ASSIGNMENT INTERMEDIATE MACROECONOMICS TOPIC ECONOMIC SLOWDOWN IN VIET NAM 2009

The impact of global financial crisis on world economy.... The purpose of this essay is to examine the impact of the global financial crisis on the Vietnamese economy, discuss the main m

VIETNAM NATIONAL UNIVERSITY, HANOI

UNIVERSITY OF ECONOMICS AND BUSINESS

- -

ASSIGNMENT

INTERMEDIATE MACROECONOMICS

TOPIC:

ECONOMIC SLOWDOWN IN VIET NAM 2009

Full name: VU THI TUYET DINH Student ID: 19051049

Class no: QH2019-E KTQT CLC4 Lecturer: PHAN THE CONG

Ha Noi – 2021

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TABLE OF CONTENTS

LIST OF TABLES ii

LIST OF FIGURES iii

INTRODUCTION 1

PART 1: THE GLOBAL FINANCIAL CRISIS OVERVIEW 2

1.1 Economic crisis and Financial crisis 2

1.2 The context and cause of global financial crisis 2

1.2.1 Housing prices increased, then fell, because of subprime mortgage crisis 2

1.2.2 Banks went into crisis 3

1.2.3 The stock market plummeted, erasing wealth 3

1.3 The impact of global financial crisis on world economy 3

PART 2: ECONOMIC SLOWDOWN IN VIET NAM 2009 6

2.1 Causes of the economic crisis in Vietnam in 2009 6

2.1.1 Objective reasons 6

2.1.2 Subjective reasons 6

2.2 Impacts of the global financial crisis 6

2.2.1 Economic growth rate 6

2.2.2 Import – Export operation 7

2.2.3 Foreign direct investment 7

2.2.4 Goods and Services market 7

2.2.5 Labor market 8

2.2.6 Stock Markets face difficulties, the investors meet disadvantages 9

2.2.7 Real estate market 9

PART 3: THE POLICIES OF THE GOVERNMENT 10

3.1 Expansion Fiscal Policy 10

3.2 Loose monetary policy 11

3.3 Evaluate the effectiveness of policies: Vietnam's economy gradually recovered 12

3.4 The challenges for Vietnam's economy 12

3.5 Recommendation 13

CONCLUSION 15

REFERENCES 16

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LIST OF TABLES

Table 2.1 Basic Quarterly Macroeconomic data 6 Table 2.2 Recent export and import performance 7 Table 3.1 GDP growth rates in Southeast Asia 12

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LIST OF FIGURES

Figure 1.1 AD – AS model 3

Figure 1.2 GDP Growth 4

Figure 1.3 Unemployment rate in some countries 4

Figure 1.4 Credit growth in some countries 5

Figure 2.1 Industrial production 8

Figure 3.1 IS* - LM* model 10

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INTRODUCTION

Finance is an extremely important sector of a country's national economy A country's financial situation serves as the foundation for determining its level of development The development of the global financial system, while bringing great opportunities to each country and people, also carries the risk of a crisis Changes in financial markets, as well as countries' levels of trade openness, and each country's internal conditions, can all contribute to the risk of a crisis

Back in time to 12 years ago, when the entire world was witnessing the severe consequences of the ongoing global financial crisis To date, the crisis's contagious effects have been felt on all continents and in the majority of nations To respond to the complex development of the global crisis and to lessen the severity of the economic recession, governments around the world have used economic stimulus packages to rescue their economies on a continuous basis Countries' central banks have adopted a loose monetary policy, drastically lowering interest rates to levels not seen in many years and employing unconventional monetary tools to improve banking system liquidity Fiscal stimulus packages were also announced and aggressively introduced in many counties

The global crisis has resulted in a decrease in investment inflows, as well as lower global commodity prices and trade Vietnam, as a small open, FDI-dependent, and export-dependent economy, has not been spared from this external shock In late 2008, the negative shock was transmitted to the Vietnamese economy Monthly exports fell sequentially in the final months of

2008 and early 2009 Industrial production fell by 15.6% in the fourth quarter of 2008, compared

to 17.4% in 2007 Foreign direct investments have significantly decreased Consumer sentiment deteriorated, and the stock market index continued to fall Finally, GDP growth in 2008 was only 6.28%, a significant decrease from the over 8% achieved in 2007 The situation deteriorated further

in early 2009, when GDP growth in the first quarter was only 3.1%, and 3.9% in the first half of

