INTERNATIONAL FINANCE MID TERM ESSAY a study on latin american debt crisis in the 1980s and lesson for vietnam in public debt management

FOREIGN TRADE UNIVERSITY FACULTY OF BANKING AND FINANCEINTERNATIONAL FINANCE MID-TERM ESSAY A study on Latin American debt crisis in the 1980s and lesson for Vietnam in Public debt manag

INTRODUCTION

Rationale

Government debt acts as a vital source of capital to finance economic growth in developing and less-developed countries Among the many factors influencing an economy, debt remains an indispensable element that can affect economic stability in either a positive or negative way For a country, sound debt management yields tangible benefits for national development, whereas poor management over the long term can lead to serious problems, including higher taxation on domestic consumers and inflationary pressures.

Over the past decades, the foreign debt problem has become a fundamental challenge for developing countries Latin America’s debt crisis in the 1980s, often called The Decade of Loss, began in the 1970s as countries such as Brazil, Argentina, and Mexico built up large external borrowings to develop domestic industries and improve infrastructure By the early 1980s, these nations faced mounting debt service obligations and difficulties in repaying external loans, leading to widespread economic destabilization as public debts to international creditors swelled between the mid-1970s and early 1980s.

During the period, the public debt-to-GDP ratio rose by more than 20%, pushing the total debt from USD 75 billion in 1975 to over USD 315 billion by 1983, while annual interest and principal payments grew from USD 12 billion in 1975 to USD 66 billion in 1982 The global crisis of 1979–1980 affected developing economies, including many OECD countries, and Latin American nations were unable to sustain high growth as foreign debt payments outpaced earnings Real incomes and living standards declined sharply, contributing to the collapse of dictatorships in Brazil and Argentina The Latin American debt crisis persisted into the early 1990s, after which countries declared the end of the “lost decade,” emerged from debt distress, and began a new period of growth.

Vietnam, like many developing countries, relies on loans to fund socio-economic development and large-scale infrastructure projects The debt crises in Latin America during the 1980s offer cautionary lessons about the risks of unsustainable budgetary decisions and rapid debt accumulation In particular, Vietnam’s public debt stock surged after the 2007-08 global financial crisis, raising concerns about sustainable growth in the medium to long term To safeguard growth, Vietnam needs prudent debt management, transparent budgeting, and strategies that balance investment needs with fiscal sustainability.

Vietnam's total public debt rose from about 40% of GDP in 2007 to 56.3% of GDP by the end of 2010, before a slight decline to 54.9% of GDP in 2011 due to high inflation At the same time, external debt increased from 32% to approximately 42% of GDP.

GDP 1 The remaining challenges in public debt management show that this is the time for a thorough and comprehensive renovation in fiscal policy in order to gradually bring the budget back to its balance and maintaining long-term stability for the economy Lessons learned from what happened during the past debt crisis, about the causes of the crisis as well as the ways countries behave and resolve the matter can become valuable experiences for Vietnam in the process of reviewing the state of its public debt, suggesting the solutions to minimize and manage public debt effectively, thereby reducing the risks which could lead to a debt crisis For the above reason, our team chose to study the topic “Public debt

1 The Government’s Report No 305/BC-CP dated October 30th, 2012 on the situation of public debt.

3 download by : skknchat@gmail.com crisis in Latin America in the 1980s and lessons learned for Vietnam” to contribute the issues.

Literature review

Following the 1980s debt crisis, researchers intensified studies on the determinants of sovereign debt crises In their 2005 study, Schclarek and Ramon-Ballester analyze data from 20 Latin American and Caribbean countries across five-year intervals spanning 1970 to 2002, dividing the period into seven five-year subperiods to trace how the drivers of debt crises evolved over time.

Global economic turmoil has spurred many empirical studies to examine the debt–growth relationship, often modeling it as a non-linear, concave connection Classical economists such as Smith (1776), Mill (1845), and Ricardo (early 19th century) argued that public debt can harm a country’s economic performance The Ricardian equivalence theory posits that financing public expenditure via taxation and borrowing is equivalent: governments can fund spending either through taxes or by issuing bonds, which are loans that must be repaid in the future If deficits are financed, taxpayers anticipate higher future taxes, increase saving, and reduce current consumption, causing a drop in aggregate demand that mirrors an immediate tax increase Thus, the net effect of public debt on economic growth is neutral.

Within the IS–LM framework, Keynesian economists argue that deficit-financed fiscal expansion, driven by higher government debt, increases income, raises transaction demand for money, and pushes up prices They also contend that private sector decisions can sometimes yield inefficient macroeconomic outcomes, which require active public policy responses, particularly monetary policy actions by the central bank.

4 download by : skknchat@gmail.com bank and fiscal policy actions by the government, in order to stabilize output over the business cycle.

Harmon (2012) investigates how public debt influences three key Kenyan macroeconomic indicators—inflation, GDP growth, and interest rates—over the period 1996–2011 Using a descriptive research design complemented by simple linear regression, the study finds a weak positive relationship between public debt and inflation, while the associations with GDP growth and with interest rates are negative.

Ahmad (2012) argues that inflation is a major challenge in many economies, particularly in less developed countries Using ordinary least squares (OLS) regression, the study examines the impact of domestic debt on inflation in Pakistan over the period 1972–2009 The findings indicate that both the stock of domestic debt and the cost of debt servicing push up the price level in Pakistan, with a significantly positive relationship between domestic debt volume, debt servicing, and inflation The authors attribute part of this effect to the dominance of floating debt, such as treasury bills, in Pakistan’s domestic debt, and to interest payments as a key driver of higher prices.

Until now there are few studies on impacts of public debt in literature emphasized on countries in the ASEAN region One example is Muhammad (2017) Other authors focused on individual countries such as Muhammad (2008), Pham (2011), Lee & Ng (2015) Lau and Baharumshah (2005) investigate the issue of fiscal sustainability by adopting families of panel unit root tests for a panel of 10 Asian countries including India, Indonesia, Korea, Malaysia, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, and Thailand for the period 1970-2003 They find favorable evidence of mean-reverting behaviour for the cluster of Asian-10 countries by adopting the commonly used panel unit root technique; while using the series-specific unit root test, they found that four out of ten countries (Korea, Malaysia, Singapore and Thailand) are stationary, suggesting little evidence of fiscal sustainability in these Asian countries Then, Adedeji and Thornton (2010) exploit panel unit root and co-

5 download by : skknchat@gmail.com integration techniques and employed a dynamic ordinary least squares (DOLS) model to distinguish between ‘strong’ and ‘weak’ sustainability for five Asian countries–India, Pakistan, Philippines, Sri Lanka, Thailand–for the period 1974-2001 The results indicate that government revenue and expenditure in a panel of these economies were non-stationary and co-integrated series However, the co-integration coefficient is significantly less than unity, indicating ‘weak’ fiscal sustainability and the likelihood that policy measures would be required to put public finances on a more sustainable basis Syed et al (2014) explore the issue of sustainability of fiscal policy for ten Asian countries Bui et al (2015) perform an analysis of Vietnam’s fiscal and public debt sustainability The findings demonstrate that no sustainability, as well as potential risk, is reflected by Vietnam public debt and fiscal policy.

Although the researches related with the development of public debt management inVietnam confirmed that debt management is becoming a great challenge to the government, they are still lack of optimal solutions Therefore, a research of evaluation of public debt management techniques in Vietnam, highlights the strengths and weaknesses of them and recommendations for a more effective and sustainable management system is of certain academic and practical value.

Objectives of research

- Public debt crisis in Latin America in the 1980s

- Current situation of public debt and public debt management policy in Vietnam

Methodology

- Collect data and information published on the media

- Collect data from professional reports for the period of 2010 - 2017

Qualitative research was conducted through data collection from the World Bank, the International Monetary Fund (IMF), and the Vietnamese Ministry of Finance, with subsequent processing and analysis to draw specific conclusions about Vietnam's current public debt This approach synthesizes authoritative data from international and domestic sources to reveal debt levels, trends, drivers, and potential risks, providing evidence-based insights for policymakers, investors, and researchers seeking an up-to-date assessment of Vietnam’s public debt landscape.

