Nghiên cứu căng thẳng khu vực tài chính tại việt nam tt tieng anh

MINISTRY OF EDUCATION
AND TRAINING

STATE BANK ÒF VIETNAM

BANKING ACADEMY OF VIETNAM

VU THI KIM OANH

RESEARCH ON FINANCIAL STRESS IN VIETNAM

Major: Finance - Banking
Code number: 9340201

SUMMARY OF PHD THESIS

HA NOI – 2019


MINISTRY OF EDUCATION
AND TRAINING

STATE BANK ÒF VIETNAM

BANKING ACADEMY OF VIETNAM

VU THI KIM OANH

RESEARCH ON FINANCIAL STRESS IN VIETNAM
Major: Finance - Banking
Code number: 9340201

Reviewer 1: ……………………………..
Reviewer 2: ……………………………..
Reviewer 3: ……………………………..

The thesis was defended in front of the thesis committee at ........ on
........ 2020 at Banking Academy of Vietnam.
The thesis can be found at:
- Library of Banking Academy of Vietnam
- National librabry

Ha Noi, 2019


1
INTRODUCTION
1. The necessity of the thesis
The financial sector with complex structure has close links, interacting with areas of the real
economy in each country. The financial crisis, which began in July 2007 in the US, has
pushed up credit costs, making businesses, individuals and financial institutions more
cautious, pushing the US economy down into the most serious recession since the Great
Depression, threatening the stability of the global economy. In emerging economies such as
Vietnam, as Vietnam has just integrated into the world and regional economies, there will
be many external shocks so the financial sector will be more volatile. Moreover, the
Vietnam economy is a bank-based market, the size of non-bank financial institutions and the
stock market are still very small, so when credit activities grow slowly, it will seriously
affect the ability to provide capital to the economy. At the same time, from the perspective
of ability to absorb capital, the disclosed internal weaknesses of enterprises have really
restricted the enterprises from receiving credit capital. Therefore, it is necessary for the
study of financial stress, how to construct finnancial stress index to identify periods of

financial stress, assess the impact of financial sector stress on the real economy, thereby
making policy recommendations that contribute to preventing financial stress, ensuring
financial stability. That is the reason I choose the topic "Research on financial stress in
Vietnam" as the research topic of the PhD thesis.
2. Literature review
2.1. Literature review in the world
There are many studies on financial stress about how to build financial stress index and to
assess the impact of financial stress on economic activities. Notably, there are some studies
as followings::
Illing and Liu (2006) were the first to study financial stress. They built a financial stress
index for Canada based on the results of a survey with experts on stress levels of 41
different events over the past 25 years. Through the survey, the study has selected the
variables reflecting expected losses; risk and uncertainty. The research has shown that the
FSI is a meaningful measurement method in the financial system. As the FSI rises, it
reflects the level of increasing financial stress.
Research by Cardarelli, Elekdag, Lall (2010) on "Financial stress and economic activities"
in which the financial stress index is aggregated from indicators reflecting the stress of the
banking sector, stock market and foreign exchange market. The study looked at financial
stress in 17 countries and showed that financial stress caused by banking sector stress would
lead to a deeper and more lasting decline than those caused by stress in stock market and
forex market.
Hakkio and Keeton in their paper "Financial Stress: What it is, how it is measured, and why
it matters" has developed a new financial stress index - Kansas City Financial Stress Index
(KCFSI). 11 variables were selected, collecting data on a monthly basis to reflect the
fluctuations in the money market, stock market, banking sector and foreign exchange
market. The KCFSI index has been successful in pointing out periods of financial stress
over the past 20 years in the United States and making good forecasts of changes in
economic activities in the United States.
2.2. Literature review in Vietnam
In Vietnam, there has not been much research on financial stress.

2
PhD thesis of Nguyen Khac Quoc Bao on "System of preventing financial crisis for
Vietnam in the integration process". The dissertation approaches in the direction of
presenting a theoretical system of financial crisis to explain the causes of the crisis in 2008.
The thesis has just assessed the risk of crisis happening in the period from 1998 to 2008.
The discussion of Monetary Policy Department, SBV on "Financial stability and macrofinancial linkages" showed the channels of impacts of the financial sector on the real
economy, financial stress can lead to economic downturns, even financial crises. The
seminar only suggested a very small issue related to the thesis topic.
In the article “Construct stress index of financial sector in Vietnam” by Nguyen Chi Duc
and Ho Thuy Ai in the Journal of Monetary and Financial Markets (2017), the authors
evaluated the financial stress in Vietnam through the construction of financial stress index
for Vietnam with monthly frequency data. The variables chosen include CMAX and the
volatility of stock prices; government bond yield gap, fluctuation of government bond yield;
fluctuations of interbank interest rates for 1 month period; forex market pressure index
(EMPI); beta for banking sector and CMAX for banking sector stock price. After that, the
authors used two methods of equal variance weight and the principal component analysis
(PCA) to build the composite index. The research results have shown that the FSI periods
with extremely high values are from mid-2008 until early 2009.
2.3. Research gap and research question
From the review of foreign and domestic studies on financial stress, it can be seen that there
are many studies on building financial stress index and assessing the impact of stress of
financial sector. However, at present, domestic research on this issue is very limited and not
comprehensive. The thesis addresses the following basic research questions:
- What is financial stress and how does financial stress affect the real economy ?
- In Vietnam, if there is financial stress or not, what are the causes of financial stress in
Vietnam?
- How does financial stress affect Vietnam's real economy?
- How to construct financial stress index for Vietnam?

