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Global financial crisis and its impact on the operations of Vietnamese small and medium enterprises - 1

FOREIGN TRADE UNIVERSITY FACULTY OF ECONOMICS AND INTERNATIONAL BUSINESS

MASTER OF FOREIGN ECONOMICS

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GRADUATION THESIS


Global financial crisis and its impact on the operations of Vietnamese small and medium enterprises - 1

Topic :

GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON THE PERFORMANCE OF VIETNAMESE SMALL AND MEDIUM ENTERPRISES


Student : Nguyen Tien Dung

Class : Russian 2

Lock : 44G

Instructor : Dr. Vu Hoang Nam


Hanoi, May 2009

LIST OF ABBREVIATIONS


ARM Adjustable Rate Mortgage


CDS Credit Default Swap


SMEs Small and Medium Enterprises


State-owned enterprises State-owned enterprises


MBS Mortgage-backed securities


State Bank of Vietnam


Commercial Bank Commercial Bank


Central Bank Central Bank


iii

Stock Market Stock Market


INTRODUCTION


1. Urgency of the topic

Historically, the world economy has witnessed the financial crisis of 1929 and its severe consequences that took many years to overcome. The current global financial crisis is also considered to have a very serious impact on the world economy in general as well as the economies of individual countries. Thousands of large and small businesses in many countries have either gone bankrupt or been acquired. Many businesses are on the brink of bankruptcy, or have had to merge with other businesses, or have had to cut a large number of employees to be able to continue operating.

Vietnam is a developing country with an economy that is increasingly integrating more deeply with the world economy. Therefore, our economy cannot avoid certain impacts of the global financial crisis. Among Vietnamese enterprises, the most affected are small and medium enterprises (SMEs). SMEs are the largest segment and also play an important role in the national economy such as providing a large volume of products and services to the economy, contributing an important part to GDP growth, creating a large number of jobs for the economy, contributing to increasing income and social stability. Therefore, in-depth analysis of the causes and impacts of the global financial crisis on SMEs and proposing solutions to help Vietnamese SMEs overcome immediate difficulties as well as develop in the long term is an urgent requirement at present. That is the reason I chose the topic: "Global financial crisis and its impact on the operations of Vietnamese small and medium enterprises".

3. Research purpose

Based on the study of the causes of the global financial crisis as well as its impact on the Vietnamese economy in general and Vietnamese SMEs in particular,

The thesis proposes some solutions to help businesses overcome the difficulties caused by the crisis as well as long-term development solutions.

4. Research object and scope

Research subjects:

First, study the global financial crisis and its developments.

Second, research on Vietnamese SMEs.

Scope of research: the global financial crisis with main developments in 2008 and limited impact on Vietnamese SMEs.

5. Research methods

The thesis uses a combination of traditional methods such as document collection, desk research, comparison, contrast, synthesis and analysis of information. Using the dialectical method, combining theory with practice.

6. Structure of the thesis

The thesis is structured in 3 chapters:

Chapter I: Causes and developments of the global financial crisis

Chapter II: Impact of the global financial crisis on the operations of Vietnamese small and medium enterprises

Chapter III: Some solutions to overcome the consequences of the global financial crisis for Vietnamese small and medium enterprises and create a premise for future development

First of all, I would like to thank all the teachers of Foreign Trade University. This thesis is not only the result of personal efforts but also the result of 4 years of studying and researching at the school, under the guidance and enthusiastic instruction of the teachers.

In particular, I would like to thank my supervisor - Dr. Vu Hoang Nam. His guidance, comments and enthusiastic guidance are extremely important factors in helping me complete this thesis.

Thank you very much!

CHAPTER I


CAUSES AND DEVELOPMENTS

OF THE GLOBAL FINANCIAL CRISIS


The current global financial crisis is considered the worst crisis since the crisis of 1929. It has caused serious consequences for the US economy in particular and the global economy in general. The crisis has left Wall Street without any investment banks in just over a week, and its spread has not only been in the US but has had a severe impact on the European banking system, most notably the governments of the Netherlands and Belgium had to rescue Fortis Bank, the British government took over Bradford & Bingley (B&B). To better understand the current global financial crisis, in this chapter I, I will analyze in depth to clarify the causes, developments of the crisis and its effects on the world economy.

1. Causes of the global financial crisis

It can be said that the most direct and profound cause of the global financial crisis is the US subprime debt crisis in 2007. It was the increase of subprime debts for many consecutive years that created a "giant real estate bubble" and once that bubble burst, its spreading effects on the US financial system and then the global financial system were extremely fierce and unavoidable. Besides, it is impossible not to mention another indirect cause: the US government's way of managing the market. The excessive removal of all barriers to the market also removed the necessary control barriers to keep the market at a manageable level. Therefore, once the crisis broke out,

Its spread and impact, though predictable, were unstoppable.

1.1. The subprime debt crisis

The term “subprime debt” has become familiar, especially after the US real estate crisis. But not everyone has the most complete understanding of this issue. To have a deeper and more complete view of the nature of the subprime debt problem, I would like to present an overview of the causes, methods and consequences of this credit crisis.

1.1.1. Subprime debt

Before delving into the nature of subprime loans, I would like to briefly mention the classic form of installment home loans. Normally, to borrow money from a bank to buy a house in installments, the borrower needs to have some capital to pay a portion of the house's value in advance and must also demonstrate that he or she has the financial capacity to repay the loan regularly throughout the loan period. The bank's lending policy varies depending on the market situation, but banks usually require borrowers to have at least 10% - meaning they can only lend up to 90% of the house's value. The monthly installment should not exceed the safe level of one-third of pre-tax income.

Going into more detail, when considering loan applications, American banks often use a formula called the “28:36 ratio” based on monthly income - 28% is the front ratio and 36% is the back ratio. Banks usually only lend if the monthly installment (including taxes and homeowner’s insurance) does not exceed 28% (front ratio) of monthly income. Adding other debts (such as credit card debt , car loans, student loans) together, the total must not exceed 36% (back ratio) of monthly income.

When considering loan applications, American banks also base their decisions on the borrower's "credit score". This is a scale established by Fair Isaac Corp., abbreviated as the FICO score, ranging from 300-900 points. Credit score

This is set for each individual based on five factors, the most important of which is credit history. The more late a person has been in his or her past debt repayments, the lower his or her credit score. The higher the score, the easier it is to get a loan and the borrower will also be given a lower interest rate . Generally, borrowers will have difficulty with a credit score lower than 620.

Installment loans to buy a house are basically that simple. However, in recent years, to attract more home buyers, real estate financing companies in the US have used many financial tricks and launched new installment loan products, the most popular of which is the “adjustable rate mortgage” contract (or Option ARM). The characteristic of the ARM option is that the loan interest rate increases or decreases depending on the changing market situation.

Another tool lenders use to attract borrowers is to offer a very low introductory interest rate compared to the actual interest rate on the loan. For example, the introductory interest rate may be as low as 2% per annum. From this interest rate, the minimum monthly payment is calculated, which is much lower than the amount that would be paid if the initial high interest rate was discounted. But this minimum interest rate is usually very short-lived, in the first month or two, and is really only used to calculate the minimum monthly payment in the first year. This monthly payment will increase each year, but not by more than 7.5% per annum. And the borrower is told that he can make the minimum payment this way for five years, and that in the sixth year the loan will be “recast.”

However, the crux of the matter that very few borrowers pay attention to is this: because the official interest rate remains high, the interest alone exceeds the minimum payment each month. This results in a monthly deficit of the actual amount the borrower must repay (interest minus the minimum payment). This deficit is added to the

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