6 download by : skknchat@gmail.com

Scope of the research

- Research on a national level in Latin America in the 1980s

- Research on a national level in Vietnam

- Research issues related to the current state of public debt in Vietnam

Research structure

This paper is organized as follows: Section 2 outlines the basic concepts and theory of public debt, public debt management, and public debt crises; Section 3 synthesizes the causes and consequences of the Latin American public debt crisis and reviews governments’ policy responses to draw lessons for Vietnam; Section 4 analyzes the current situation and the negative impacts of fiscal deficits and rising public debt on key macro variables—economic growth, inflation, interest rates, exchange rates, and the trade balance—while assessing the risks and sustainability of Vietnam’s public debt from solvency and macroeconomic stability perspectives to identify crisis potential and inform future sustainability; finally, the study proposes policy options to improve transparency, supervision, and management of public debt toward lasting sustainability.

THEORETICAL BASIS

General theory about Public debt

Public debt is a concept that appears across a diverse range of debt management activities in countries Depending on the purpose, scope, and practices of each country's debt management framework, public debt can have different interpretations and definitions.

* According to the International Monetary Fund (IMF):

Public debt can be understood in two senses In the broad sense, it refers to the debt obligations of the entire public sector, including the government, local governments, central banks, and independent organizations, with the state ultimately bearing responsibility for repayment if a default occurs In the narrow sense, public debt is the debt of the central government and local governments, plus the debt of independent organizations that carry government guarantees.

Under the IMF framework, public debt is divided into two sectors: the financial public sector and the non-financial public sector In practice, debt within these sectors that is guaranteed by the government is included in the overall public debt figure, while central bank debt and non-government-guaranteed debts of public sector deposits and non-deposits institutions are excluded This separation means that the IMF measure omits certain liabilities, which can result in an inaccurate total public debt figure.

* According to the World Bank (WB):

Public debt is understood as the debt obligation of 4 groups of subjects including:

(1) Debt of the Central Government and central ministries, agencies

(3) Debt of the Central Bank

Independent entities in which the Government owns more than 50% of the capital or which are part of the state budget have debt decisions made by the Government, and in the event of default, the State must assume and repay that debt on their behalf.

Thus, we can see the concept of public debt of the World Bank is the concept of public debt most fully.

*According to the Law on public debt management issued by the Vietnamese government in 2017:

"Public debt prescribed in this Law includes government debt, guaranteed government debt and local government debt." In which the Law stipulates:

- Government debt is a debt arising from domestic and foreign loans which is signed and issued on behalf of the State and on behalf of the Government.

- Government-guaranteed debt is a loan guaranteed by the State's policy-making enterprises or policy banks.

- Local government debt is a debt incurred by the provincial People's Committee.

Vietnam's Public Debt Management Law 2017 defines a narrower scope of public debt than the definitions used by the IMF and World Bank, because it excludes central bank debt and the debt of state-owned enterprises As a result, when researchers compare Vietnam's public debt reports with international assessments, differences in scope can lead to discrepancies between Vietnam's official statistics and IMF/World Bank reports.

2.1.2 Economic nature and impact of Public debt on the economy

Public debt arises when a government's total revenue does not cover its total spending, creating a budget deficit To address this gap, the government must either cut spending or increase revenue In the short term, cutting spending is often challenging, so governments frequently seek to raise budget revenue through tax policy, fees, or measures that spur economic growth.

To boost government budget revenue, authorities rely on two main approaches First, they raise taxes—the largest and most direct source of public funds—which can curb consumption and slow labor dynamics, potentially triggering an economic recession Second, the government borrows by issuing domestic and foreign loans to finance deficits and fund public priorities.

9 download by : skknchat@gmail.com through the central bank Issuing shares or bonds to investors, thereby increasing public debt, leading to budget deficit.

From the economic nature of public debt, we consider the impact of public debt on the economy in two directions: positive and negative.

Public debt can meet domestic capital needs to support social security, and in the early stages of development it serves as an additional source of capital through foreign loans that complements private investment It helps the government address budget overspending when tax increases and tighter spending take time, since printing money can trigger inflation, while foreign loans offer a prompt way to offset deficits Borrowing by issuing bonds or government shares provides a tool to regulate monetary policy, and such investment can speed up a country's integration into international capital markets without reducing domestic investment or spending.

Public debt can destabilize the macroeconomy: foreign loans can erode a nation's standing and lead to exchange-rate volatility, while domestic borrowing pushes up interest rates, raises investment costs, and dampens investment incentives, increasing the risk of an economic recession; inflation and currency fluctuations can widen the trade deficit and undermine macroeconomic stability When debt becomes unsustainable, a public debt crisis can trigger monetary and economic crises with spillover effects that affect regional economies and can spread to the global economy.

Public debt is categorized into domestic and foreign loans, a distinction that reflects both geographic factors and the dynamics of cash flow In many countries, including Vietnam, statistics often overlook domestic debt and emphasize foreign debt, which can skew overall debt assessments This bias leads to errors in debt calculations and makes it harder for policymakers to monitor the debt and implement timely measures to address emerging problems.

According to Vietnam's Public Debt Management Law (2017), public debt has been divided into three categories:

Government debt comprises debt issued by the government to raise funds through debt instruments and liabilities that the government commits to in domestic or foreign loan agreements Central budget debt is borrowed from the state's financial reserve fund, the state budget, and off-budget state financial funds.

- Debts guaranteed by the Government include: Debts of enterprises guaranteed by the Government; the liabilities of the State policy bank are guaranteed by the Government.

Local government debt consists of debts incurred from issuing municipal bonds; debts of local budgets borrowed from the State policy bank, the provincial financial reserve fund, the state budget, and other loans in accordance with the law on the state budget; and debt arising from on-lending of ODA and concessional loans.

To maintain a stable economy, governments must keep the public debt ratio under control This requires strong debt and budget management, featuring accurate forecasting, disciplined planning, and actions that reinforce macroeconomic stability By aligning debt strategies with fiscal plans, authorities can reduce vulnerabilities, improve fiscal resilience, and support sustainable growth To do this, they should enhance forecasting methods, implement robust budgeting processes, and ensure close coordination between fiscal and macroeconomic policies.

To manage public debt effectively, we must understand the factors affecting it and how they shape macroeconomic stability Key drivers include fiscal deficits, interest costs, growth performance, exchange-rate movements, and debt maturity profiles, and recognizing these factors helps policymakers anticipate risks By analyzing these dynamics, governments can design timely, targeted measures—such as prudent debt management, disciplined fiscal policy, and structural reforms—to prevent instability and address vulnerabilities before they escalate This approach supports debt sustainability and resilience to shocks, while transparent data and coordinated fiscal and monetary actions improve decision-making over time.

Public debt is closely tied to the budget balance The budget deficit serves as a clear indicator of a country's indebtedness, because changes in the deficit reflect the level of public debt As the deficit gap narrows, borrowing needs decline, which in turn reduces the overall public debt.

Public debt Management

Public debt management is the process of designing and implementing a coherent strategy to manage a government's debt The goal is to raise the necessary funding at the lowest possible cost over the medium to long term, while maintaining a prudent level of risk Effective debt management coordinates borrowing across maturities and instruments, monitors market conditions, and ensures debt sustainability to support fiscal stability and sustainable public finances.

It should also meet any other public debt management goals the government may have set, such as developing and maintaining an efficient market for government securities.”

2.2.2 The importance of Public debt management

The first role is to make sure that debt can be serviced under a wide range of circumstances, including economic and financial distresses, provided meeting debt’s cost and risk objectives.

