interest rate is only around 1.4 per cent per year with a long grace period of 30 to 40 years. In addition, Japan’s economy has been facing with deflation situation in recent years. Therefore, public debt is not a big challenge to Japan at the moment. Eurozone’s public debt CIEM, Trung tâm Thông tin – Tư liệu Public debt crisis has become one of the biggest challenges to the EU. According to the 2010 annual financial report of the EC, public debt of 17 European countries increased from 66.3 per cent of GDP in 2007 to 87.9 per cent of GDP in 2010 and is projected to rise to 88.7 per cent of GDP in 2012. At present, public debt of Greece, Italy and Ireland has reached over 100 per cent of GDP. Most of public debt of European countries belongs to foreign investors. It has been three years since the European public debt crisis boomed in Greece. The Greek public debts reached to 160 per cent of GDP and its budget deficit was 13.6 per cent of GDP as of October 2011. In addition, the economic growth rate of Greece has been negative continuously. The interest rate of the Greek government’s bond with 10-year term increased continuously from 3.47 per cent per year in January 2010 to 9.73 per cent per year in July 2010 and jumped to 18 per cent per year in July 2011. Public debt management of Ireland is relatively better in comparison with that of Greece. However, the budget deficit of Ireland also increased rapidly from 14.3 per cent of GDP in 200a9 to 32.4 per cent of GDP in 2010. The current public debt of Ireland reaches USD 14 billion, which is equivalent to 125.4 per cent of GDP. The most serious problem of Ireland at the moment is the “credibility crisis”. Portugal has a public debt to GDP ratio of about 82.4 per cent which is much lower than that of Greece but it has a high budget deficit and high private loans. Moreover, 70 per cent of public debt in Portugal belongs to foreign investors. To avoid risks of debt default in Eurozone, IMF and some big countries in Eurozone have lent Greece €110 billion, Ireland €85 billion and Portugal €78 billion since May 2010 with the condition of implementing a tightened fiscal policy and reducing budget deficit to 11 per cent of GDP in 2011 and to 3 per cent of GDP by the year 2013. However, most of implement plans of these countries have faced with problems. The public debt crisis in Eurozone is not the story among the three above countries (Greece, Ireland, and Portugal). It has been spreading region wide, especially to the three bigger countries including Hungary, Italy and Spain. Spain and Italy account for 29 per cent of economic activities in Eurozone and two third CIEM, Trung tâm Thông tin – Tư liệu of total public debt in the region. Therefore, if these countries can not control their public debt situation, a risk of Eurozone collapse is visible. 2.2. Risks of a monetary crisis Impacts of the current public debt crisis on the world economy The current public debt crisis has had negative impacts on the stock market of the US due to the huge investment of American enterprises into European countries. Emerging countries such as Brazil, China and India have been also affected significantly by the debt crisis in Eurozone. The growth rate, export turnover, retail revenue, etc. of these countries have decreased strongly. In addition, to stabilize the exchange rates, state banks of emerging countries had to sell about USD 35 billion from their foreign exchange reserves. The public debt crisis in Eurozone has made the recovery of the world’s economy slowly. Especially, the European region have had to face with the situation of highly increased unemployment and inflation as well as the devaluation of the Euro and a decrease of the GDP growth rate, real income and demand of export goods. Moreover, the European public debt crisis has contributed to the increase of the world’s gold price in 2011. The world’s gold price rose steadily from USD 1,400 per ounce in January 2011 to the peak of USD 1,906.8 per ounce on the 22 August 2011. Impacts of the current public debt crisis on banking system If governments of these European countries can not meet the public debt liabilities, large banks in Eurozone will face with severe losses and a risk of illiquidity because these banks are holding hundred billion of government bonds in Euro of European countries. A number of large banks in the US are also facing with a “severe risk” because their credits will go bad if the European public debt crisis goes worse. According to Fitch Ratings, as of September 30, 2011, USD 50 billion of the six largest banks of the US including