Thesis summary: The impacts of external debt to Vietnam’s economic growth

The overall objective of the thesis is to assess the impact of external debt on Vietnam''s economic growth by quantitative research model. To achieve the above objectives, the thesis will focus on two specific objectives.

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY HO CHI MINH CITY

*****

NGUYEN XUAN TRUONG

THE IMPACTS OF EXTERNAL

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY HO CHI MINH CITY

*****

NGUYEN XUAN TRUONG

THE IMPACTS OF EXTERNAL

HO CHI MINH CITY – 2019

ABSTRACT

Vietnam is a developing country and needs huge capital to

build infrastructure and invest in development However, Vietnam

has a high budget deficit, low rate of income, saving rate and foreign

exchange reserves, resulting in insufficient resources for investment

Therefore, foreign loans are one of the important resources to offset

the shortage of national development, contributing to catch up with

other countries in the world However, more and more foreign loans

help the Vietnamese economy grow high because every year the

Government has to spend nearly 25% of its budget to pay debt? How

does foreign capital affect investment, consumption and trade as well

as the economic growth of borrowing countries?

The study examines the impact of external debt on Vietnam's

economic growth using a quantitative approach based on MIDAS

The results of the study show the positive impact of external debt on

economic growth during the study period In addition, the variables

of economic openness, exchange rate as well as inflation also impact

on economic growth

In addition, the study used the VECM quantitative approach

to examine and assess the impact of external debt thresholds on

economic growth The results show that there is a external debt

threshold in the study period This is an important basis for making

policy recommendations in the management and use of Vietnam's

external debt in the future

In summary, the study is an empirical evidence to illustrate

the positive impact of Vietnam's external debt, which provides

policy recommendations to managers and policymakers on this

issue

Keywords: external debt, economic growth, Vietnam.

CHAPTER 1 INTRODUCTION 1.1 The necessity of the study

From a theoretical and practical point of view, the relationship between external debt and economic growth is a subject

of much interest to researchers Theories of external debt and economic growth focus on explaining this relationship based on dynamic economic models in open economies, with one side borrowing external debt to develop the economy Use external savings to invest in the economy This is more and more true for developing countries when they use abundant external resources and modern technology to shorten development time in the hope of escaping poverty, catching up with developed countries, and increasing incomes for people However, the other side is the problem of the efficiency of using loans and increasing the debt obligations in the future when increasing foreign loans for investment This brings risks to the borrowing countries in the process of economic development as countries borrow heavily from outside will lead to a buildup of rising interest payments resulting in reduced investment, reduce social welfare The question is whether increasing external debt will increase economic growth or vice versa

as debt obligations increase In other words, external debt can have

a negative impact on economic growth due to the accumulation of debt obligations, which makes countries unable to pay their debts How does this issue in Vietnam during the open period of implementing economic reform is a matter of concern for research

1.2 Background of the study

Studies by Cohen (1993), Deshpande (1997), Krugman (1998), Sachs (1989), Chowdhury (2001), Pattillo (2004) supported this theory through a number of empirical studies The

high level of external debt brings uncertainty to the economy due to the inefficient allocation of capital, focusing on short-term and high-risk projects However, studies by Frimpong and Abayi (2006), Daud et al (2013), Korkmaz (2016) show that the positive effects of external debt on economic growth reinforce the basis for mentioned above Quantitative studies mainly use VECM, ARDL, GMM models with variables of the same frequency (Winston and Chrystol, 2010) For empirical studies on the impact of external debt

on Vietnam's economic growth, Nguyen Hoang Bao and Doan Kim Thanh (2009), Nguyen Huu Tuan (2012) and Nguyen Ngoc Thach and Tran Thi Kim Oanh (2016) using the VECM, GMM models are consistent with previous studies on external debt However, studies

on Vietnam have a small number of observations (less than 30 observations) or a varied study period Based on the above-mentioned theoretical and practical analyzes, the thesis found no study on the impact of external debt as well as some macro variables (openness, exchange rates, inflation) to Vietnam's economic growth based on the combination of different frequency data in the research model Previous research models mainly used the ARDL, VECM model for variables with the same frequency (Moore and Thomas, 2010) Therefore, studying the impact of external debt on Vietnam's economic growth on the basis of combining variable frequency studies with the MIDAS method is the research gap of the thesis

1.3 Objectives of the study

The overall objective of the thesis is to assess the impact of external debt on Vietnam's economic growth by quantitative research model To achieve the above objectives, the thesis will focus on two specific objectives:

