Dissertation foreign debt and its effects on the economic growth

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Dissertation foreign debt and its effects on the economic growth

  1. 1. 1 Dissertation Foreign debt and its effects on the economic growth: The observation from Vietnam Table of Content List of Figures1 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. 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
  3. 3. 3 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 VietnamError! Bookmark not defined.
  4. 4. 5 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.
  5. 5. 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
  6. 6. 7 (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:
  7. 7. 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.
  8. 8. 9 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
  9. 9. 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
  10. 10. 11 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
  11. 11. Source: Pattillo et al. (2002) Figure 2-4 Laffer curve Source: Pattillo et al. (2002) Figure 2-5 “Threshold effect” between debt and growth
  12. 12. 13 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
  13. 13. 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
  14. 14. 15 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
  15. 15. Chapter 5. Conclusion and Recommendation Learning Statement 5.1 General opinion 5.2 Experience 5.3 Development 5.4 Contribution This document is provided by: VU Thuy Dung (Ms.) Manager Center for Online Writing Resources Facebook : https://www.facebook.com/vu.thuydung.5076 Email : assignmentsource@gmail.com Blogger : http://assignmentsource.blogspot.com/ Website : http://assignmentsource.com/

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