JPMorgan Chase & Co, Bank of America, Citigroup, Wells Fargo & Co, Goldman Sachs Group and Morgan Stanley has been stuck in Greece, Ireland, Italy, Portugal and Spain. CIEM, Trung tâm Thông tin – Tư liệu Domino effect of the current public debt crisis Probability of debt default of Greece is extremely high. The public debt crisis in Greece has been creating a domino effect that is out of control. If Greece public debt default happens, there will be a number of countries being in debt default. Risks of another monetary crisis To cope with the 2007-2009 financial crises, governments provided many stimulus packages. However, most of these stimulus packages have not stimulated economic growth rate yet. In addition, belief of investors on chances of investment as well as capacity of governments decreased. It results to a vicious circle that public debt increases, expenditure and investment of private sector decrease, unemployment rises, economic growth is slow. The Greek public debt crisis has spread widely and rapidly. If there is no solution to solve completely this public debt crisis, the risk of falling into a new period of monetary crisis and economic recession of the world following the collapse of the Eurozone is obvious. 2.3. Impacts of public debt crisis in Eurozone to Vietnam First, the public debt crisis in Eurozone has negative impacts on export and GDP growth of Vietnam. Second, foreign capital including ODA, credit, and FDI from European investors to Vietnam has decreased due to the debt crisis. Third, risks of exchange rates increase. The public debt crisis in Eurozone creates unforeseen fluctuates of exchange rates that produces certain risks for borrowing and paying in foreign currencies of import and export enterprises as well as for foreign exchange business of commercial banks. III/ LONG LASTING TWIN DEFICITS AND RISKS FOR VIETNAM 3.1. Situation of public debt in Vietnam Vietnam’s public debt index currently stands at a moderate and safe level, made up of mainly long-term debt and debt with preferential interest rates Foreign debt structure CIEM, Trung tâm Thông tin – Tư liệu According to statistics of Ministry of Finance, Vietnam’s public debt often accounts for over 10 per cent of total expenditure in its budget balance. As of 2010, public debt to GDP ratio of Vietnam was 56.6 per cent, which increased 4 per cent in comparison with that of 2009. Total foreign debt of Vietnam accounted for 42.2 per cent of GDP, in which foreign debt of the government accounted for 63.17 per cent, foreign debt being guaranteed by the government accounted for 10.53 per cent and foreign debt not being guaranteed by the government accounted for 26.3 per cent. From 2006 to 2010, proportion of foreign debt of the government decreased continuously while foreign debt not being guaranteed by the government was double. Of the foreign debt of public sector, official development assistance (ODA) loans accounted for 80 per cent, with low interest rates in the majority, but this proportion has a downward trend. In conclusion, the current foreign debt structure of the public sector is rather favorable for Vietnam. Ability of debt payment in the future The growth rate of foreign debt is faster than that of GDP. In addition, foreign reserve has strongly decreased in comparison with total short-term debt. That threatens the ability of paying debt in short term of Vietnam. Risks of exchange rates More than 50 per cent of Vietnam’s public debt is foreign debt, thus, fluctuation of exchange rates, foreign currency demand and supply as well as currency structure in foreign debt will have large impacts on risks of public debt of Vietnam. 3.2. Government bond market of Vietnam The government bond market of Vietnam has been still rather small in comparison with that of other countries. While total scale of the government bond market accounted only about 17 per cent of GDP, government bonds accounted for only around 12 per cent of GDP in 2010. The total value of government bonds issued in 2011 was about USD 2.5 billion. Especially, Vietnam has not had a developed secondary market. To develop government bond market sustainably, it is necessary to well deal with three dimensions including capital mobilization, liquidity creation, and efficiency using of capital. . total short-term debt. That threatens the ability of paying debt in short term of Vietnam. Risks of exchange rates More than 50 per cent of Vietnam’s public. also increased. 3.5. Recommendations for Vietnam a) Macroeconomic stabilization The macroeconomic unbalance of Vietnam exists among three sectors including