(i) Empirical assessment of the impact of this external debt on Vietnam's economic growth by quantitative models with macroscopic data published publicly by international organizations (ii) Analyze the relationship between external debt and economic growth to determine the external debt threshold for Vietnam

1.4 Scope of the study

The subject of the thesis is the impact of external debt on Vietnam's economic growth in the period 2000-2016, data are collected quarterly

1.5 Methodology and data of the study

To assess the impact of external debt on economic growth from

a quantitative perspective on these two research questions, the thesis uses two research models:

(i) Ghysels et al (2002, 2006) used the estimation of the linear effects of external debt on economic growth MIDAS (Mixed-Data Sampling) has the advantage of evaluating input time series data at different frequencies through linear regression

(ii) Estimation methods using the Vector Error Correction Model (Johansen) (1991) were used in the thesis to assess the impact

of the external debt threshold on economic growth The VECM model was developed from the Vector Autoregressive Model (VAR) based on the addition of error correction components to the model Data used in the study are macro data published by international organizations such as WB, IMF, ADB and GSO

1.6 Results and novelty of the study

Empirical research on the impact of external debt on Vietnam's economic growth shows that: (i) positive impacts of external debt on Vietnam's economic growth; (ii) the existence of Vietnam's external debt threshold; (iii) In addition, other factors such as openness of the

economy, inflation, exchange rate also affect the economic growth

of Vietnam Compared with previous studies of the same topic, the thesis has new contributions as follows:

Firstly, empirical research using the MIDAS model allows data to be combined at different frequencies without missing important information such as other models when referring to variables at the same frequency, contributing Updated research data due to some years of external debt not updated quarterly data The results show that the positive impact of external debt on Vietnam's economic growth in the period 2000-2016, compared to previous research on this issue by Nguyen Hoang Bao and Doan Kim Thanh (2009) give negative results

Secondly, the thesis assessed the impact of the external debt threshold on Vietnam's economic growth based on the existence of this debt level based on the VECM model with the dummy variables

as exogenous variables The empirical results show that the debt level has a significant and significant impact on the short term growth as well as the positive impact of external debt on long-term growth Compared to previous studies on the nonlinear relationship between external debt and Vietnam's economic growth, Nguyen Huu Tuan (2012), Nguyen Ngoc Thach and Tran Thi Kim Oanh (2016), the data used in this study were frequency-based to increase the number of observations of the sample as well as to increase the reliability of the study results

Thirdly, the thesis examines the impact of external debt on Vietnam's economic growth under both linear and nonlinear angles Previous studies on external debt and economic growth in Vietnam have been largely linear

1.7 Organization of the study

Figure 1.1 Research frame of thesis

THE IMPACTS OF EXTERNAL DEBT TO VIETNAM ’ S ECONOMIC GROWTH

Target 1: Study the impact of external debt

on Vietnam's economic growth

Target 2: Determining the threshold of

external debt of Vietnam

Data collection and regression model estimation

Research gap + Empirical review

Proposed research model

Analysis based on MIDAS model Analysis based on VECM model

Discuss the research results

Conclusions and policy recommendations

CHAPTER 2 THEORY BACKGROUND AND PREVIOUS STUDY ON THE IMPACTS OF

EXTERNAL DEBTS TO ECONOMIC GROWTH 2.1 Theoretical review

2.1.1 External Debt

According to the International Monetary Fund (IMF 2013), external debt at one point is the actual outstanding balance that currently requires repayment of the principal and / or interest of the borrower at a future point in time ( excluding contingent liabilities) This is the debt of the nonresident borrower A foreign country's debt

is defined as the debt of a non-resident borrowing a resident of an economy, regardless of entity or natural person, but is liable for the repayment of the loan, in accordance with the provisions of the current law

2.1.2 Classification of external debt

According to the IMF (2013), external debt classification is based on borrowers, loans and conditions If based on the subject of the loan, including the creditor and private creditors If the borrower

is a borrower, it includes external debt in the public sector and private sector debt Finally, if the loan conditions are based on preferential loans (ODA) and non-preferential loans

2.1.3 Economic growth

Todaro and Smith (2006) define economic growth as a process

of increasing the nation's productivity to bring productivity and income growth.Economic growth is an increase in the output of goods and services that has been sustained over the long term (Chaudhuri 1989) In short, economic growth is defined as the

production of goods and services in a country and, with it, a rise in average incomes, and the shift in economic structure