2009 As the situation worsened, the Vietnamese government, like most other Asian governments, acted quickly, relaxing both monetary and fiscal policies The government, in particular, reverses the course of monetary tightening and fiscal austerity policy implemented in 2008 when the economy overheated and implements a large fiscal stimulus package (amounting to 8.3% of GDP) GDP growth increased to 7.7% in the fourth quarter of 2009, up from 3.1% in the first quarter, 4.4% in the second quarter, and 5.2% in the third quarter However, some uncertainty remains as the trade deficit continues to rise and there are signs of inflation returning In comparison to other Asian countries that have managed to accumulate large amounts of foreign reserves while maintaining a healthy government budget, Vietnam was already in serious trouble, with high inflation and twin deficits Pursuing such an expansionary policy puts the economy under extraordinary strain, and it is unclear how long the current extraordinary stance of monetary and fiscal policies can be maintained

Because the author is aware of the significance and urgency of the aforementioned problem, as well as the actual situation in Vietnam, he has written an essay on the topic "" The purpose of this essay is to examine the impact of the global financial crisis on the Vietnamese economy, discuss the main measures taken by the Vietnamese government in response to the global financial crisis, and then propose some solutions to be ready to respond to future crises

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PART 1: THE GLOBAL FINANCIAL CRISIS OVERVIEW 1.1 Economic crisis and Financial crisis

Economic crisis can be defined as the wild fluctuations, outside the acceptable limits of change,

in the prices or supplies in any markets of goods or services, or factors of production The term

"economic crisis" refers to a circumstance in which a country's economy faces a sharp drop in aggregate output, or GDP, as well as rising unemployment There are many early causes of an economic crisis, such as a sudden weakening of the exchange rate of a currency (commonly called the currency crisis) or a sudden collapse of the financial sector in a country (called the financial crisis)

Financial crises typically involve problems in the banking and financial sector For example, banks, financial institutions, money markets and capital markets are part of the banking and finance sector

During a financial crisis, asset prices plummet, businesses and consumers become insolvent, and financial institutions experience liquidity shortages Other situations that can be referred to as financial crises include the bursting of speculative financial bubbles, stock market crashes, sovereign defaults, or currency crises A financial crisis can be limited to banks or spread across

an economy, the economy of a region, or economies around the world

The last global financial crisis occurred in 2007/8 which commonly called the Global Financial Crisis or 2008 Financial Crisis

1.2 The context and cause of global financial crisis

First, a quick primer on mortgages Basically, someone looking to buy a home will often borrow hundreds of thousands of dollars from a bank in exchange for a piece of paper known as a mortgage Every month, the homeowner must repay a portion of the principle, plus interest, to whomever holds the piece of paper If they stop paying, it's known as a default, and whoever has that piece of paper gets the house If you had terrible credit or didn't have a consistent work in the past, it was difficult to secure a mortgage Lenders used to be wary of taking the chance of you defaulting on your loan, but that began to change in the 2000s

1.2.1 Housing prices increased, then fell, because of subprime mortgage crisis

During the housing boom of the early to mid-2000s, many mortgage lenders began to broaden their definition of credit-worthy, extending mortgages to buyers with poor credit histories who did not meet the previous criteria of a suitable borrower

Banks pounced on these high-risk loans and began purchasing them as “mortgage-backed securities” (mortgage-backed investments), a product that grew in popularity but was widely misunderstood by the general public Because of the high demand for this new investment product, risky lending practices became more prevalent, resulting in a surge in the housing market

While individuals with fixed-rate mortgages were unaffected, millions of new borrowers had adjustable-rate mortgages, which meant that their monthly interest payments were initially lower and more manageable, but quickly escalated as interest rates rose Many people went into default

on their loans because they couldn't make payments or sell their properties for a profit As a result,

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more inventory entered the housing market, and prices continued to fall Finally, the housing market bottomed out in December 2008

1.2.2 Banks went into crisis

As home prices collapsed and mortgage-backed securities no longer appeared to be the solid-gold investment they had appeared to be, banks stopped lending to one another for fear of becoming caught with subprime mortgages as collateral The Fed attempted to restore confidence in August

2007 by dramatically lowering interest rates, but this proved insufficient

In November 2007, the US Treasury established a superfund to buy distressed subprime mortgage portfolios and provide liquidity to banks and hedge funds in an attempt to calm the panic In December 2007, the Fed established the Term Auction Facility (TAF), which provided banks with subprime mortgages with short-term funding Once again, it was too little, too late Bear Stearns and Lehman Brothers both went bankrupt, and mortgage giants Fannie Mae and Freddie Mac were

on the edge of collapse

1.2.3 The stock market plummeted, erasing wealth

In September 2008, as foreclosures continued to rise, the stock market plummeted and fell, losing more than half of its value Americans suffered significant losses as a result of the double whammy

of a failing housing market and a sinking stock market Between 2007 and 2011, one-quarter of all American families lost at least 75% of their wealth, and more than half lost at least 25%