Within the broader public-policy framework, debt management must align with the concerns of both fiscal policy authorities and monetary policy authorities By focusing on debt sustainability, government financing requirements, and borrowing costs, debt managers can coordinate strategies that reinforce fiscal stability and support effective monetary transmission.

The second role involves making policy choices on preferred risk tolerance, the governance of balance-sheet management, and the management of contingent liabilities within a framework of sound debt-management governance The objective is to reduce vulnerability to contagion and financial shocks by strengthening risk controls, balance-sheet resilience, and transparent debt management practices.

Poorly structured debt portfolio often leads to crises For example:

An excessive emphasis on cost savings from debt issuance can drive a government toward more short-term and floating-rate borrowing As a country’s creditworthiness changes, that debt must be refinanced, amplifying exchange-rate instability and monetary pressures.

- A debt portfolio that is robust to shocks places the government in a better position to effectively manage financial crises.

Government debt portfolio is usually the largest financial portfolio with complex and risky structure, thus has substantial risk to overall financial stability Hence, sound risk management practices are essential.

Even when macroeconomic policy settings are sound, risky debt management increases a country's vulnerability to economic and financial shocks Although debt management policies are not the sole or primary cause of crises, the maturity structure and the mix of interest-rate and currency exposures in the government debt portfolio, along with large explicit and implicit contingent liabilities—particularly those linked to the financial sector—have contributed to the severity of crises.

Public debt crisis

The public debt crisis is a situation where the debt increases too much beyond the control, regulation and repayment of the government Unpaid debt as a result of compound

15 download by : skknchat@gmail.com interest makes the debt more unsettled, the longer the budget deficit leads to the serious economic recession.

2.3.2 Causes of Public debt crisis

* Double liabilities and poor management

The primary driver of the public debt crisis is unsustainable debt that cannot be repaid These obligations accumulate and compound as interest accrues on interest, causing the total debt burden to grow relentlessly With the debt swelling and few viable options to reduce interest rates or extend repayment terms, governments face a challenging path to repayment.

During the 1960s and 1970s, weak governance and lax oversight at all levels of government in many Western economies allowed mismanagement of loans and public expenditures In poorer, less well-governed countries, corruption enabled loans to be steered toward export-oriented priorities, provoking capital outflows that far exceeded inward flows.

These are sovereign loans that lack popular backing for the government or debts inherited from predecessors In many developing nations, independence began with enormous war-related debt, a legacy that continues to shape their economies and public finances today.

Economic decisions, contracts, treaties, and the work of international organizations have helped rich countries form the backbone of today’s globalization While many nations face poverty and debt, a minority holds substantial wealth, and rising living standards in wealthy countries have not happened by accident; they reflect policy choices that promote investment, open markets, and durable institutions worldwide.

16 download by : skknchat@gmail.com terrible prices Rich countries are also indebted, but they have the means to avoid risk more than poor countries.

2.3.3 Consequences of Public debt crisis

The consequences of the debt crisis will not only affect the target countries of the borrowing countries, but will also affect the lending countries.

The debt crisis framework acts like an earthquake, shaking a nation across all sectors Economically, it pushes the country into a recession marked by high inflation, declining GDP, stagnant production, and rising unemployment, illustrating how debt pressures ripple through everyday livelihoods and the broader economy.

An unstable economy leads to political instability, pushing developing countries toward deeper dependence on capitalist economies Over time, this dependence invites political interventions by wealthier nations that erode domestic economic policy Consequently, ordinary people endure extreme poverty.

In capitalist economies, a debt crisis among large borrowers can lead to bankruptcy and an inability to repay debts, causing heavy losses for governments and slowing economic growth This is part of why the European Union frequently steps in to assist Greece, the bloc’s biggest debtor When borrowers tighten belts and cut spending, imports fall, reducing capital revenues and pushing unemployment higher, which further dampens overall growth.

During a debt crisis, reduced liquidity tightens the money flow and disrupts the circulation of goods in the market, triggering broader economic stagnation The impact becomes more severe when a debtor's liabilities form a sizable portion of their economy, increasing the likelihood of insolvency and bankruptcy.

17 download by : skknchat@gmail.com of the domino effect causing a series of capitalist bankruptcy, the collapse of international organizations, leading to the global economic crisis.

LATIN AMERICAN PUBLIC DEBT CRISIS IN THE 1980S

Causes of Latin American Public debt crisis

The Latin American debt crisis, given its scale and wide-ranging consequences, has attracted sustained attention from economists and policymakers Researchers have proposed a variety of causes, reflecting external shocks, domestic fiscal weaknesses, and structural vulnerabilities across the region In this essay, we identify and summarize the main drivers that had the greatest impact on public debt trajectories in Latin America, explaining how each factor contributed to debt accumulation and financial stress Key drivers include persistent fiscal deficits and mismanagement, exposure to volatile external financing and sudden stops in capital flows, fluctuations in commodity prices that undercut export revenue, and currency depreciations that raised the local cost of foreign-denominated debt, all of which amplified debt service burdens and constrained growth By isolating these pivotal forces, the analysis shows how interconnected macroeconomic dynamics shaped the crisis and offers insights for policy responses to curb future debt vulnerabilities.

*Inefficient economic structure and the foreign capital dependence

During the 1980s, Latin American economies were still developing, with per-capita GDP around $4,000 Economic activity was uneven across sectors, and income mainly came from oil exports After two oil price shocks, many countries—Mexico in particular—enjoyed a large revenue boost and were seen as having strong growth potential In reality, weak domestic institutions, flawed macroeconomic policy, and a monopolistic path to market liberalization undermined growth and contributed to a growing public-debt crisis Protectionist practices in major industries reduced domestic incentives, slowed diversification, and led to inefficient use of loans At the same time, underdeveloped financial markets and stock markets limited firms’ access to bank credit.

Inadequate government management kept state banks at artificially low interest rates to protect key sectors, distorting supply and demand and fueling excess demand To satisfy this demand, governments borrowed foreign capital, contributing to a public debt crisis A major misstep was over-investment in industrialization, which required importing materials and equipment, turning oil trade surpluses into persistent trade deficits and widening the current account gap This reliance on imports and heavy government intervention produced little sustainable growth In the late 1970s and early 1980s, Latin American economies experienced slower growth, worsened trade balances, and escalating foreign debt, illustrating that industrialization policies without market-friendly reforms failed to boost the economy.

Figures 3-1: Latin American external debt and reserve.

Weak economic governance in Latin America led to heavy reliance on foreign debt and an overdependence on foreign investment From World War II onward, foreign investment in the region hovered around 19%, but between 1975 and 1980 the share rose to about 23%, dominated by short-term capital When economic conditions deteriorated in the early 1980s, investors pulled out en masse, driving foreign investment down to roughly 17% by the 1990s This pattern—reliance on borrowing over durable investment—left Latin American economies vulnerable and increased default risk, a situation often illustrated by the accompanying figure.

Figures 3-2: Latin American Total debt, Total debt service and Interest

*The impact of export deficit

As noted earlier, Latin America's public debt crisis grew not only from the need to borrow to fund government purchases and private-sector activity, but also from broader external shocks and policy responses In the 1970s and 1980s, many Latin American economies depended heavily on oil exports for income; after the first oil-price shock, oil-importing countries pursued protectionist trade policies to boost domestic production and consumption These measures sharply reduced demand for Latin American oil, significantly impacting export volumes and revenue, with Mexico among the hardest hit.

Figures 3-3: Mexico Crude oil prices from 1861 to 2011.

Exports from Latin America in the early 1980s were hit not only by shifts in international trade policy but also by high inflation The root cause lay in exchange-rate dynamics: many Latin currencies were pegged to the US dollar, so when the dollar strengthened due to the U.S deficits, Latin American currencies rose as well, fueling inflation Mexico experienced the most dramatic impact, with inflation reaching about 27% in 1981 Inflation reduced export competitiveness and export earnings, contributing to growing current-account deficits As a result, Latin American countries faced difficulty servicing foreign debt because foreign-currency income was insufficient to repay loans.