2.1.4 The theory of the impact of external debt on economic growth

2.1.4.1 Two - gap model

Chenery and Strout (1966) in the two-gap model on the basis of

an analysis of the impact of external capital on economic growth based on analytical framework of input factors for the economy Analytical model based on the study of Chenery and Bruno (1962)

contributes to the balance of model two

2.1.4.2 Three - gap model

Bacha (1990), Taylor (1994) added a budget gap to the gap model According to Bacha, governments are developing budget deficits to invest in development to build infrastructure and industries that underpin private investment At the same time, these overspending is offset by foreign loans The three-gap approach approaches public debt in general and external debt in particular on the basis of deficit control For sustained economic growth, countries need to narrow these three gaps One of the measures to narrow is the use of external resources such as FDI, FII, ODA The three-gap model emphasizes the adjustment to balance between the three distances If the budget gap is greater than the savings gap, reducing government spending, the rate of increase in investment must be consistent with increased savings in consumer spending If the trade gap is greater than the budget gap, revenue should be increased through taxes and trade surpluses should be reduced to reduce trade gap

three-2.1.4.3 Transmission mechanism

Kamin et al (1989) studied the effects of external debt on growth through three transmission channels, (i) through investment channels, (ii) aggregate demand, (iii) debt obligations in future For investment channels, countries make up for the shortfall by entering the international capital markets When the funds are invested effectively will increase GDP for the economy For aggregate demand, external debt affects economic growth through per capita income Foreign borrowing makes public and private sector expenditures increase Increasing private sector spending will affect fiscal policy, leading to increased aggregate demand and output for the economy At the same time, imports are affected by income and domestic production by importing inputs for export The final impact

of external debt on economic growth through future interest

payments Lending to external borrowers means an increase in future debt obligations (principal and interest payments) This means increasing pressure on future foreign exchange earnings This, in turn, means reducing investment, reducing imports and reducing aggregate demand in the economy, resulting in reduced economic growth

Figure 2.1 Mechanism of transmission of external debt to

economic growth

Nguồn: Nautet và Meensel (2011)

Nautet and Meensel (2011) argue that public debt and external debt affect long-term economic growth through fiscal distances The implementation mechanism is described on the basis that low national savings are offset by foreign borrowing to offset the budget deficit This means that in the long run interest rates will increase,

Net

savings

Sovereign

risk premium

Interest Rate

Interest charges

Private investment

Labour taxes

Capital taxes

Productive public expenditure

Other

Labour productivity

Labour supply

GDP External

Debt

resulting in lower investment, resulting in reduced capital accumulation and reduced labor productivity In addition, rising debt has led to increased debt obligations that lead government to reduce investment or raise taxes to create a source of repayment Consequently, it reduces consumption, reduces private sector investment, and labor supply Finally, debt impacts on growth in terms of risk costs The higher cost of debt risk leads to higher financing costs for loans due to affecting the solvency of the country

As a result, interest rates on loans increased All of these factors will affect the country's economic growth (Figure 2.1) On the contrary, economic growth is also affecting the debt of nations

2.2 Empirical review

2.2.1 Studies on linear effects

Do Thien Anh Tuan (2003) used the Jaima De Pines model (1989) to analyze the sustainability and predictability of external debt in Vietnam for the 2001-2010 period, based on the assessment

of the key factors affecting To the debt repayment of countries such

as the rate of development between interest rates on exports, the growth rate of imports on exports, the ratio of debt-to-export and the ratio of imports to exports

Nguyen Hoang Bao and Doan Kim Thanh (2009) examined the sustainability of external debt as well as the impact on Vietnam's growth during the 1990-2007 period based on the Jame de Pines model The multiple regression model of the study was from 1990 to

2007 with independent variables of exports, inflation, foreign direct investment, external debt liabilities on GDP and foreign aid on GDP The results show that domestic investment, foreign direct investment and exports have a positive impact on economic growth However, the inflation rate, the debt-to-GDP ratio and foreign aid on GDP have had a negative impact on economic growth External debt has a

negative impact on economic growth in the short term so loans must pay attention to the differences in interest rates, domestic and foreign inflation, efficiency in allocating and using capital as well as timing pay

Were (2001) also studied the effects of external debt on Keyna's economic growth during the period 1970-1995 by the VECM method Research shows that external debt has a negative impact on economic growth and private investment in Keynea, with a 1% increase in external debt, leading to a decline in real GDP growth of 0.05%

Adegbite et al (2008) investigating external debt in Nigeria for the period 1975-2005 showed that external debt had a negative impact on national income The results of the study show that export growth variables, the ratio of external debt to GDP, the ratio of investment to GDP and the rate of savings have an impact on Nigeria's economic growth during the study period export growth, external debt has a positive impact on economic growth

