Tiểu luận về tình hình cán cân vãng lai ở Việt Nam trước và sau khi xuất hiện đại dịch Covid19. Tài liệu được viết bằng tiếng Anh. Tài liệu được dùng trong bộ môn International Finance (Tài Chính Quốc Tế). Tiểu luận về tình hình cán cân vãng lai ở Việt Nam trước và sau khi xuất hiện đại dịch Covid19. Tài liệu được viết bằng tiếng Anh. Tài liệu được dùng trong bộ môn International Finance (Tài Chính Quốc Tế).
International Finance Assignment Introduction In the present time, globalization is developing rapidly in each country, no tariffs, no economic obstacles As a result, GDP growth rate is continuously increasing and paving the way for the fourth industrial revolution However, recent macroeconomic crises in developing countries have once again underscored the need for a clear understanding of the factors underlying a country's current account position So what is current account and its important influence on developing countries? On the one hand, the current account records a nation's transactions with the rest of the world - specifically its net trade in goods and services, its net earnings on crossborder investments, and its net transfer payments - over a defined period of time, such as a year or a quarter In addition, current accounts include main factors: Balance of Trade, Primary Income and Secondary Income In which, Balance of Trade includes import and export activities of goods and services Primary Income includes Salary of Labor and Income from Investment (FDI1, FPI 2and Credit) And finally Secondary Transfer with money transfer operations The current account may be positive (a surplus) or negative (a deficit); positive means the country is a net exporter and negative means it is a net importer of goods and services In either case the country's capital account balance will register an equal and opposite amount Exports are recorded as credits in the balance of payments, and vice versa imports are recorded as debits On the other hand, as we know that the balance of trade (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend Especially, during a strong economic expansion, developing countries often have stronger import volumes than exports However, if exports are unable to grow at the same rate, the current account deficit will widen Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies Besides, the exchange rate exerts a significant influence on the trade balance, and by extension, on the current account An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit or narrowing the surplus An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus or narrowing the deficit The problem of current account deficits in developing countries 2.1 The cause of current account deficits in developing countries There are various factors which could cause a current account deficit: FDI: Foreign Direct Investment FPI: Foreign Portfolio Investment Overvalued exchange rate Economic growth Decline in competitiveness/export sector Higher inflation Recession in other countries Borrowing money Financial flows to finance current account deficit 2.1.1 Overvalued exchange rate When a developing country overvalues its currency, imports will be cheaper, and therefore there will be a higher quantity of imports Exports will become uncompetitive, and therefore there will be a fall in the quantity of exports As a result its current account would be deficit 2.1.2 Economic growth When there is an increase in economic growth, national income also enhanced, people have more disposable income to consume goods Therefore, people have more demand for foreign goods, partly because the quality of domestic goods is not as good asthan imported ones This is because developing countries are still unable to produce high quality goods to meet the needs of their people 2.1.3 Decline in competitiveness/export sector Similar to the above reason, it is also because the production capacity of developing countries is still weak, so their comparative advantage is low So they still have to import a lot from foreign countries such as raw materials, machinery or even highly skilled labor 2.1.4 Higher inflation If their inflation rises faster than our main competitors then it will make their exports less competitive and imports more competitive This will lead to deterioration in the current account However, inflation may also lead to a depreciation in the currency to offset this decline in competitiveness 2.1.5 Recession in other countries In addition to factors originating in developing countries themselves, relationships with other countries also affect current accounts, for example, if the US experience negative economic growth, they will buy less goods from Vietnam, this worses the Vietnam current account 2.1.6 Borrowing money (Credit) If countries are borrowing money to invest, and the investment is less profitable than the interest on the debt (or the cash inflow is less than the cash outflow) then this will lead to deterioration in current account position 2.1.7 Financial flows to finance current account deficit If a country uses foreign debt to finance investments that yield more than the interest rate on debt, it can maintain solvency while still having a current account deficit However, if a country is unable to pay its current debt with future revenue flows, that country could lose its solvency (or insolvency) 2.2 Solutions to deal with current account deficits in developing countries To reduce current account deficits, developing countries need to implement the following policies: 2.2.1 Devaluation of exchange rate and Deflationary policies On the one hand, they should devaluate exchange rate to make exports cheaper and imports more expensive This involves reducing the value of the currency against others (e.g selling VND would cause the value of the VND to fall) If there is a devaluation of the currency, the price of imported goods increases and therefore the quantity demanded of imports falls Exports will become cheaper, and there will be an increase in the quantity of exports But first, I am going to explain by J curve effect Table J curve effect The J curve effect shows that the balance of payments trend is in deficit at first, then turns into surplus when a step devalues its currency As soon as a country's currency depreciates, imports become more expensive and cheaper exports make the trade deficit worse (or at least a smaller trade surplus) Soon, the country's export sales volume began to increase steadily, because of relatively cheap prices At the same time, consumers