Consequently, the repayment of debt was more difficult and eventually a series of countries had to declare insolvency, the public debt crisis spread.

*The wrong investment decision of the Europe and the USA

Foreign capital inflows into Latin America contributed indirectly to the region’s public debt problems After the initial oil-price shock, OPEC economies posted current account surpluses as profits from oil exports flowed into European and American banks These profits were then channeled into international lending, with European and U.S banks directing substantial investments toward Latin American debt and markets The resulting financial flows helped make Latin America a key investment destination for global banks, shaping the debt dynamics of the region.

Latin America became a focal point for international lending in the 1960s because many nations in the region were major oil exporters with lucrative profits, and oil reserves suggested strong credit prospects However, banks focused on oil wealth and potential profits while neglecting the underlying economic structure and development trajectories, exposing weaknesses by the late 1960s Evidence included inappropriate micro policies, inefficient use of borrowed funds, and a failure to generate sustained profits, which led to budget deficits and insolvency The notion that a government cannot be insolvent and that public debt is always safe did not hold for transitioning economies like Latin America Because lenders did not assess risk carefully, they poured capital into the region and pulled it out at the first signs of decline, leaving these young economies unable to withstand shocks and thereby amplifying public debt crises.

*The increase several times of real value of the loan due to the appreciation of the dollar.

Most Latin American governments borrowed in dollars with floating rates tied to LIBOR By 1978, the US budget deficit pushed LIBOR from 9.5% to 16.6%, raising the cost of dollar-denominated borrowing, increasing the real value of USD-denominated loans, and driving up overall interest rates This sequence intensified debt burdens for Latin American countries, contributing to insolvency crises as governments faced higher repayment costs.

Progressions of the Latin American Public debt crisis

During the 1970s, two major oil price shocks caused current account deficits in many Latin American nations, while oil-exporting countries ran current account surpluses Government policy then encouraged large U.S money-center banks to act as intermediaries between the two groups—oil-importing borrowers in Latin America and oil-exporting lenders—facilitating cross-border capital flows.

23 download by : skknchat@gmail.com providing the exporting countries with a liquid, safe place for their fund and then lending those funds to Latin American nations (FDIC 1997) 2

The sharp rise in oil prices prompted many Latin American countries to seek additional loans to cover higher energy costs, and even some oil-producing nations accumulated substantial debt to fund economic development, hoping that prices would remain high long enough to service their obligations As a result, lending to Latin America from US commercial banks and other creditors rose significantly during the 1970s.

1970, the total debt from all foreign sources was $29 billion, but at the end of 1978, Latin American saw a dramatically increase of this number to $159 billion and the figure for

By 1982, foreign direct investment had reached about $327 billion, and the nine largest U.S money-center banks had extended debt to Latin American and other less-developed countries that amounted to roughly 176% and 290% of the banks’ capital, respectively (Sachs 1988).

Figures 3-4: Total Debt and Public Debt by Region

As interest rates rose in the United States and Europe in 1979, debt service costs climbed, making it harder for borrowing nations to meet their debt obligations The accompanying depreciation of exchange rates against the U.S dollar tightened financial pressures, and Latin American governments faced mounting strain as the value of their currencies fell relative to the dollar.

2 FDIC (1997), The LDC Debt Crisis, An Examination of the Banking Crises of the 1980s and Early 1990s, Federal Deposit Insurance Corporation

3 Sachs, Jeffrey D “International Policy Coordination: The Case of the Developing Country Debt Crisis.”

Many countries endured severe currency devaluations and a loss of purchasing power, while global nominal interest rates rose and the world economy entered a recession in 1981 This combination left Latin American economies with debt burdens that proved unsustainable.

The crisis began in August 1982 when Mexico's Finance Minister Jesús Silva-Herzog announced that the country could no longer service its external debt, which stood at roughly $80 billion In the wake of the crisis, most commercial banks sharply reduced or halted new lending to Latin America Since much of Latin America’s borrowing consisted of short-term loans, refinancing refusals triggered a crisis as billions of dollars that would previously have been refinanced suddenly came due The turmoil quickly spread to other nations, with Argentina among the countries that followed suit.

(1982, 1989), Bolivia (1980, 1986, and 1989), Brazil (1983, 1986- 1987) and Ecuador

(1982, 1983) This created a chain reaction that triggered a debt crisis across the Latin American region.

During the 1980s, many Latin American countries endured what is often called the "lost decade" as they struggled to service mounting foreign debt, triggering a public debt crisis that damaged the economies of both creditors and debtors The largest creditors were European and American state banks and governments, and as the crisis deepened, their financial and banking systems faced higher credit risks The crisis also undermined Latin America’s ability to borrow in the future, since prestigious global banks placed these nations on lists of high lending risks Additionally, Latin American countries suffered substantial losses in international trade because creditors imposed protectionist policies, sanctions, blockades, and asset seizures abroad.

Impacts of the Latin American Public debt crisis

3.3.1 Impacts on the Latin American countries

In the debt crisis, the peso devalued by nearly 50% against the US dollar, and inflation surged toward 100%, pushing the economy into a recession Real GDP contracted by 0.6% in 1982 and 4.2% in 1983, while real GDP per capita fell by 3% in 1982 and 6% in 1983; over the following five years, real GDP per capita declined about 11%, and real wages dropped roughly 30%.

(Buffie 1989) 4 Unemployment increases to high levels, especially in rural areas In 1982, contractions in investment and consumption negatively contributed to economic growth.

Following February 1982's peso devaluation, Mexico's net exports became the only positive growth driver as the crisis pushed terms of trade down by 42.2% over the next five years By the end of 1986, the country still carried a foreign debt equivalent to 78% of GDP and inflation surpassed 100%, a situation compounded by a collapse in world oil prices that same year In the period 1983–1988, Mexico's real GDP grew at an average rate of just 0.1% per year, a performance that earned the 1980s the label of the "lost decade" for the Mexican economy.

4 Buffie, E.F (1989), Mexico 1985-86: From Stabilizing Development to the Debt Crisis

Figures 3-5: Decomposition of economic growth (Source: OPEC)

The 1982 debt crisis was the most severe economic upheaval in Latin America’s history, triggering a steep drop in incomes and imports, stagnation in growth, rising unemployment, and inflation that eroded the purchasing power of the middle class Over the next decade, these pressures dominated the region’s economy, shaping policy responses and slow recoveries across countries as they confronted debt burdens and persistent macroeconomic instability.

In 1980, real wages in urban areas fell by about 20 to 40 percent, eroding purchasing power for city residents At the same time, resources that could have funded social programs and poverty alleviation were redirected to debt service.

Mexico faced a mounting external debt crisis after years of accumulating leverage, as rising world interest rates, a global recession, and sudden peso devaluations pushed external debt payments sharply higher Beginning in November 1982, the country pursued several debt‑restructuring initiatives, including the Baker Plan and the Brady Plan, to stabilize its finances Under the Brady Plan, U.S banks assumed losses on Mexican debt, helping to absorb the debt shock, while the IMF supported three financial packages that were paired with structural reforms aimed at restoring macroeconomic stability and growth.

5 Ferraro, Vincent (1994) World Security: Challenges for a New Century

6 Felix, David (Fall 1990) "Latin America's Debt Crisis".

3.3.2 Impacts on the global economy

During the 1980s crisis, the region faced a more elaborate international financial architecture, yet this system did not prove advantageous for Latin America, as it forced the area to service its external debt beyond its capacity and pushed it into unduly contractionary macroeconomic policies The resulting public debt crisis not only strained Latin American economies but also had ripple effects on the global economy.

