Topic The management of exchange rate policy in Vietnam in recent years A Introduction Prior to the 1980s, Vietnam closely followed the model of a centrally planned economy (CPE) The failure of this system led to partial microeconomic reforms, yet within the framework of a CPE In the spring of 1989, Vietnam adopted a comprehensive reform package and the reforms implemented since then have fundamentally changed the economic management system in Vietnam toward a market oriented economy Some import.
Topic: The management of exchange rate policy in Vietnam in recent years A Introduction: Prior to the 1980s, Vietnam closely followed the model of a centrally planned economy (CPE) The failure of this system led to partial microeconomic reforms, yet within the framework of a CPE In the spring of 1989, Vietnam adopted a comprehensive reform package and the reforms implemented since then have fundamentally changed the economic management system in Vietnam toward a market-oriented economy Some important steps have been undertaken on the road to a more marketoriented financial system The SBVN has considered controlling the ER as an important macroeconomic instrument for ensuring low inflation and stability of the financial system, promoting exports, controlling imports, and enhancing economic growth B Context I Exchange rate regime in Vietnam and role of State Bank: Definition and Feature · A regulated floating exchange rate regime is one in which the exchange rate fluctuates according to the supply and demand relationship in the market and the central bank intervenes in the foreign exchange market to influence the exchange rate The central bank is not committed to maintaining a fixed exchange rate or a range of fluctuations around the central rate · A managed floating exchange rate regime is a compromise between a fixed exchange rate regime and a freely floating exchange rate regime · To maintain this regime, the central bank must also have a strong enough amount of foreign currency to intervene in the market when necessary and must determine the appropriate level of intervention, otherwise it will become a fixed exchange rate regime Roles of State bank (SBV) Unlike other countries that have modernized monetary policy, the Vietnamese economy still features characteristics of a centrally planned economy, where the central bank is an integral component of the State and therefore follows government guidelines when formulating monetary policy The State Bank of Vietnam features low central bank independence and accountability as public policy decisions are centralized, and the State Bank of Vietnam’s mandate is influenced by the government’s political goals The State Bank of Vietnam lacks both political independence and operational independence The tasks and powers of the State Bank of Vietnam, as elaborated upon in the Law on the State Bank of Vietnam (2010) include the following: · “To conduct operations for the purpose of currency stability; to assure the safety for banking operations and the systems of credit institutions; to assure the safety and effectiveness of the national payment system; and to contribute to accelerating socio-economic development along the socialist orientation.” · “To participate in the elaboration of national socioeconomic strategies and plans.” · “To perform the state management of foreign exchange, foreign exchange and gold trading activities.” · “To manage state foreign exchange reserves.” To implement the national monetary policy, the Governor of the State Bank of Vietnam is empowered to “decide on the use of tools for the implementation of the national monetary policy, including re-financing, interest rates, exchange rates, compulsory reserves, open-market operations and other tools and measures as prescribed by the Government.” To that end, the State Bank of Vietnam administers the exchange rate regime in Vietnam and announces exchange rates According to Vietnamese law, “exchange rates of Vietnam dong shall be determined on the basis of the foreign currency supply and demand in the state-regulated market.” State Bank of Vietnam Decision No 2730 (2015) provides that the State Bank of Vietnam will announce a central exchange rate between the VND and U.S dollar (USD), as well as the cross-exchange rate between the VND and certain other currencies The State Bank of Vietnam specifically announces a daily VND/USD central exchange rate on its website II Objectives of exchange rate policy in Vietnam: Vietnam is deviating from the phase of policy and growth compared to developed countries Vietnam is also different from China because there is little room for adaptive growth Trying to maintain stability in factors such as price ratio, interest rate and inflation will be the priority of operators to deal with external risks a OBJECTIVES: (Overall goals and tasks in 2022) - Operating monetary policy proactively, flexibly, closely coordinating with fiscal policy and other macroeconomic policies - Controlling inflation according to the 2022 target of about 4% on average, contributing to stabilizing the macroeconomy, supporting the recovery of economic growth, and promptly adapting to market developments at home and abroad - Implement synchronously appropriate solutions to contribute to stabilizing the foreign currency market, gold market, and supporting the management of monetary policy - To increase the State's foreign exchange reserves when market conditions are favorable and to convert capital sources into production and business activities b DIRECTION OF STATE BANK: Basically keeping the exchange rate stable, but considering developments in the world foreign exchange market (the volatility of strong foreign currencies, especially USD) to adjust when necessary Allowing the exchange rate to fluctuate within a certain