- What policy recommendations are needed to be able to limit the financial stress and
minimize the impact of financial stress on the real economy in Vietnam in the near future?
3. Research objectives
The thesis objective is to study the stress of the financial sector in Vietnam in the recent
period to build the financial stress index and to examine the impact of financial stress on the
economy. Later on, the thesis proposes some policy recommendations to maintain financial
stability and prevent financial stress in the future.
4. Research methodology
- The thesis used various methods and tools to achieve the research objectives. Traditional
ones are statistics, comparison, analysis, synthesis, interpretation, inductive to assess the
situation of financial sector tension in Vietnam and the impact of financial sector stress on
the real economy.
- Quantitative methods include: The method of equal variance weight to build financial
stress index. From the variables that reflect the stresses of each region / financial market, a


3
synthetic stress index is constructed by the method of equal variance weight. The author
then used the HP filter to determine the financial stress period. To examine the impact of
financial stress on the real economy, the thesis uses the threshold vector auto regression
model - TVAR by selecting the financial stress index variable as the threshold variable. The
thesis assesses the impact of financial sector stress on the real economy in two regimes
when the financial stress index is higher than the threshold and when this index is lower
than the threshold
5. Subject and scope of research

Subject of research: The thesis focuses on researching financial sector tension,
including banking sector, stock market, currency and foreign exchange markets, and
impacts of financial sector stress on Real economy.


Scope of research:
- Scope of space: The thesis studies the financial stress and the impact of financial stress on
the real economy in Vietnam.
- Time range: The thesis studies the financial stress and the impact of financial stress on the
real economy from 2005 to 2017.
6. Contributions of the thesis
Firstly, the author has formulated a theoretical framework on financial stress and the impact
of financial stress on the real economy.
Secondly, the author summarizes studies on financial stress in some countries, thereby
showing the countries' experience in managing financial stress. This is the basis for the
author to make recommendations for Vietnam.
Thirdly, by qualitative research, the author has assessed the state of financial stress in
Vietnam from 2005-2017.
Fourth, the author has built a financial stress index in Vietnam through the use of an equal
variance weight method; At the same time, TVAR model is also used to assess the impact of
financial stress on the economy.
Fifthly, the thesis proposes policy recommendations to prevent financial stress and
minimize the impact of financial stress on the real economy, towards stable development of
financial markets.
7. Thesis structure
In addition to the introduction, conclusion, list of references, the thesis content is structured
into 3 chapters:
Chapter 1: Theoretical framework on financial stress
Chapter 2: Current situation of financial stress in Vietnam from 2005 to 2017
Chapter 3: Policy recommendations to prevent financial stress and ensure macro stability


4
-

CHAPTER 1: THEORETICAL FRAMEWORK ON FINANCIAL STRESS

1.1. Overview of financial sector
1.1.1. Definition
The financial sector plays a particularly important role in the economy of each country, such
as the central nervous system of the market economy (Crockett et al., 2011). The financial
sector is a comprehensive group of redundant and capital deprived entities, financial
institutions, financial markets in mobilizing and effectively allocating capital sources in the
economy. The healthy and sustainable development of financial markets and financial
intermediaries is an essential factor to ensure macroeconomic stability, contributing to the
promotion of sustainable economic growth.
1.1.2. Components of financial sector
The financial sector consists of: (1) savers and investors, (2) financial markets, (3) financial
institutions
In the economy, capital is transferred from the place of capital surplus to the place of lack of
capital through two channels: direct capital channel and indirect capital channel. Depending
on the characteristics of each country, the financial structure can be developed in the
direction of bank-based market or market-based market.
1.1.3. Role of financial sector
The financial sector provides the following basic functions: (1) value exchange - a way of
making payments; (2) intermediaries - a way of transferring resources from savers to
borrowers; (3) risk transfer - means for pricing and distribution of risks; (4) liquidity means of converting assets into money without undue value.
1.2. Financial stress
1.2.1. Definition

Source: Illing và Liu (2003)
Diagram 1.1: Schematic of financial stress
Financial stress can be interpreted as the state when the functions and integrity of the
financial system are changed, due to the effects of exogenous or endogenous shocks on the
financial system. The degree of stress depends on the interaction between the financial

vulnerability and the size of the shock. The more fragile the financial conditions are, the
more vulnerable the market is, the more likely the shock will lead to financial stress. When


5
a shock is large or when financial conditions are weak, a shock can lead to a crisis and
extreme stress.
1.2.2. Characteristics of financial stress
Each financial stressful situation has its own characteristics. However, studies on financial
stress in developed and developing countries have all pointed out the main characteristics of
financial stress, in which five characteristics are highlighted: i) Increasing uncertainty about
the value of the underlying asset; ii) Increasing uncertainty about investor behavior; iii)
Increasing the status of asymmetric information; iv) Reducing willingness to hold risky
assets and v) Reducing willingness to hold less liquid assets.
1.2.3. Causes of financial stress
1.2.3.1. External factors
a. The appearance of capital inflows
b. The spillover effects of the crisis through trade and financial links
1.2.3.2. Internal factor
a. Monetary market risk
b. Banking risk
c. Capital market risk
d. Foreign exchange market risk
e. External debt
f. Regulatory factors
1.2.4. Measuring financial stress
1.2.4.1. Stress in monetary market
- Risk premium
- Euribor 3 months / T-bill Germany 3 months
1.2.4.2. Stress in banking sector