Western banks, particularly in the United States and Britain, faced bankruptcy if Latin American debt payments stopped, prompting bailout loans from the IMF and later the World Bank This was an extraordinary move, marking the first time Latin American countries did not use default as a response to a debt crisis Jose Antonio Ocampo, the former Colombian finance minister, argued that the 1980s approach was an excellent way to manage the US banking crisis but an awful way to address Latin America’s debt crisis The current European experience suggests that while some lessons may be acknowledged, those in power are again prioritizing bank protection over broader consequences.

Latin America isn’t the only region to suffer from the boom-and-bust cycles caused by unfettered global finance, a phenomenon economist Stephany Griffith-Jones has highlighted Across Africa, debt-driven depression persisted through the 1980s, 1990s and into the 2000s, while the late-1990s Asian financial crisis was followed by turmoil in Russia and, in turn, by the US and European financial crises of today.

The reactions and solutions of Latin American countries to the crisis

3.4.1 The reactions of Latin American countries to the crisis

* Phase 1 (From before the crisis - 1985)

During this period, economists and policymakers implemented a range of macroeconomic changes, predicting that the crisis would be short‑lived and would end as soon as the economy showed signs of recovery To escape the crisis, several measures were taken.

The 1984 Cartagena conference aimed to unite the region's creditors and is often referred to as the Cartagena Consensus After the conference, Bolivia and Ecuador had their debts postponed, while major debtors such as Mexico, Brazil, and Venezuela continued negotiating directly with their banks, and Argentina remained inflexible The event showed that despite efforts there was no regional consensus, with many countries preferring to resolve their debts on their own This conservatism helped push Latin America deeper into the crisis.

Phase two of the debt crisis unfolded in Seoul with the first Baker Plan, designed to adjust lending laws for greater effectiveness and to accompany a credit package The bailout alone could not fully resolve the crisis, so the next two years saw the rollout of the second Baker Plan, which introduced innovations in facilitating repurchases and debt exchanges and allowed the issuance of bonds at low interest rates.

*Phase 3 (starting in March 1989, almost seven years after the start of the crisis)

Phase 3 began with the Brady Plan, which involved reducing the debt balance, along with facilitating the Latin American region to borrow from international private sources. This was the last stage of the crisis, and Latin American countries also gradually recovered their economy However, a decade of crisis recession reduced the region's contribution to world GDP by 1.5%, along with a regional GDP per capita of 8% lower than that of industrialized nations and 23% compared to the average of whole world.

3.4.2 The measures of Latin American countries to the crisis a) Short-term measures * Bridge loans

Commercial banks initially used bridge loans as a preventive measure, allowing countries to keep paying interest on existing debt while delaying principal repayments In effect, these new loans were issued by banks to enable sovereign borrowers to cover the interest due on their old loans To prevent any single bank from bearing a disproportionate share, each lender contributed only a defined percentage of its outstanding loans to the debtor nation By enabling this approach, the banks protected themselves through risk-sharing Since the borrower nations had not fully defaulted, banks could still treat the loans as assets on their balance sheets Without this provision, regulatory and accounting rules might require banks to classify or disclose the loans differently, potentially altering their reported financial position.

Nonperforming loans—defined as interest payments more than ninety days overdue—posed a significant risk to banks' finances It was especially vital to prevent borrower nations from defaulting, since many large banks had lent far more than their available capital By 1982, the nine largest commercial banks had extended 250% of their capital to sovereign debtors To preserve their own viability, banks needed debtor nations to continue paying at least the interest on their loans As soon as the debt crisis was announced, many large banks extended new loans in an effort to stave off full default and minimize their losses.

Facing faltering economic growth and rising inflation, the 1982 Baker Plan, proposed by US Treasury Secretary James Baker (Van Wijnbergen, 1991), linked economic reforms to access to new financing In return for reforms, highly indebted countries would gain access to medium-term new loans and a rollover of the amortization of their existing debt The new loans were to come from both commercial creditors and official lending institutions In June 1983, the framework and its implementation continued to evolve.

11 Van Wijnbergen (1991), Mexico and the Brady Plan, Economic Policy, World Bank.

During the 1980s, the Paris Club, an informal group of creditor governments from major western economies, rescheduled Mexico’s sovereign debt with these creditors, including the World Bank, and offered debt restructuring and relief With access to capital markets restored, it was hoped that Mexico’s reforms would enable the country to grow out of its debt However, capital outflows rose, inflation surged, and investment fell, and from 1982 to 1988 Mexico experienced no net economic growth Consequently, external debt rose to 78% of GDP by 1987, marking the Baker Plan’s failure.

In September 1989, the “Brady plan” was agreed, legitimizing the concept of debt relief By now, it was believed that US banks could withstand projected losses on Latin

Under the Brady Plan, debt relief was made acceptable to commercial bank creditors by offering a smaller but safer payment stream in exchange for the original claim that clearly could not be serviced in full (as noted by the FDIC) The Mexican government and the Bank Advisory Committee representing the commercial bank creditors reached a financing package for the period 1989–1992, restructuring about USD 49.8 billion of Mexico's external debt Because only long-term debt with commercial banks was restructured, roughly half of the external debt was involved The banks involved had three options.

1 Banks could exchange old loans for new bonds at a discount of 35% of their face value, keeping interest rates at market levels (equivalent to LIBOR + %)

2 Banks could exchange old debt for face-value new bonds (called par bonds) bearing fixed interest rates of 6.25%

12 Tammen, M.S (1990), The Precarious Nature of Sovereign Lending: Implications for the Brady Plan, Cato Jounal

13 Odubekun, F (2005), Debt Restructuring and Rescheduling, US Treasury Department.

3 Banks could provide additional loans over the next three years equivalent to 25% of the banks’ initial medium- and long-term loans, which implied no debt relief but the provision of new money

Most banks opted for the par bond (47%), signaling lower interest costs, while 40% reduced the principal and 13% extended new loans An additional agreement with the Paris Club—comprising creditor governments—covers USD 2.6 billion of principal and interest payments due from 1989 to 1992 (Van Wijnbergen, 1991) The Brady Plan substantially improved Mexico’s ability to service its external debt by reducing both interest and principal payments (Dornbusch, 1994).

Starting in December 1982, Mexico undertook far-reaching structural reforms as a condition for an IMF loan, featuring fiscal austerity, privatization of state-owned enterprises, reductions in trade barriers, industrial deregulation, and liberalization of foreign investment With rigorously enforced fiscal discipline, the budget deficit halved from 17.6% in 1982 to 8.9% in 1983, while a tight monetary policy supported these fiscal measures.

Mexico implemented extensive trade reform to open its economy, liberalizing import policies and reducing protection for domestic non-oil tradable production The share of domestic non-oil tradable production covered by import quotas fell from 100% in 1984 to under 20% by 1991, while maximum import tariffs were lowered As a result, non-oil merchandise exports doubled their share of total exports to two-thirds In May 1989, foreign investment regulations were significantly relaxed and made more transparent.

Tax reforms encouraged capital inflows and tightened penalties for tax evasion, while the government advanced financial market liberalization by removing ceilings on commercial banks' deposit interest rates.

14 Dornbush, R and Werner, A (1994), Mexico: Stabilization, Reform and No Growth

Mexico's banking reforms had abolished the forced allocation of credit to favored sectors and privatized banks that were nationalized in 1982 Despite these steps, reforms progressed slowly, and the country still faced inadequate banking supervision even as the government guaranteed deposits and liabilities Looking ahead, long-term measures were planned to strengthen regulation, enhance supervisory capacity, and build a more stable, resilient financial system.

Firstly, Latin American countries have had reasonable public debt treatment.

Achieved result

Moore and Thomas (2010) describe developing countries as those with relatively high levels of public debt They argue that the proceeds from government borrowing can potentially boost economic growth when invested to expand the country’s productive capacity Using a meta-analysis, the authors find a significantly positive relationship between debt and economic growth, suggesting that debt can spur growth when funds are allocated to productive investments.