range (up to ±5% sometimes, then down to ±3%, and from 2011 to now, ±1%) Every year, the State Bank makes a statement about the adjustment limit of the exchange rate for the year so that the market knows in advance The State Bank is ready to intervene whenever the free market has strong fluctuations First of all, by official statements about market stability After that, if the market still has strong fluctuations, then apply the operations of buying and selling USD to keep the exchange rate stable 5 If the exchange rate in the market continues to fluctuate strongly for a long time, the State Bank will make a move to adjust the exchange rate, usually with a small level of a few percent =>In the coming time, along with the process of modernizing the monetary policy framework, the State Bank is committed to continue to operate the exchange rate proactively, flexibly, in line with the development level of the foreign currency market and economic factors, ensuring stable and smooth operation of the foreign currency market, contributing to stabilizing the macro-economy, thereby alleviating concerns of the US Department of Finance III Management of exchange rate policy in Vietnam recent years: To adjust the exchange rate, the State Bank can adjust the supply and demand by buying or selling foreign currencies on the interbank foreign currency market This management mechanism is more flexible, and in line with international practices, contributing to enhanced integration into the world economic community * 2016 - 2020 period: Since 2016, the State Bank has started implementing a new exchange rate management method according to the central exchange rate mechanism, which fluctuates daily in close contact with market movements and the monetary policy goal is to ensure macroeconomic stability, strengthen confidence believe in VND, implement the Government's policy on antidollarization of the economy Flexible management of the central exchange rate in combination with buying and selling foreign currency interventions in accordance with market conditions; proactively communicating in various forms to orient and stabilize market sentiment when there are adverse pressures; closely coordinating with other monetary policy instruments - Vietnam – through the State Bank of Vietnam – tightly manages the value of the VND, particularly against the USD, and the State Bank of Vietnam intervenes in FX markets through reserves accumulation and decumulation to maintain the exchange rate that it sets - IMF data indicate that Vietnam’s foreign currency reserves rose from just under $49 billion at the end of 2017 to slightly more than $88 billion by September 2020 This considerable growth in Vietnam’s FX reserves is attributable primarily to the State Bank of Vietnam’s interventions in FX markets - The graph illustrates Vietnam’s estimated interventions since 2016 based on valuation- and earnings-adjusted monthly changes in reserves positions reported to the IMF Estimated purchases of FX in a particular month are shown as a positive number on the y axis; estimated sales of FX are shown as a negative number on the y axis As demonstrated in the graph below, Vietnam’s estimated interventions in FX markets since the beginning of 2019 have been heavily weighted towards purchases of FX Since the beginning of 2019, the majority of Vietnam’s FX purchases came during the second half of 2019, before the beginning of the COVID-19 pandemic - As illustrated in the graph above, Vietnam intervened largely in one direction at the outset of 2020 as well, purchasing FX reserves Net purchases of FX then declined in early-to mid 2020 as global financial conditions tightened amid the COVID-19 pandemic - IMF data further shows that Vietnam’s FX reserves rose to approximately $87.8 billion by August 2020 => The increase in national foreign exchange reserves can be considered as a preventive buffer for national financial security and macroeconomic stability The accumulation of international reserves can prevent net capital outflows and external debt repayment Moreover, holding international reserves helps monetary authorities control inflation in times of financial crisis However, on the other hand, mercantilist motives may also motivate the central bank to keep the exchange rate depreciation by increasing international reserves, thereby increasing international trade competitiveness and ultimately promoting exports Recently, Vietnam’s trade surplus has been increasing, particularly with the United States This led the US Treasury to find that Vietnam is a “currency manipulator” and giving an unfair advantage to the country’s exports That is, the Treasury argues that the Vietnamese dong has been held at “too low” a level to artificially boost Vietnam’s exports However, the real value of the dong has been stable against the dollar since 2015, and in 2015, Vietnam had an overall trade deficit Thanks to the stable macro-economy along with proactive and flexible management measures, the foreign currency market in recent years has been generally stable, the foreign currency liquidity is smooth, the legal demand for foreign currency of enterprises and public is fully and timely responded The VND/USD exchange rate is basically stable despite strong fluctuations in the world currency market, which is a premise for people to sharply reduce their foreign currency holdings, thereby converting foreign currency resources into VND for economic development, consistent with the anti-dollarization policy The State Bank of Vietnam has managed the exchange rate very flexibly and effectively during the period from the beginning of 2016 up to now The success and efficiency in exchange rate management of the State Bank of Vietnam can be recognized in the proactive and flexible position, ensuring the