* Balance sheet data:
- Deposit gap
- Lending gap
- Bank's profitability (Profit margin)
- NPL ratio
- Loan to deposit ratio (LDR)
* Market data:
- Market price of bank shares (bank stock index)
- Specific risks of bank stock prices
- CDS difference
- Risk difference
1.2.4.3. Stress in capital market
- Stock market price
- Volatility of stock market
- Earning per share (EPS)
1.2.4.4. Foreign exchange market risk


6
1.2.4.5. Debt market
- Bond yield difference
- Difference of government bonds
1.2.4.6. Measure financial sector stress with the FSI financial stress index
Equal variance weights: This is a commonly used method of constructing
composite indices that reflect financial stress, including combining standardized variables
into one indicator, where each variable is assigned an equal weight:
∑

̅

in which:
k – number of variables
̅ – mean of variables Xi
- standard deviation of the variables Xi
Principal Component Analysis (PCA)
This method has two basic purposes: (i) reducing the number of variables, and (ii)
discovering the structure in the relationship between variables.
Credit weight
This method determines the weights of the variables corresponding to the size of the
market they represent.
Transformation method using empirical CDFs
The variables are converted into percentile percentages based on the sample cumulative
distribution function (CDF), so that the maximum value corresponding to the highest stress
level is defined as the 99th percentile.
1.3. Impact of financial stress on the real economy
1.3.1. Financial stress has reduced new investment activities
1.3.2. Financial stress depresses economic activities leading to a decline in output
1.4. International experience on financial stress
1.4.1. Singapore’s experience
1.4.1.1. Singapore’s economic context
Since independence in 1965, Singapore has achieved rapid economic development.
Singapore is a prime example of a small country with an open economy and a very high GDP
and GDP growth per capita
Singapore is one of the major financial centers in the world, in addition to many large
and diverse domestic banks, Singapore also attracts many large international banks offering
a wide range of banking and non-banking services.
1.4.1.2. Financial stress period
Financial stress in Singapore occur firstly due to the effects of the global financial
crisis. Much of the shock came to Singapore through the commercial sector and capital and
financial flows to the real economy.

The periods of 1998 and 2008 were the periods with the highest FSI, reflecting the


7
financial stress of Singapore
1.4.1.3. Effects of financial stress
The spread of trade and finanial channels has affected real economy, reflected in
Singapore's industrial production index (IPI). From March 2008 to February 2009, IPI for
the entire manufacturing sector fell by 28%. The worst affected area was electricity,
decreased by 40%, followed by chemistry (33%), and the textile and apparel industry also
dropped by 24%.
As industrial production decreases, businesses' confidence also decreases and
investment decreases. According to Singapore's statistics agency, the indexes in the fourth
quarter of 2008 dropped sharply: expectations of businesses decreased by 57%, labor by
28%, production by 52%, new orders by 39%. All these fluctuations caused real GDP
growth to decline from 6.7% in the first quarter of 2008 to -4.1% in the fourth quarter of
2008. The growth rate of investment capital decreased from 30% in the first quarter of 2008
to -10% in the fourth quarter of 2008 and -10.2% in the first quarter of 2009. The growth of
public and private consumption also decreased to 0.9% and 0% in the fourth quarter of
2008.
1.4.1.4. Singapore’s solution
* Solutions to maintain the stability of the financial system
Firstly, in order to maintain the stability of financial institutions, MAS has
strengthened the supervision of financial institutions through close monitoring of financial
health, regularly discussed with management, auditors of financial institutions; for foreign
financial institutions, often discuss with managers in the host country and auditors of the
headquarters.
Secondly, implement solutions that ensure the proper functioning of market functions.
Thirdly, take measures to maintain the confidence of investors in Singapore as
Singapore is an international financial center.

Fourth, the policy of MAS is adjusted to maintain the medium-term orientation and
ensure the stability of the Singapore dollar, especially in the period of financial stress.
* Solutions to support economic growth
The first is the USD5.1 billion job creation plan in which the government subsidizes
employers by paying 12% of the first $ 2,500 of the monthly salary of each worker to avoid
dismissing workers. The second policy measure to ensure the maintenance of credit flow for
businesses is a special risk-sharing plan for bank loans. The third measure is to reduce
income tax for businesses through reducing tax rates from 18% to 17%. The fourth is to
increase the competitiveness of workers, the government will pay up to 90% of the cost of
re-training workers. Fifthly, the government spends USD4.4 billion to improve
infrastructure conditions on health, housing....
1.4.2. China’s experience
1.4.2.1. China’s economic context
Since China carried out economic reforms in early 1979, the Chinese economy has
experienced incredible economic growth and has become the second largest economy in the


8
world. However, from 2011 up to now, the growth rate of this country has slowed down
significantly and this situation is expected to continue in the future.
1.4.2.2. Financial stress periods

Nguồn: Sun và Huang, 2016
Figure 1.12: China Financial Stress Index
1.4.2.3. Effects of financial stress
China's export sector was severely affected by the global crisis and financial stress
which occurred domestically when the demand of the world economy showed signs of
decline. China's GDP growth dropped sharply from 14.2% in 2007 to 9.6% in 2008 and
9.2% in 2009.
1.4.2.4. China’s solutions