Egbetunde (2012) examined the causal nexus between public debt and economic growth in Nigeria over the period of 1970 - 2010 using a Vector Autoregressive (VAR). The estimated results showed there exists a bi-directional causality relationship between public debt and economic growth The author concluded the relationship between public debt and economic growth is positive only if the government is honest with the loan obtained and uses it reasonably for the purpose of economic development.

15 Criminal Finance: The Political Economy of Money Laundering in a Comparative Legal Context

16 Moore, W., & Thomas, C (2010) A meta-analysis of the relationship between debt and growth.

Al-Zeaud (2014) empirically assesses the impact of public debt on the performance of the Jordanian economy between 1991 and 2010 Using OLS estimation, the results show public debt and population growth play a critical role in economic growth 17 It indicates that public debt fosters economic growth while population growth is detrimental to it. Thus, according to the author, in order to attain sustained economic growth, Jordanian government should maintain the positive influence of public debt and reduce the negative impact of population growth.

As the debt crisis marks its 10th anniversary, observers who watched it unfold are increasingly reluctant to write it off as a lost decade, with Jaime Pellicer, a debt expert at the Center for Latin American Economic and Monetary Studies—an organization of central banks based in Mexico City—stating, “This has been a decade of preparation and learning that has given Latin America a new foundation for economic growth.”

Governments have learned to govern without controlling the entire economy, focusing on clear priorities and measurable outcomes rather than ownership By setting priorities, delegating responsibilities to private enterprises, and making the most of limited resources, the public sector can deliver better results with less money This approach relies on efficiency, accountability, and strategic public–private partnerships to maximize value for citizens.

Latin American officials contend that the new export-led growth model, underpinned by private initiative, is a stronger foundation and is already yielding results In Mexico, manufactured goods now account for more than half of total exports, a sharp rise from roughly one-fifth in 1983, highlighting a major shift toward private-sector production.

There are signs that workers in export-oriented industries are beginning to benefit, though they have not regained the buying power that was eroded over the past decade In Mexico, for example, the minimum wage still lags behind inflation, but contracts for unionized workers have begun to improve over the past three years Wages in 1981 were funded by foreign debt and could not be sustained, underscoring the long-run constraints on real pay.

17 Al-Zeaud, H.A (2014) Public debt and economic growth: An empirical assessment.

35 download by : skknchat@gmail.com sustained,” President Carlos Salinas de Gortari told reporters last week “Today’s wages are being paid with domestic savings and they can be sustained.”

In order to empirically examine the highly disputed the nexus between sovereign debt and economic growth for 20 developed countries over the periods 1954 – 2008 and 1905

In their 2014 study, Löf and Malinen employ panel vector autoregressions (panel VARs) to analyze the debt–growth relationship They find no evidence that public debt affects economic growth, even at higher debt levels, while they observe a significantly negative impact of economic growth on public debt, indicating that growth helps reduce debt.

Puente-Ajovin and Sanso-Navarro (2014) examine whether national debt categories—public debt, non-financial corporate debt, and household debt—drive economic growth in 16 OECD countries over 1980–2009 Using a bootstrap Granger causality test, their results show that government debt does not Granger-cause the growth of real GDP per capita, while economic growth negatively influences government debt.

Using a dynamic panel Generalized Method of Moments (GMM) estimator, Zouhaier and Fatma (2014) empirically examine the impact of debt on the economic growth of 19 developing countries over the period 1990–2011 The results indicate a significant negative effect of debt on growth in these economies, showing that higher debt burdens are associated with slower economic expansion.

The effect on developing countries was dramatic In testimony before the House Committee on Foreign Affairs, William R Cline, a senior fellow at the Institute for International Economics in Washington, said that the value of developing country exports fell by an average of 1 percent in the 1981-1982 period, and that during the same period, Eurodollar interest rates were a factor contributing to the financial strain facing these economies.

18 Lof, M., & Malinen, T (2014) Does sovereign debt weaken economic growth?

19 Puente-Ajovin, M., & Sanso-Navarro, M (2014) The causal relationship between debt and growth: evidence from OECD Countries.

36 download by : skknchat@gmail.com averaged 15 percent By contrast, between 1976 and 1980 developing country exports grew at an average annual rate of 23 percent Eurodollar interest rates averaged 9 percent.

Amid this new environment, Latin American economies grew only 1.6 percent last year, according to a survey by the Inter-American Development Bank As Mr Kuczynski put it in his article, "The music has stopped," signaling a shift toward slower regional growth.

The 1982 debt crisis was the most serious financial crisis in Latin American history, triggering declines in incomes and imports, stagnating economic growth, rising unemployment, and inflation that eroded the purchasing power of the middle class In the decade after 1980, real wages in urban areas fell roughly 20 to 40 percent, while investment that could have addressed social issues and poverty was redirected toward debt service.

VIETNAM PUBLIC DEBT AND LESSON FROM LATIN AMERICAN

Current situation of Vietnam public debt

Borrowing plays a vital role in Vietnam's economy by financing capital formation, meeting investment needs, and driving production development during periods of low capital accumulation When debt is managed prudently and borrowed funds are allocated efficiently, debt can support sustainable economic expansion and resilience Conversely, misused debt or inefficient allocation threatens future fiscal space, destabilizes the macroeconomy, and jeopardizes long-term economic sustainability To maximize benefits, Vietnam needs transparent borrowing practices, strong governance, and policies that ensure borrowed funds translate into productive investments and steady growth.

With the development of the economy, Vietnam's public debt rose up very fast in 2010 – 2016, but tends to decrease in the recent years.

Figures 4-1 Total public debt of Vietnam period 2010 - 2018

According to the Ministry of Finance's report, Vietnam's public debt fell from 56.3% of GDP in 2010 to 50.8% in 2012, then rose to 63.7% of GDP by 2016, nearing the 65% public debt ceiling set by the National Assembly; it stood at 61.3% of GDP in 2017.

Year Public debt Year Public debt

Tables 4-1 Total public debt of Vietnam (billion VND)

The scale of public debt in 2017 was more than 3.130 million billion VND, nearly 3 times in 2010 (1.12 million billion), nearly 8 times in 2006 and 18 times more than the year

From 2011 to 2015, the public debt grew at an average rate of 16.3% per year, roughly three times faster than the economy’s growth However, the marginal debt growth rate declined over the period, with debt increasing by 3% in 2014 and by only 2.7% in 2015.

Figures 4-2 Public debt in Asian developing countries

Debt calculations and the debt-to-GDP ratio differ across countries and over time, influenced by exchange rate movements, so figures can vary by report According to IMF data, Vietnam's public debt rose above 60% of GDP in 2014, the highest level among developing economies in the region Most peers maintain a debt-to-GDP ratio below 60%, with Indonesia around 25% Vietnam’s public debt increased from 56.3% of GDP in 2010 to 61.3% in 2017, an increase of about 5 percentage points, while Cambodia rose 1.6%, Indonesia 4.4%, Malaysia 2.3%, Thailand 2.1%, and the Philippines 11.9% While ad-hoc measures and privatization receipts could keep the debt-to-GDP ratio under 65% in the near to medium term, without further consolidation or in case of adverse shocks, Vietnam’s debt could breach the limit within a few years.

Vietnam's public debt is primarily composed of government debt and government-guaranteed debt, which accounted for 85.6% and 13.5% respectively in 2018 Local government debt rose only modestly, remaining around 1% of the country's total public debt The share of government debt within the total public debt stayed relatively stable at about 80%, with a slight upward trend This indicates a dominant central-government borrowing structure in Vietnam’s public debt profile for 2018.

Figures 4-3 Structures of total public debt

Along with the increase in public debt, the structure of Vietnam’s public debt has also changed.

The proportion of domestic debt to total public debt increased from 44.4% in 2010 to 55.4% in 2018.

Figures 4-4 Structure of total public debt

In government debt, the proportion of foreign debt decreased, in the period from

2010 to 2016, decreased from 59.8% to 48.1% Because of the increasing demand for capital, while the access to foreign capital is limited, the Government has to rely mainly on domestic loans.