stability of the market positively; while minimizing the cost of direct intervention through foreign currency supply and demand and continuously increasing the size of Vietnam's foreign exchange reserves * 2021 Vietnam and the US have made positive progress in the issue of "currency manipulation", the SBV has stopped buying foreign currency forwards and returned to using spot buying tools to have immediate impact on the money market The factors affecting the exchange rate in 2021 will mainly come from the international market, of which the two main factors are the slowing down of US economic growth due to the impact of the Covid-19 pandemic and the Federal Reserve's The US (Fed) still kept the loose monetary policy to stimulate the economy affected by the pandemic, so the dollar only increased slightly by 0.1% compared to the beginning of the year Since the beginning of 2021, the State Bank has adjusted the buying price in USD many times The downward adjustment of the buying price is an inevitable consequence in the context that the central exchange rate as well as the selling price of the SBV and the USD price in the interbank market decreased compared to the beginning of the year Besides, the VND is still being pegged to the USD and when China's currency depreciates sharply, Vietnam's trade balance will be severely affected due to the influx of cheap Chinese goods into the market With the exchange rate adjustment, it will be beneficial to import raw materials from China (this is Vietnam's largest source of imports) and then export to the US market During this period, the State Bank still actively bought foreign currencies to increase foreign exchange reserves From a crisis control perspective, increasing foreign exchange hoarding through the purchase of USD - the dominant currency in Vietnam's international reserves and payments - is a typical crisis prevention move in the context of a financial crisis => Proving that the SBV's exchange rate management policy is completely correct and flexible, on December 3, 2021, the US Department of Finance announced the "Report on foreign exchange and macroeconomic policies of foreign partners" key trade of the United States”, in which Vietnam continues to meet the criteria to determine not to manipulate currency IV Comparison between exchange rate policy of VietNam and Singapore: a.Targets on managing exchange rate *Singapore The exchange rate represents an ideal intermediate target of the general economy for several reasons It makes sense in the context of Singapore being a small and open economy Singapore has no natural resources, and is almost completely dependent on imports for necessities such as food and energy Singapore has to export to pay for their imports The economy is thus extremely open to trade, which totalled more than 300% of GDP in 2011 2 The economy’s openness means that the exchange rate bears a stable and predictable relationship to price stability as the final target of policy over the medium-term The exchange rate is relatively controllable through direct intervention in the foreign exchange markets An exchangerate-based monetary policy thus allows the government to retain greater control over macroeconomic outcomes such as GDP and CPI inflation, and thus over the ultimate target of price stability a.Targets on managing exchange rate *Vietnam Regarding the goals of the SBV, the SBV Law states that “the operations of the State Bank shall aim at the stabilization of the value of the currency, contribute to securing the safety of banking activities and the system of credit institutions, facilitate the socio-economic development with the socialist orientation”, “Stabilization of the value of the currency” is interpreted here as stabilization of the exchange rate, as the stabilization of the currency is mentioned as a separate goal, together with control of the inflation rate In 2004 and 2005, the Governor of the SBV announced exchange rate targets suggesting that the SBV uses the exchange rate as a nominal anchor For the time being, targets are formulated as annual targets, and the SBV does not appear to have made commitments to continue with the peg in the future In fact, the SBV stresses in its 2004 Annual Report the flexibility of its exchange rate policy b Impact on the economy *Singapore Changes in the exchange rate are transmitted to the economy in the following ways 1.The exchange rate acts directly to reduce imported inflationary pressures Given that Singapore imports most of what it consumes, domestic prices are very sensitive to world prices The exchange rate thus provides an important buffer against external price pressures at the borders, especially in periods of escalating global commodity prices, thereby contributing significantly to the objective of medium-term price stability • Second, the exchange rate acts indirectly to tackle domestic sources of inflation A stronger currency moderates the external demand for our goods and services, and as the demand for domestic factor inputs eases, factor incomes rise more modestly This in turn reduces the domestic demand for nontradable goods and services, and puts downward pressure on prices b Impact on the economy *Vietnam Recent developments in Vietnam suggest that the expectations of a stable exchange rate have contributed to a strong increase in borrowing in foreign currency in Vietnam In 2019, lending in foreign currency increased by 60%, compared to 38% of loans in domestic currency While lower interest rates on foreign currency loans explain part of the increase in foreign currency lending, the SBV’s policy of pegging the exchange rate has most likely also contributed to the increase The economy has a greater ability to adjust to external shocks and to avoid costly adjustment processes with a flexible rather