* Solutions to maintain the stability of the financial system
Firstly, China has made strong strides towards market-oriented financial system,
including reforms such as restructuring the capital of the banking system, creating new
capital markets, introducing sustainable legal structures mechanism, opening up financial
markets following the accession to WTO and gradually reforming interest and exchange rate
policies.
Secondly, to break the vicious cycle of the RMB depreciation, capital outflows from
China increased, in 2016, the Chinese government had to apply stricter capital controls and
reserve requirements for RMB deposits from foreign credit institutions.
Thirdly, for the securities sector, leading companies have been restructured, a plan to
protect investors has been established.
* Solutions to support economic growth
Firstly, in order to avoid the economic downturn, the Chinese government has
launched big bailouts to restore the economy's growth momentum.
Secondly, to promote economic growth, from September to December 2008, interest
rates were cut down 5 times, on November 26, 2008 it decreased of 108 basis points.
Thirdly, the government has implemented tax incentives such as increasing VAT
refunds for exports, reducing taxes for small businesses by reducing the tax rate from 6% to
3%, increasing the family allowances in monthly income from 5,000 CNY to 10,000 CNY.
1.4.3. Lessons for Vietnam


9
1.4.3.1 Lesson on preventing the risk of financial stress
- Carefully opening the financial sector and effectively controlling capital flows
- Ensuring the stability and soundness of the banking system.
1.4.3.2. Lessons on implementing solutions to minimize the impact of financial stress
- Develop early warning system for financial sector tension.
- Healthy development of financial markets, diversification of capital channels for
the economy.

- Improve the operational efficiency of the financial monitoring system, micro-safety
supervision.
- Implement measures to support businesses and households, minimize the impact of
financial stress.

CONCLUSION OF CHAPTER 1
Chapter 1 has codified and generalized the theory of financial stress. The concept and
characteristics of financial stress have been carefully considered in order to study the causes
of financial stress, as well as the effects of financial stress on the economy. In chapter 1, the
author also studies Singapore and China's experience in managing the financial stress,
thereby drawing valuable lessons for Vietnam related to measures to prevent financial stress
and regulatory measures to minimize the negative impact of financial stress on the
economy.


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CHAPTER 2: CURRENT SITUATION OF FINANCIAL STRESS IN VIETNAM IN
THE PERIOD FROM 2005 TO 2017
2.1 Overview of Vietnam's financial sector
2.2 Situation of financial stress in Vietnam's financial sector from 2005 to 2017
2.2.1. Stress in monetary market
The periods of increasing TED gap were in 2007 (TED gap was 4.77%), at the end of 2008
and beginning of 2009 (TED gap was 2.97%) and at the end of 2011 and beginning of the
year 2012 (TED difference was 1.68%).
2.2.2. Stress in banking sector
100.000%

1.000

80.000%

.800

60.000%

.600

40.000%

.400

20.000%

.200

.000%

.000

Cho vay/Tiền gửi

4.500%
4.00%
3.500%
3.00%
2.500%
2.00%
1.500%
1.00%
.500%

.00%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

1.200

2005Q1
2006Q3
2008Q1
2009Q3
2011Q1
2012Q3
2014Q1
2015Q3
2017Q1

120.000%

CV/GDP

Tỷ lệ nợ xấu

TG/GDP

Nguồn: Báo cáo tài chính các NHTM
Figure 2.10: Deposit/GDP and loan/GDP
during 2005-2017

Figure 2.11: Bad debt ratio of banking
sector during 2005-2017

Through observation of Figure 2.10 and Figure 2.11, it can be seen that the period 2008 - 2011
witnessed a strong fluctuation in the size of deposits and loans of the banking system, the quality of
assets of the banking system also decreased significantly. The ratio of non-performing loans
increased to over 3% in 2006 and the period from 2011 to 2014.

2.2.3. Stress in stock market
During 2008s
Due to the unstable macroeconomic situation, along with a series of bad and unfavorable
information for the market, the Vietnam stock market has been under stress, increasing the level of
uncertainty of investors, reducing the willingness to hold assets, the asset price continuously
dropped, from the beginning of 2008 to the end of 2008, VNINDEX dropped by nearly 700 points,
hundreds of thousands of billion dong of value of assets evaporated. By the end of 2007, the market
capitalization of the HSX reached VND 333,529 billion and by the end of 2008 only VND 169,346


11
billion was left, despite a newly increased 53% of listed shares in that year. At the end of 2007,
HNX capitalization reached VND 130,633 billion and in 2008, VND 50,400 billion remained.

During 2011s
2011 was a difficult year for Vietnam's economy, the stock market was a barometer of the
economy, also reflected this trend with the main and major downtrend. From the beginning of the
year to the end of the year, VNINDEX dropped sharply by 27.46% to 350 points at the end of 2011,
62% of codes on both exchanges were below the par value.
2.2.4. Stress on foreign exchange market
The negative impact of global crisis and domestic macroeconomic instability has caused the foreign
exchange market and VND/USD exchange rate to be constantly fluctuated. Only in 2008, the SBV
extended the exchange rate band 3 times, taking measures to control the foreign exchange market to
mobilize foreign currencies on banks. However, the supply and demand of USD remained seriously
imbalanced, the foreign exchange market became extremely stressful, the exchange rate of VND/
USD was most unstable when the exchange rate at the beginning of 2008 was around 15,000 to
16,000VND/USD, by the end of 2008 this figure nearly reached VND 19,500. In order to stabilize
the foreign exchange market as well as the VND/USD exchange rate, in addition to monetary and
administrative policy measures, the SBV had to use the foreign exchange reserve fund to intervene
in the market, foreign exchange reserves showed signs of sharp and continuous decline from the end
of 2008 to 2011, from 23.9 billion USD at the end of 2008 to 12.2 billion USD in the first quarter of
2011, equivalent to 1.5 months imports, lower than the 3-4-month safe threshold recommended by
the IMF (IMF, 2000).