 To sum up: From a theoretical perspective, during the global financial crisis of 2008, a negative

demand shock in the United States economy was caused by several factors that included falling house prices, the subprime mortgage crisis, and lost household wealth, which led to a drop in consumer spending So aggregate demand falls: AD shifts to the left, and the economy moves along the line from E0 to E1 As a result, output Y decreases, leading to a decrease in the price

of P, which slows down economic growth, thereby increasing unemployment (Figure 1.1) Finally, the US economy entered a devastating recession

Figure 1.1: AD – AS model

1.3 The impact of global financial crisis on world economy

The financial crisis of 2008 began with the collapse of the US subprime loan industry, which quickly expanded to financial institutions and the whole economy, resulting in significant

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consequences Investors and depositors have become fearful of the financial system, and banks have found it more difficult to raise capital as a result of the chain break Since then, bank deposit and lending rates have been pushed upward, having an impact on enterprise production, business, and investment activities Furthermore, limiting people's use exacerbates the problem The financial crisis has now spread to the manufacturing sector, resulting in a global economic downturn

According to statistical data, the

global economy experienced

GDP growth of approximately

5% in 2007 and earlier, but fell

sharply to 3.1% in 2008 and

continued to decline in 2009

According to the World Bank's

most recent report, the global

economy was in recession in

2009, with a -2.2% contraction,

and the economy will gradually

recover in 2010, with a growth

rate of 2.7% - 3% Figure 1.2: GDP Growth (percent change)

Source: IMF staff estimates

The unemployment rate is one of the indicators that many countries are watching during this crisis This percentage is rising, particularly in the countries most affected by the crisis, such as the United States (10%), the European Union (10%), the United Kingdom (7.8%), Japan (5.2%), and European countries During the same time period in 2008, this rate increased from 40% to 80%

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bad asset rescue package (TARP), and an economic stimulus package worth $800 billion USD in February 2019 Many other countries, including the United Kingdom, Japan, France, and China, are also providing solutions on a comparable scale The German government has announced a 500

billion EUR bailout package for the banking system

Figure 1.4 shows that credit

growth has slowed

dramatically in many

countries around the world,

falling to only 2% - 4%

This is the slowest rate of

expansion since the early

2000s

Figure 1.4: Credit growth in some countries

Source: New Zealand Central Bank 2009

However, when compared to the major economic crises of 1929-1939 or the oil crisis of

1973-1974, the current crisis, despite its strong intensity and great influence, has the ability and time to recover relatively quickly According to statistics, the price of capital assets fell by 50-60% in the 10-15 months following the real crisis, but recovered relatively quickly Meanwhile, the 1929-

1933 crisis lasted more than three years, the oil crisis caused capital asset prices to plummet but only lasted two years, and the 2000 crisis lasted more than 30 months

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PART 2: ECONOMIC SLOWDOWN IN VIET NAM 2009 2.1 Causes of the economic crisis in Vietnam in 2009

2.1.1 Objective reasons

Derived from the financial crisis that occurred in the United States, which was primarily caused

by the proliferation of subprime loans, which led to the housing bubble Until the housing bubble

burst, a number of financial institutions that had a lot of debt mortgaged by real estate went

bankrupt

Since early 2008, the world has been witnessing the unfolding and devastating effects of the global

financial crisis The global crisis has resulted in a decrease in investment inflows, as well as lower

global commodity prices and trade Vietnam, as a small open, FDI-dependent, and

export-dependent economy, was not immune to the external shock

2.1.2 Subjective reasons

The same period of financial crisis in the United States coincided with a period of rapid

development in Vietnam The economy was overheated due to high inflation, and the government

was forced to implement a monetary contraction policy As a result, the country is particularly

vulnerable to an unexpected global economic slowdown, and given the scale of the crisis and the

state of the economy, market structure, and policy options/constraints, mitigating the negative

effects of the global crisis would be a stark job for Vietnam

Furthermore, the financial market, particularly the stock market in Vietnam, is still young, and

investors' psychology is not stable, making them susceptible to the effects of global fluctuations

2.2 Impacts of the global financial crisis

2.2.1 Economic growth rate

Up until the first half of 2008, Vietnam was largely unaffected by the global financial crisis The

financial and economic environment deteriorated in the fourth and first quarters of 2008 In the

first quarter of 2009, real GDP increased by only 3.1 percent year on year, compared to an average

of 7.5 percent in the first

quarter of 2008 In the first

quarter of 2009, industrial

production increased by only

2.9 percent The dismal

performance in the first

quarter of 2009 confirmed the

expectation that Vietnam will

enter a full-fledged recession

in 2009 Some basic

macroeconomic data of

Vietnam during the crisis

are presented in Table 2.1

Table 2.1: Basic Quarterly Macroeconomic data