in that country start to buy more domestically produced goods because they are relatively affordable in comparison to imported goods Over time, the trade balance between that country and the partner country is restored, even exceeding the previous devaluation period This is precisely because the devaluation of the national currency had an immediate negative impact because of the inevitable delay in meeting the growing demand for the country's products On the other hand, they also could use deflationary policies, these are policies aiming at reducing the growth of aggregate demand and reducing inflation They can include a tightening of fiscal policy or monetary policy; this will reduce aggregate demand 2.2.2 Monetary policy Firstly, they could tighten monetary policy, this involves increasing interest rates Higher interest rates will increase the cost of debt and mortgage repayments and leave people with less money to spend Therefore, this will reduce their consumption of imports, improving the current account Also, higher interest rates will cause a fall in aggregate demand and therefore reduce economic growth This will reduce inflation and help to make exports more competitive And lastly, deflationary policies will also put pressure on manufacturers to reduce costs, and this will lead to more competitive exports, and so exports may increase in the long run because of this effect However, in addition to monetary policy, the government can influence through fiscal policy For example, the government could increase income tax This would reduce consumer discretionary income and reduce spending on imports But this policy will conflict with other macroeconomic objectives - with lower aggregate demand (AD), growth is likely to fall causing higher unemployment And absolutely this is too risky to trade off 2.2.3 Supply side policies & Protectionism Supply side policies can improve the competitiveness of the economy and help make exports more attractive This can improve the current account position, but it may take considerable time to have an effect For example, if the government pursued a policy of privatisation and deregulation it may help to increase the efficiency of the economy because of the profit motive in the private sector This increased efficiency would translate into lower costs of production and more exports By contrast, the government could increased tariffs on imports or even impose quotas Both these measures would have the impact of reducing imports and therefore improve the current account 2.3 The status of current account in Vietnam from 2015 to 2020 T he status of current account in Vietnam from Q1/2015 up to Q3/2020 (in million USD) 10000 8368 8000 6261 6000 4300 4000 3499 691 479 -2000 -1341 3139 3018 2632 2242 2000 4840 4300 3934 1677 1244 1077 270 155 -616 -1169 -300 -323 Current Account Table Current account of Vietnam from Q1/2015 to Q3/2020 According to the table 2, from the first quarter of 2015 to the third quarter of 2020, Vietnam's current account fluctuated slightly, but it was generally an increasing trend over time Starting from a deficit of $ 1341 million in early 2015, the current account gradually increased again until the end of 2016, at approximately $ 3499 million in surplus However, due to the economic upheavals in the world, Vietnam's balance fell sharply in early 2017, even having a deficit of $ 1169 million in the middle of the year This is explained by the cuts in labor from industries and an increase in the consumer price index that makes domestic goods more expensive, leading to a loss of competitive advantage in international markets Then, the current account remained relatively stable in the next four quarters at over $ 3,000 million However, in the last quarters of 2018 and the first quarters of 2019, it declined significantly, ending with a deficit of about 300 million USD in the second quarter of 2019 After a long deficit, Vietnam boosting exports by the end of 2019, recording at $ 6261, $ 4840 and $ 3139 million in the next three quarters, respectively And finally, due to the impact of the Covid-19 pandemic, in the second quarter of 2020, Vietnam had to import from foreign countries because domestic production had not recovered promptly after the negative effects of the epidemic, for instance, the current account deficit is more than 300 million dollars However, after that, a positive signal appeared when in the third quarter of the same year, Vietnam's current account reached more than 8,000 million USD, showing a strong recovery of economic activity of Vietnam, overcoming difficulties and obstacles caused by the Covid-19 pandemic Conclusion In conclusion, the current account reflects the proportion of exports and imports in each country's balance of trade, and as I said above, developing countries are facing current account deficits There are many reasons for this situation, and countries need to come up with appropriate policies to stabilize the economy While the current deficit may imply that a country is spending beyond its budget, a current account deficit is not a disadvantage In fact, if a country can attract more financial flows (either short-term portfolio investment or long-term direct investment), then these flows on the financial account will enable the country to run a larger current account deficit Additionally, by having a good foundation and if the Covid-19 pandemic is under control in Vietnam as well as in the world, Vietnam's economy will recover by 2021 Covid-19 also shows a need for strong reforms In order to help recover the economy in the medium term, such as improving the business environment, promoting the digital economy, and improving the efficiency of public investment, these are the main issues that Vietnam needs to consider for rapid reform and stronger References International Financial Management, 12th Edition - Jeff Madura Investopedia: https://www.investopedia.com/ ... USD) 10000 8368 8000 6261 6000 4300 4000 3499 691 479 -2 000 -1 341 3139 3018 2632 2242 2000 4840 4300 3934 1677 1244 1077 270 155 -6 16 -1 169 -3 00 -3 23 Current Account Table Current account of Vietnam... disadvantage In fact, if a country can attract more financial flows (either short-term portfolio investment or long-term direct investment), then these flows on the financial account will enable... having a good foundation and if the Covid-19 pandemic is under control in Vietnam as well as in the world, Vietnam's economy will recover by 2021 Covid-19 also shows a need for strong reforms