2.2.5. Measuring Vietnam's financial stress with the FSI
2.2.5.1. Criteria for selecting variables for Vietnam FSI to determine periods of financial stress
The variables selected to construct a financial stress index for Vietnam should meet the
following criteria: financial system coverage, ability to express stress in each component of
the financial system, the availability of financial data, and the variables must be related to
the real economy.
2.2.5.2. Develop financial stress index
a. Selecting variables
The financial stress index is designed to measure financial stress in Vietnam in the period of
2005-2017, including indicators reflecting the stress of four market sectors: money market,

banking sector, stock market and foreign exchange market.


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* Monetary market
The author uses the difference between the interbank interest rate and the treasury bill
interest rate for the 3-month term (TED_spread).
6.000

4.773
2.969

4.000

1.676

2.000

-2.000

2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3

2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2016Q1
2016Q3
2017Q1
2017Q3

.000

TED_spread

Source: Author’s calculation from SBV data
Figure 2.22: TED_spread in Vietnam monetary market during 2005-2017

* Banking sector
The balance sheet data used in the study is the loan/deposit ratio at commercial banks.
According to Sun and Huang (2016), the increase of this ratio reflects the stress and default risk of
the banking sector. The graph shows that durring the period 2011-2012 the loan/deposit ratio was
approximately 1, reflecting the stresses in the banking sector. This is also entirely consistent with
developments in credit growth and deposit growth during these periods.

2017Q4

2017Q1

2016Q2

2015Q3

2014Q4

2014Q1

2013Q2

2012Q3

2011Q4

2011Q1

2010Q2

2009Q3

2008Q4

2008Q1

2007Q2

2006Q3

2005Q4

2005Q1

1.5
1
0.5
0

Loan_Deposit

Source: Author’s calculation from commercial banks’ balance sheet
Figure 2.23: Loan/deposit ratio at some commercial banks of Vietnam during 2005-2017

* Stock market
One of the common variables used to assess stock market risks is realized volatility.
The volatility of VNINDEX (sd_vni) is the standard deviation of VNINDEX in each quarter.


13

2017Q4

2017Q1

2016Q2

2015Q3

2014Q4

2014Q1

2013Q2

2012Q3

2011Q4

2011Q1

2010Q2

2009Q3

2008Q4

2008Q1

2007Q2

2006Q3

2005Q4

2005Q1

150.000
100.000
50.000
.000

sd_vni

Nguồn: Tính toán của tác giả
Figure 2.24: The volatility of VNINDEX
* Foreign exchange marrket
To reflect stress in the foreign exchange market, the author used exchange rates and
changes in foreign exchange reserves to calculate the EMP. According to Elekda and Selim
(2009) EMP is determined as follows:
In which, e (dEX) and RES (dFEX) are the quarterly percentage change of the nominal
exchange rate between the local currency and the US dollar and foreign exchange reserves.
 and  are the mean and the standard deviation of the two component determining EMP.

0
-5

2005…
2005…
2006…
2006…
2007…
2007…
2008…
2008…
2009…
2009…

2010…
2010…
2011…
2011…
2012…
2012…
2013…
2013…
2014…
2014…
2015…
2015…
2016…
2016…
2017…
2017…

5

EMP

Nguồn: Tính toán của tác giả
Figure 2.25: Exchange market pressure during 2005-2017
Figure 2.25 shows the EMP and the foreign exchange reserves are in the opposite
relationship, and completely consistent with the developments in the foreign exchange market.
During the period of 2008-2011, due to the great fluctuations from the world economy together
with the instability of the internal economy of Vietnam, the forex market fluctuated sharply.
The State Bank has repeatedly used foreign exchange reserves to intervene in the market,
causing the size of foreign exchange reserves to decrease sharply and continuously from the end
of 2008 to 2011.

b. Constructing financial stress using equal variance weight
According to Balakrishnan et al (2009 and 2011), variables are normalized according
to the following formula:
Standardized variables =

̅


14
1.5
1
0.5

-0.5
-1

2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3

2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2016Q1
2016Q3
2017Q1
2017Q3

0

FSI

Source: Author’s calculation
Figure 2.26: Vietnam financial stress index during 2005-2017
According to Yiu, Ho and Jin (2010), the simplest method to determine the stress period is
when the FSI is at its peak, while the relatively low FSI is when the financial sector is relatively
stable. The graph shows that the time when the financial sector experienced the most stress was in
the first quarter of 2011 and continued until the third quarter of 2012 to show signs of decline.
Another way to identify periods of financial stress is to compare FSI with the long-term
trendline.
1.5
3.4

1

Cycle

FSI

Trend

2017Q4

2017Q1

2016Q2

2015Q3

2014Q4

2014Q1

2013Q2

2012Q3

2011Q4

2011Q1

2010Q2

2009Q3

2008Q4

-1

2008Q1

-0.5

2007Q2

1.4

2006Q3

0
2005Q4

2.4
2005Q1

0.5

0.4
-0.6

1SD+trend

Source: Author’s calculation
Figure 2.27: The long-term trendline of FSI and the deviation from the trendline
After determining the trend line, the authors refer to the criteria of Balakrishnan et al.