Figures 4-5 Structure of Government debt

In contrast, the foreign debt in the Government-guaranteed loan balance increased, replacing domestic debt.

Figures 4-6 Structure of Government-guaranteed debt

Domestic debt in Vietnam is largely composed of government bonds, with commercial banks holding about 55.4% of outstanding government bonds as of the end of 2016 This concentration creates two main risks: first, potential strain on the sustainability of commercial banks if government bond values fall sharply, and second, growing difficulties for private enterprises—especially small and medium-sized enterprises—in accessing affordable bank credit From 2011 to 2013, most government bonds carried short to medium maturities (up to 3 years), with average yields above 10% on 5-year issues, increasing repayment pressure into 2014–2016 By contrast, the current profile shows all government bonds with maturities longer than 5 years, an average life of 13.52 years, and an average yield of 6.07% per year.

Vietnam's access to international capital markets has historically relied on official development assistance (ODA) loans and concessional loans from governments and international financial institutions Since attaining middle-income status in 2010, ODA flows have declined, and loan terms have tightened: repayment periods have shortened from 30–40 years to 20–25 years, and sometimes to a decade, while interest rates have risen from under 1% to over 2%, increasing the repayment burden Meanwhile, private sector borrowing has risen, driven largely by enterprises with foreign direct investment (FDI).

Access to international capital markets in the form of commercial loans is quite limited and mainly through the Government's international bond issuance

4.1.3 The cause of the increase in Vietnam public debt

Vietnam’s high public debt has risen largely from widening fiscal deficits, driven in particular by a sharp increase in recurrent expenditure and the inefficiency of public investment projects carried out by state-owned enterprises in recent years This combination underscores how rising spending and weak public investments shape debt trajectories and highlights the need to strengthen public finances to stabilize debt levels.

Figures 4-7 Fiscal balance of Vietnam (%)

Figure shows the fiscal balance in Vietnam over 2010–2019, with the fiscal deficit indicating that government spending exceeded revenue during this period Despite steady revenue growth, the gap between expenditure and revenue remained wide, particularly after 2011 Vietnam attracted substantial FDI, enabling larger fiscal outlays for infrastructure investment during the rapid development phase However, the pace of expenditure growth is unlikely to be sustained for a long period Public administration has accounted for a large and rising share of total public expenditure in recent years.

Vietnam's economy has undergone a structural transformation in recent decades, with agriculture waning as manufacturing and services rise This shift is propelled in part by foreign direct investment that has boosted the manufacturing sector's share of the economy At the same time, public investment in infrastructure and other industrial bases has expanded, raising public expenditures and fueling higher private borrowing to sustain growth.

Domestic debt is mostly used to finance budget deficit of Vietnamese government until

From 2000 to 2008, more than 70% of the government’s total debt was sourced domestically The global financial crisis and widening trade deficits eroded confidence in the Vietnamese dong, triggering large private capital outflows as residents shifted VND-denominated assets into foreign currencies or gold, which weakened international reserves and led to depreciation of the exchange rate Consequently, Vietnam’s external debt rose more than 7.5 times, from 19,668 billion VND in 2008 to 1,647,124 billion VND in 2012 By 2013, foreign borrowing had already exceeded domestic borrowing by about 1.75 times.

Vietnam’s total public debt climbed from about 40% of GDP in 2007 to around 56.3% of GDP by the end of 2010, reflecting the impact of the global financial crisis of 2007–2008, and then eased modestly to 54.9% of GDP in 2011.

The debt service principal amount has increased by 3 times from 62.6 trillion VND in

2010 to 187,9 trillion VND in 2014 The volume of rollover was 260.8 trillion VND in

Total government bond principal payments reached 288.7 trillion VND in 2015, largely because most bonds had been issued with very short maturities (1–3 years) since 2009 The maturation of these bonds began in 2011, causing principal repayments to rise rapidly, and the introduction of short-term bills (3–6 months) further increased the amount due Afterward, issuance of long‑term bonds expanded, but the National Assembly’s Resolution No 78/2014/QH13 restricted government bonds with maturities under five years from 2015 Nevertheless, demand for long‑term bonds remained very low.

Tables 4-2 Public debt payment using budgetary expenditure (billion VND)

Interest payments have accounted for a large share of the budget and rose rapidly from 3.2% of total expenditure in 2010 to 6.8% in 2015, effectively doubling over the period This sustained high debt service reduces the budget available for development investment, reflecting a high public debt ratio Consequently, expenditures on education, pensions and social security, and public administration also faced tighter budgets.

46 download by : skknchat@gmail.com accounted for large amount, especially pension expenditure has increased recently and will continue to rise because of aging process in Vietnam.

4.1.4 The impacts of public debt on Vietnam macroeconomy

This article investigates how budget deficits and public debt affect core macroeconomic variables, including GDP growth, inflation, interest rates, the trade balance, and exchange rates Through a qualitative analysis of transmission channels, it maps how fiscal deficits can propagate through the economy and influence macro stability It also examines a range of financing options and their implications for growth, price levels, debt sustainability, and external competitiveness The results highlight the pathways linking deficits to macro outcomes and offer guidance on financing strategies that can dampen adverse effects while supporting sustainable economic performance.

Lessons from Latin America debt crisis for Vietnam

According to the chapter, the 1980s debt crisis in Latin America was driven by a mix of populist policies—overspending—and careless, ineffective, and sometimes corrupt borrowing from foreign lenders, a pattern that signals a policy failure This left the region highly vulnerable to rapid capital withdrawals by investors, turning funding gaps into a full-blown crisis Once investor confidence collapsed and capital began leaving, it would be too late to fully tackle the crisis.

Several lessons emerge for Vietnam’s fiscal policy First, financing large-scale expenditure through reckless and ineffective government borrowing to sustain budget deficits heightens corruption risk and undermines fiscal discipline Although most of Vietnam’s current debt consists of concessional official development assistance (ODA) loans with favorable interest rates and long maturities, such advantages cannot be relied upon indefinitely as Vietnam becomes a middle-income country, and continued borrowing exposes the economy to long-term risks, including debt sustainability challenges and foreign exchange volatility.

External borrowing must be managed to limit exposure to external conditions Debt issued at floating rates exposes the public finances to higher foreign interest rates, raising debt-service costs, increasing budgetary outlays, and potentially widening the deficit; currency depreciation has a similar effect by expanding the local-currency burden of foreign debt When borrowing is used to cover a growing deficit, foreign debt can reach unsustainable levels, driving up debt-service pressures and necessitating substantial use of reserves or other fiscal adjustments.

Using foreign exchange to service external debt can, over the long term, increase the risk of a debt crisis While Vietnam's external debt as a percentage of GDP remains below common safe thresholds, experiences from Latin American countries show that there is no universal external-debt threshold that fits all economies This implies that debt sustainability depends on country-specific factors such as growth dynamics, fiscal and monetary policy, and access to finance, and it calls for tailor-made risk assessments rather than a one-size-fits-all rule.

All of the crises stem from a flawed economic mechanism and structure, as shown by three interrelated problems: (i) persistent issues in the finance and banking system and weak supervision; (ii) lack of transparency in private businesses and the blurred line between ownership and management; and (iii) opaque relationships between the government and major corporations Accordingly, economic restructuring—particularly reform of the finance and banking sectors—is an essential and objective step to prevent similar crises and to build a more resilient economy.

Countries that maintain a USD-based fixed exchange rate system, i.e., a currency peg, should strengthen economic resilience and risk management to prepare for adverse scenarios In the long run, this arrangement can increase vulnerability to a balance of payments crisis if external shocks, capital outflows, or fiscal pressures undermine the peg.

Measures to apply lesson from the crisis in Vietnam’s context

To avoid reckless and ineffective government borrowing, IMF-supported structural adjustment policies, including contractionary fiscal measures that reduce the deficit, curb inflation, slow credit growth, and stabilize public debt, are needed A disciplined fiscal policy should be enforced through a clear roadmap, with revenues that exceed the yearly estimate used to service debts, and the budget deficit targeted at 4% from now to 2020, then 3% after 2020.