Mahmud and Shahida (2012) studied the independence of the Bangladeshi economy against the government's external debt and were guaranteed by the government in both short and long term terms under the VECM model The author uses the time series data set by the year 1974-2010 The issue raised by this study is the efficient use of external debt as well as interest rates, no debt financing at all costs, and the replacement of external debt by domestic resources on the basis of incremental increases domestic savings, boost exports by using domestic resources In addition, transparency as well as reduced participation rates are also issues of concern when using external debt

Adamu and Rasiah (2016) studied Nigeria's external debt for the period 1970-2013 using the ARDL model The results show that

long-term external debt negatively impacted economic growth at a rate of -069% However, the stability index of external debt has a positive impact on economic growth in the short and long term with the respective rates of 0.024% and 0.072% The study offers recommendations to the government to reduce foreign borrowing, use domestic resources, and ensure the sustainability of debt through stabilization of external debt ratios

Pegkas (2018) studied the effects of government debt on Greek economic growth for the period 1970-2016 through the ARDL and VAR models for time series data Research shows that in the medium term external debt of the government adverse effects on economic growth, long-term external debt has a positive impact on domestic borrowing, public investment and consumption

2.2.2 Studies on non-linear effects

Nguyen Huu Tuan (2012) analyzed the impact of external debt

on Vietnam's economic growth during the period 1990-2011 through

a debt-based scale based on the study by Osinubi Tokunbo et al (2007) with economic growth economic openness, external debt on GDP and external debt threshold on the basis of dummy variables The study shows the positive impact of external debt, the opening of the economy to Vietnam's economic growth However, the existence

of external debt thresholds suggests that if the excess debt exceeds this threshold will negatively impact on economic growth

Tokunbo et al (2010) studied the budget deficit, external debt that affected the economic growth of Nigeria in the period 1970-

2003 with the VECM model Research shows that the Laffer curve exists with a debt threshold set at around 60% of GDP The relationship between external debt and economic growth depends on this level of debt, if external debt ratios below 60% of GDP will have

a positive impact on Nigeria's economic growth and vice versa In

addition, the study also shows the impact of budget deficits on external debt and on economic growth

Mohamed (2013) studied the effects of external debt in the short and long term on the economic growth of Tunisia from 1970 to 2010 using the VECM model The results show that debt has a negative impact on economic growth during the research period, with every 1% increase in debt, resulting in economic growth of 0.15-0.17% In the long run, every 1% increase in debt led to a 0.27% decrease in economic growth In addition, the study also pointed to the existence

of Laffer curve debt with a debt limit of 30% of GDP

Daud (2016) studied the effect of government debt on Malaysian economic growth for the period 1996 - 2011Q4 using the ARDL model The author has looked at two models with GDP variables and INV is a dependent variable, in each model considered

in two models with different independent variables The results show that there is a long-term nonlinear relationship between government debt and economic growth with a debt range estimated at RM362,386 million (Malaysian currency), while the current government debt is RM 456,128 million Thus, research indicates that government debt has a negative impact on Malaysia's economic growth during the study period

CHAPTER 3 MODELS AND RESEARCH METHODS

3.1 Model Specification

3.1.1 Linear Specification

The first research objective, based on empirical models of previous studies, develops a model for studying the effect of external debt on economic growth Research model based on research by Pattillo et al (2002) The selection of variables in empirical research

is based on a review of previous studies In previous studies, labor force variables, investment capital and trade openness were included

in the model to estimate the impact of external debt on economic growth For the models of economic growth mentioned in the thesis, the workforce and capital investment are the two main drivers of economic growth This is shown in Fosu (1999), Were (2001), Pattillo et al (2011), Cecchetti et al (2011), Shah and Pervin (2012)

In addition to the above variables, the following variables are also included in the research model: Money Supply (Mohamed, 2013), Exchange Rate (Sulaiman and Azeez 2012), Inflation (Ramzan and Ahmad 2014) The regression line used by the thesis to examine the impact of external debt on Vietnam's economic growth includes the following variables:

GDP= f (EXD, OPE, M2, EX, CPI) (3.1)

More specifically for the model:

GDP= α 0 + α 1 EXD + α 2 CPI + α 3 OPE + α 4 M2 + α 4 EX + u t (3.2)

Inside:

 GDP is a dependent variable, representing the growth rate of gross domestic product of Vietnam with the unit of calculation% / quarter This variable is used in the studies Clements (2005), Adegbite et al (2008)