(2009 and 2011) and Cardarelli, Elekdag, and Lall (2008 and 2011) to determine the period
of financial stress when FSI has a deviation from the trend from 1-1.5 times the standard
deviation (of the trend). Thus, both the event method and the quantitative method
comparing FSI with the above long-term trend line indicate that the period of 2011-2012 is
the most obvious period of financial stress.
2.2.6. The causes of the stress on Vietnam's financial sector
2.2.6.1. External causes
The sharp increase in capital inflows in the period before 2009 can be considered as a basic
cause of financial sector stress in Vietnam.
Spillover effects of the world financial crisis on Vietnam's economy
2.2.6.2. Internal causes


15
The structure of the financial system is still unreasonable
The lack of flexibility in operating policies of regulatory agencies, the institutional
framework and the safety regulations and legal provisions are not consistent with the
fluctuations, especially before 2010, partly causing financial sector stress to occur and
leading to negative effects on the real economy.
The inspection and supervision capacity of the State Bank of the previous period still had
some limitations
No agency has yet implemented a comprehensive macro safety supervision of the entire
financial system.
2.3 Impacts of financial stress on real economy
2.3.1. Impacts of financial stress on investment
50.000%
40.000%
30.000%
20.000%
10.000%

.000%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Tỷ lệ đầu tư/GDP

Tốc độ tăng vốn đầu tư

Linear (Tốc độ tăng vốn đầu tư)

Source: General Statistics Office
Figure 2.33: Growth rate of investment capital, investment/GDP ratio during the
period of 2005-2017
Figure 2.33 shows that the movements in the growth rate of investment capital over the
years are relatively consistent with the theory of the impact of financial sector stress on
investment activities. When the financial sector experienced stress and instability,
investment activities decreased sharply. In 2008, due to the impact of the global economic
crisis, businesses felt uncertain about future prospects, the decline of aggregate demand
made the financial situation of enterprises weakened, investment activities decreased. The
growth rate of investment capital was below the trend line, only increasing by 15.91%
compared to 2007. In 2011, 2012 and 2013, the growth rate of investment capital was still
below the trend line, the ratio of capital investment over GDP decreases about 30% of GDP.


16
100.000%

60.000%
40.000%

50.000%

20.000%

Vốn đầu tư/GDP

.000%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

2016
2017

.000%

Khu vực có vốn đầu tư nước ngoài
Kinh tế ngoài nhà nước
Kinh tế Nhà nước

Kinh tế Nhà nước
Kinh tế ngoài nhà nước
Khu vực có vốn đầu tư nước ngoài

Nguồn: Tổng cục thống kê

Figure 2.34: The investment capital to
GDP by economic sectors in the period
of 2005-2017

Figure 2.35: Investment capital structure
by economic sectors in the period of
2005-2017

The structure of investment capital/GDP shows that the ratio of investment capital to GDP
peaked at 42.68% in 2007, in 2008 the scale of investment capital/GDP dropped sharply to
below 40% and this strong downward trend continued in three years of 2011, 2012 and 2013, of
which in 2013, the ratio of investment capital/GDP dropped to the lowest level at 30.54%.
40
20

-20

2005-01
2005-07
2006-01
2006-07
2007-01
2007-07
2008-01
2008-07
2009-01
2009-07
2010-01
2010-07
2011-01
2011-07
2012-01
2012-07
2013-01
2013-07
2014-01
2014-07
2015-01
2015-07
2016-01
2016-07
2017-01
2017-07

0

Mức tăng chỉ số sản xuất công nghiệp (%)

Source: CEIC
Figure 2.37: Industrial production index
Figure 2.37 shows the evolution of the industrial production index during 2005 - 2017. It
can be seen that the time when the growth rate of industrial production index received
negative value was December 2008 (-0,915 %), February 2010 (-1,028%), January 2012 (2,407%) and the lowest growth rate was February 2013 (-10.1%). These are also the times
when Vietnam's financial sector witnessed stress in the stock market, monetary market,
foreign exchange market and the banking sector.
2.3.2. Impact of financial sector stress on economic growth
The development of credit growth in Vietnam is relatively consistent with the theory
of the impact of financial stress. The period of 2007-2010 was a period of rapid credit


17
growth in Vietnam, with credit growth reaching over 30%, but in 2008, the credit growth
dropped sharply from 49.79% ( 2007) to 27.6% (2008) and rebounded to 45.32% (2009).
Since 2011, credit growth has shown signs of slowing down, especially in 2011 and 2012,
credit / GDP growth decreased to -11.58% and -4.8%.
Stress in the financial sector caused credit growth to decline, investment activities of
enterprises tended to narrow, the risk of losing jobs, and income declines in the context of
the slow economic recovery. The majority of households and individuals tighten their
consumption. Private consumption has been continuously decreasing over a long period of
time from the 2008 peak of 70.87% of GDP to the bottom of 64.5% of GDP in 2012.
The reduced size of investment capital, and the inefficient use of investment capital is
one of the causes affecting Vietnam's economic growth.
2.3.3. Assess the impact of financial sector stress on the real economy using the
threshold regression vector model
2.3.3.1. Research model