To maintain restrained credit growth, the State Bank of Vietnam (SBV) has set a 14% credit growth target for 2019, focusing on priority sectors to ensure risk control and support economic growth The SBV will continue to set credit growth quotas for each bank based on their health, to regulate overall credit expansion and align with government targets.

To improve the effectiveness of fund usage amid the sharp decrease in ODA and rising reliance on high-interest commercial loans in the short term, modernizing the State Budget system is essential The first recommendation is to strengthen State Budget transparency and broaden public participation across all levels of government, with the State Budget submitted to the National Assembly and Local People’s Councils disclosed simultaneously to enable citizen feedback, and budget information communicated clearly and concisely to enhance understanding and participation The second recommendation calls for greater discipline in implementing approved spending plans, noting that actual spending has often exceeded allocations; major changes to budget appropriations should be approved through a supplemental budget to promote more efficient spending The third recommendation is to introduce medium-term budgeting.

A medium-term budget provides projections of total revenue, spending and borrowing for the coming three to five years, helping both the government and the public estimate the cost and affordability of development plans The fourth recommendation is to consolidate reporting on all public sector activities to give the government, the National Assembly and citizens a fuller picture of fiscal policy, achievable through consolidated government financial statements with full information on revenue, expenditure, financial and non-financial assets, and liabilities Like in other countries, the State Budget is not the only channel through which public services are delivered; in Vietnam, for example, extra-budgetary funds and state enterprises also play a role, so monitoring risks to the State Budget emanating from these sources is necessary Past global crises have demonstrated that the biggest risks to the State Budget often come from extra-budgetary public sector activities.

Secondly, to effectively control external borrowing, governments should strengthen debt management practices and ensure that new loans are directed toward productive investments with clear repayment paths The sustainability of public debt depends not only on the level of debt a country carries but also on its ability to service that debt, which hinges on sound fiscal discipline, revenue adequacy, economic growth, and resilient macroeconomic policy In practice, sustainable debt management requires transparent debt indicators, diversified funding sources, prudent borrowing limits, and strategies to mitigate exchange-rate and rollover risks, thereby preserving fiscal space and reducing vulnerability to external shocks.

Vietnam's ability to borrow internationally hinges on its creditworthiness, with the IIR playing a central role in preventing liquidity crises Over time, Vietnam's creditworthiness has gradually improved, but it remains about 2–3 notches below the investment level according to the ratings of leading global agencies Although published IIR figures for Vietnam are not available, credit ratings can be inferred from independent credit rating agencies Consequently, Vietnam falls into a group of countries with limited access to international capital markets The State Bank of Vietnam must bolster foreign exchange reserves to ensure the government can meet its debt obligations and to stabilize the exchange rate.

Vietnam's foreign exchange reserves have increased sharply recently after the State Bank of Vietnam focused on buying foreign currencies from banks.

Figures 4-8 Vietnam's foreign exchange reserves 2016-2019

However, total reserves (% of total external debt) in Vietnam reported since 2010 have been low, despite of slight increase.

Establish a sound capital account while strengthening the health of the domestic finance–banking sector At the same time, implement a robust monitoring mechanism for macro- and microfinance to effectively regulate credit to private enterprises and private borrowing under government underwriting.

Thirdly, to avoid risks from USD based – fixed exchange rate system, Vietnam should implement healthy and cautious macroeconomic policies to maintain suitable exchange rate system.

In 2016, the State Bank of Vietnam (SBV) shifted its exchange rate regime from a fixed system to a floating regime under SBV supervision In practice, Vietnam continues to follow a fixed-oriented framework, but with greater flexibility By the end of 2015, data showed that under this system the Vietnamese dong (VND) remained under control; however, the SBV was actively pursuing stability while allowing flexibility to reflect movements in international financial markets, especially the Chinese yuan (CNY) and changes in the Federal Reserve’s interest rates It is clear that under the old regime the VND was greatly affected by USD appreciation when the Federal Reserve raised interest rates, contributing to exchange-rate volatility.

54 download by : skknchat@gmail.com fluctuations of CNY - a major trading partner of Vietnam (in 2015, Vietnam had a trade deficit of about US $ 3.4 billion with China).

Policy recommendation for Public debt management in Vietnam

Public debt management aims to assess strategy and debt-structure risks and to adjust policy directions to secure debt sustainability over the medium and long term This section offers policy options for further discussion to identify effective approaches to managing Vietnam’s current public debt and budget deficit, aligning fiscal strategy with risk management, and ensuring sustainable financing for development.

*Establishing the Public debt Monitoring Committee under the Finance and Budget Committee of the National Assembly

The establishment of the Public Debt Monitoring Committee enables close, independent public debt monitoring and management, with access to all information on public and external debt across ministries in the public sector, including the Ministry of Finance, SBV, and state-owned enterprises This information must cover scales, maturities, interest rates, currencies, and debt strategies for both domestic and external borrowings, providing a solid basis for public debt supervisors and managers to monitor, analyze, and supervise the total public sector debt and to issue policy advice to the National Assembly The committee is expected to assist the Finance and Budget Committee by quarterly proposing an overall report on public debt monitoring and management to the National Assembly, summarizing the latest data and addressing policy and market developments It also has the authority to coordinate and collaborate with stakeholders and to implement essential administrative, auditing, accounting, and reporting processes.

*Establishing a system of debt safety indicators

To strengthen fiscal discipline, establish a system of debt-limit indicators that regulate both the quantity of debt and repayment flows These limits should cover all debt types—total public debt, external public debt, domestic public debt, and total external debt—and are usually expressed as a percentage of GDP and exports for total debt, and as a percentage of total tax revenue and foreign reserves or as the annual debt-to-capital expenditure ratio for debt service The National Assembly must set reasonable limits, because limits that are too low can hinder crisis response while overly high limits render the cap ineffective After issuance, the government's fiscal discipline requires close monitoring by the Public Debt Monitoring Committee.

*Debt accounting according to international standards

To accurately evaluate debt management practices and propose effective strategies, budget and public debt accounting must be conducted transparently in line with international standards Off-balance-sheet expenditure accounts should be completely avoided, and deficit measurements require additional adjustments beyond unsustainable revenues or revenues from asset sales to accurately reflect the current fiscal situation Furthermore, future budgetary obligations, such as pension commitments and health insurance costs, must be incorporated into deficit forecasts to yield a more precise medium- and long-term debt outlook.

To address potential risks to public debt, the debt of state-owned enterprises (SOEs) should be fully calculated, analyzed, and reported within Vietnam’s current public debt framework The analysis and assessment of SOEs’ liabilities must be treated as an inseparable part of Vietnam’s public debt report, ensuring that SOEs’ debt is integrated into the overall picture of the country’s public liabilities.

Enhancing both the primary and secondary domestic government bond markets is crucial for fiscal resilience and efficient financing In the short term, the government may accept higher borrowing costs to develop the market, but as liquidity improves over time, it can mobilize capital at lower cost through government bonds A more liquid market will enable funding with longer maturities, fixed interest rates, and in domestic currency, reducing exposure to interest-rate, exchange-rate, and rollover risks Furthermore, the growth of the secondary government bond market will stimulate the development of the corporate bond market, since government bonds serve as the standard for assessing the risk of other debt instruments.

Tax reform should aim for a sustainable, efficient, fair, and transparent revenue system The tax burden must be properly reduced through deliberate adjustment, but the extent of relief hinges on the process of public spending cuts A too-high tax burden can reduce system effectiveness by encouraging tax evasion and distorting resource allocation The tax and fee system should be reviewed to eliminate overlaps, with tax adjustments designed to protect social security for low-income households, encourage savings, and curb excessive consumption—especially of imported luxury goods.

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