than a fixed exchange rate This buffer function of flexible exchange rates would be an important advantage for Vietnam, which as a small open economy is exposed to external shocks and increasing external competition c.Features *Singapore There are three main features of the exchange rate system in Singapore, which can be summarized as the basket, band and crawl (BBC) system The Singapore dollar is managed against a basket of currencies of the major trading partners (also known as the Singapore dollar nominal effective exchange rate or S$NEER) Hence, its movements are less volatile than if it were pegged to an individual currency This feature also reflects Singapore’s diverse trading pattern, with both the G3 and regional markets representing important partners in our merchandise and services trade MAS (Monetary Auditory of Singapore) operates a regulated floating regime for the Singapore dollar The trade-weighted exchange rate is allowed to fluctuate within a policy band, which provides a mechanism to accommodate short-term fluctuations in the foreign exchange markets and permits flexibility in managing the exchange rate From an operational perspective, the band also minimizes the need for constant foreign exchange interventions, in contrast to a system based on a hard currency peg • Third, the slope of the exchange rate policy band is reviewed regularly to ensure that it remains consistent with the economy’s underlying fundamentals Together, these features have provided an anchor of stability for Singapore’s highly open economy, and the effectiveness of the framework has underpinned confidence in the Singapore dollar c.Features *Vietnam The regime exchange rate of Vietnam dong is a regulated floating exchange rate on the basis of the currency metal of the country with trading, borrowing, debt repayment and investment system in line with the macroeconomic targets in certain periods The exchange rate of Vietnam dong is formed on the basis of the supply of foreign currency in the market with the State reserves The SBV adjusts the exchange rate through the use of monetary policy tools and implements a feasible approach in the foreign currency market Additionally, the SBV will be able to enter the market with a stable exchange rate, inflation is in control, and in line with the general objectives of monetary policy In fact, the VND exchange rate in 2020 is relatively stable against the USD Intervention of SBV is consistent with the field of principles, with international information and does not have the scope of "currency manipulation" V Achievements and shortcomings of exchange rate policy of Vietnam: Achievements: While countries worldwide devalued or appreciated their currencies sharply, the SBV had kept the local currency relatively stable, with the management policy based on the overall balance of the economy such as import and export, public debt, balance of payments and current accounts Reports from the SBV showed that currently, the foreign exchange rate in the domestic market is relatively stable, increasing and decreasing slightly in comparison with the large fluctuations of currencies around the world According to the nine-month economic report by the General Statistics Office, despite big economic changes in many countries, including the US Federal Reserve (Fed)’s decision to cut interest rates, the USD/VNĐ exchange rate did not fluctuate significantly thanks to the SBV’s flexible exchange rate management policy The domestic market liquidity has been ensured while foreign currency transactions have been conducted promptly and smoothly It has also helped the central bank net buy dollars to build up the nation’s foreign reserves It would also combine other monetary policy instruments and take flexible market interventions to stabilize the foreign exchange market, which would contribute to stabilizing the macro-economy and supporting reasonable economic growth and build up the nation’s foreign reserves when there are favorable conditions Shortcomings: Regarding the exchange rate mechanism for Vietnam during this period, it has been suggested that Vietnam should announce the exchange rate based on a basket of currencies rather than a single currency The mechanism that relies on so many currencies will reduce the risk of the VND relying on only one currency, the USD.The rationality of this argument requires more in-depth study; however, in terms of foreign exchange, it shows that over the years, Vietnam's trade as well as foreign exchange reserves have been based on USD rather than other currencies Specifically, with the old exchange rate mechanism, if the SBV has foreign exchange intervention (buying / selling foreign currencies), without neutralization intervention (using SBV bonds), it will definitely affect the money supply (up / down) and as such, monetary policy is affected.And conversely, when there is foreign exchange intervention, if the SBV wants to control the money supply, control inflation, the SBV will cost costs related to the issuance of bills (neutral intervention, sucking the local currency back in case of buying foreign currency to maintain the exchange rate at the target level) ... macro-economy, thereby alleviating concerns of the US Department of Finance III Management of exchange rate policy in Vietnam recent years: To adjust the exchange rate, the State Bank can adjust the supply... prescribed by the Government.” To that end, the State Bank of Vietnam administers the exchange rate regime in Vietnam and announces exchange rates According to Vietnamese law, ? ?exchange rates of Vietnam. .. stabilization of the exchange rate, as the stabilization of the currency is mentioned as a separate goal, together with control of the inflation rate In 2004 and 2005, the Governor of the SBV announced exchange