To assess the impact of financial sector stress on the real economy in Vietnam in the
period of 2005-2017, the thesis uses the threshold vector auto regression model - TVAR used in
Roye's studies. (2012), Li & St-Amant (2012), Ahma et al. (2014)
2.3.3.2. Selecting variables
Based on theory and previous studies on variables when considering the impact of FSI on
real economy, the author chooses the following variables in TVAR model: GDP, CPI, INT, FSI
2.3.3.3. Results
Table 2.10: The estimation result of TVAR model to GDP with threshold variable is
the financial sector stress index (FSI)

Number of
observations

Regime 1

Regime 2

FSI(-1) < 0.3062018

FSI(-1) >=0.3062018

42 obsservations (82,4%)

9 observations (17,6%)

coefficient

t

p-value

coefficient

t

p-value

C

0.023236

2.544423

0.014800

0.100173

3.565756

0.000900

GDP(-1)

0.652164

4.962285

0.000000

-0.331978

-2.313395

0.025800

FSI(-1)

-0.005913

-0.702597

0.486300

-0.130317

-4.726012

0.000000

CPI(-1)

-0.076877

-1.160887

0.252400

-0.218805

-1.264406

0.213200

INT(-1)

0.000639

0.580002

0.565100

0.005917

1.415519

0.164500

Nguồn: Tính toán của tác giả từ phần mềm thống kê


18
Table 2.10 shows the result of TVAR model with FSI as threshold variable. In the two
regimes shown by the model, the impact of FSI on the real economy through the impact on
GDP is statistically significant in the second regime, while not statistically significant in the
first regime. At the same time, the number of observations with FSI above the threshold
accounts for 17.6% (9 observations), because the research goal is to consider how financial
sector stress affects the real economy so the thesis analyzes the economy's response to FSI
shocks in the second regime.
Below the threshold of 0.3062018, the model has not found clear evidence of the
impact of financial sector stress on economic growth, inflation or interest rates (impact is

not statistically significant).
Above the threshold, the increase in financial sector stress will have a negative impact
on GDP, as shown by the negative correlation coefficient of the FSI variable at 1%
significance level with the regression coefficient of -0.130317. The negative effect of FSI on
GDP is consistent with theoretical studies and is also seen in empirical studies by Roye
(2012), Li & St-Amant (2012), Ahma et al. (2014).
2.3.4. Assessment of the impact of financial stress on the real economy
Over the past few years, Vietnam's financial sector has performed relatively well as a
channel of capital and capital allocation to the economy, an important contribution to Vietnam's
economic growth in recent years. However, Vietnam's financial sector has also experienced
periods of stress, starting with the stress that occurred on the stock market right from the
beginning of 2007, with Vietnam's accession to the WTO, the inflows of capital increased
sharply, the stock index soared to over 1000 points, then it dropped very sharply in 2008. This
stress situation remained dull throughout the period from 2008-2011 and in 2011, financial stres
become more extreme with stress occurring on all four regions/markets at the same time: banks,
securities, foreign exchange and money markets.
The causes of financial stress in Vietnam are visible stemming from both internal and
external factors. External factors might be the strong inflow of net capital inflows in the
period before 2009 and the spillover effect of the world financial crisis. Along with the
impacts of external factors on the financial sector, the internal factors that contribute to the
increase in the stress in the financial sector are the unreasonable structure of the financial
system and the dependence of the economy on capital supply from the banking system, with
over 60% of capital supplied to the economy coming from commercial banks; the lack of
flexibility in operating policies of regulatory agencies, safety regulations, legal
regulations...; no macroeconomic safety supervision agency of financial system.
Increasing stress in the financial markets has led to negative effects on the real


19
economy through increasing uncertainty in the financial markets and economic prospects.

This directly depresses consumption and investment and thus negatively affects economic
growth. Qualitative analysis in the thesis has shown that during periods of financial stress,
investment, consumption, credit and Vietnam's economic growth tends to slow down. Using
the threshold vector autoregression model, the thesis has determined the threshold of the
financial stress index and research result has shown that when there is financial stress (FSI
higher than the threshold), FSI has a negative impact on the economy through the decrease
of GDP, while the financial stress index is lower than the threshold, the impact of FSI on
economic growth is not statistically significant.

CONCLUSION OF CHAPTER 2
In chapter 2, the author outlined the development of Vietnam's financial system, which
focused on the period from 2005 to 2017, and considered the current state of financial stress
in Vietnam and discussed impact of financial stress on the real economy. By qualitative
analysis and method of constructing financial stress index based on equal variance weight,
the author has pointed out the period that Vietnam's financial sector experienced the most
stress, especially from beginning of 2011 to the end of 2012. With qualitative analysis, the
thesis has pointed out the negative impact of financial stress on the real economy through
the impact of reducing consumption, investment and economic growth (GDP) during
periods of high FSI. By using the threshold regression vector model (TVAR), the author
once again pointed out the impact of financial stress on the real economy, when financial
stress is greater than threshold. The increase of FSI will have a negative impact on
economic growth.


20
CHAPTER 3: POLICY RECOMMENDATIONS TO PREVENT FINANCIAL
STRESS, LEADING TO FINANCIAL STABILITY
3.1. Orientation for healthy development of Vietnam's financial sector
3.2. Policy recommendations
3.2.1. Policy recommendations related to the formation of early warning indicators for

financial stress
Exchange rate fluctuations and foreign exchange reserves decline
The difference between interbank interest rates and the risk-free rates respectively
Credit growth
Lending / deposit ratio of the banking sector
Volatility of stock index
Financial stress index
3.2.2. Policy recommendations related to the stable development of the financial system
3.2.2.1. Policy recommendations related to the stable development of the monetary market
Firstly, improving the legal framework for the market through reviewing and
completing the current regulations on the issuance of instruments on primary market
(such as commercial paper and certificates of deposit in the direction of
standardization in accordance with international practice) to facilitate these tools to
trade in the secondary market.
Secondly, developing and improving the structure of manetary market through
research and consideration in order to build a complete Vietnam metary market.
Thirdly, urgently formulate and develop market makers
Fourthly, diversify transactional goods and at the same time increase the attraction of
members participating in the monetary market with the focus on fully developing important
tools and products on the market such as repos, commercial papers, certificates of deposit (CDs)
which can be traded in the secondary market, creating a legal corridor, developing secondary
markets so that monatery tools can develop to meet the needs of the market.
Fifthly, strengthen the management, administration, inspection and supervision
activities of the State Bank of Vietnam.
3.2.2.2. Policy recommendations related to the stable development of the banking market
Firstly, continue to improve mechanisms, policies and legal documents according to
international standards on debt classification and risk provisioning; lending, investment and
payment limits, valuing non-credit assets, reviewing the real capital of commercial banks to
monitor the minimum capital adequacy ratio, implementing risk management according to
Basel II.

Secondly, accelerate the restructuring of the banking system associated with cross-


21
ownership handling.
Thirdly, diversify banking services.
3.2.2.3. Policy recommendations related to stable development of the stock market
Firstly, perfecting the legal framework and improving the management and
supervision capacity with the main task of completing the revised Securities Law,
along with continuing to complete the synchronous legal framework to guide the
Securities Law in the direction of applying international practices.
Secondly, continuing to promote equitization and divestment of state capital in
enterprises associated with the improvement and promotion of share auction activities
associated with listing and registration for trading on the stock market;
Thirdly, developing new products such as derivative products, bond products, to
minimize risks or diversify types of investment funds in order to increase the market supply
to meet the diverse needs of investors.
Fourthly, improve and develop the bond market: Diversify government bond products
(Government bonds); Deploying the project of developing corporate bonds; Complete the
plan to organize the corporate bond market and the preparation to enable the market for
corporate bond transactions to operate effectively.
Fifthly, develop and improve the capacity of the system of market intermediaries
3.2.2.4. Policy recommendations related to the stable development of the foreign exchange market
Firstly, continue to maintain the central exchange rate policy in order to achieve
the goal of stabilizing the foreign exchange market.
Secondly, the State Bank needs to strengthen the supervision of the foreign
exchange market and timely take reasonable measures to regulate the market.
3.2.2.5. Policy recommendations to improve the capacity of Vietnam's current financial
monitoring system
Firstly, Vietnam needs to gradually shift from a distributed supervising model to an

integrated supervising model.
Secondly, the agency with the responsibility of supervising macro-safety of the entire
financial system should have the necessary comprehensive, independent and autonomy to
supervise.
Thirdly, Singapore's experience also shows that, besides the role of the unified
supervising body, it is necessary to enhance the role of market participants, so that market
members can carry out cross-supervision. This requires the unified supervisory authority to
coordinate and listen to feedback from market members during the monitoring process.
Fourthly, in the context of deeper financial integration, it is necessary to improve
safety monitoring standards in the system, accounting standards and risk assessment


22
according to international practices in order to properly assess the situation of financial
institutions.
3.2.3. Policy recommendations for effective management of inflows
3.2.3.1. Continue to attract and improve the efficiency of attracting and using foreign capital
3.2.3.2. Implement measures to manage foreign investment capital flows
3.2.4. Policy recommendations to minimize the impact of financial stress
3.2.4.1. Recommendations related to operating macro policies
3.2.4.2. The policy for businesses and households and towards sustainable growth
CONCLUSION OF CHAPTER 3
In chapter 3, the author outlined the orientation for development of the financial sector in
Vietnam, the author made policy recommendations to prevent financial stress and ensure
macro stability. The policy recommendations include 3 groups: (1) policy recommendations
related to the formation of early warning indicators for financial stress, (2) Policy
recommendations

related

to

stable

development

financial

system,

(3)

Policy

recommendations to effectively manage capital inflows and (4) Policy recommendations to
minimize the impact of financial stress.


23
GENERAL CONCLUSIONS
Within nearly 160 pages of research, the thesis has solved basic objectives including:
Firstly, chapter 1 has built a theoretical basis for financial stress. The concept and
characteristics of financial stress have been carefully considered in order to study the causes
of financial regional stress, as well as the effects of financial stress on the economy reality.
The experience of Singapore and China in managing financial stress was also studied to
draw valuable lessons for Vietnam.
Secondly, in chapter 2, the author has generalized the development of Vietnam's financial
market, which focuses on the period from 2005 to 2017. By qualitative analysis and method of
constructing financial sector tension index based on equal weight of variance, the author has
pointed out the period that Vietnam's financial sector experienced the most stress, especially

from beginning of 2011 to the end of 2012. Using the self-regression vector model (TVAR), the
author also pointed out the negative impact of financial sector stress on the real economy.
Thirdly, in chapter 3, the author generalized the orientation of development of financial
sector in Vietnam. The policy recommendations include 4 groups: (1) policy
recommendations related to the formation of early warning indicators for financial sector
stress, (2) Policy recommendations related to stable development financial system, (3)
Policy recommendations to effectively manage inflows and (4) Policy recommendations to
minimize the impact of financial stress.