IMPACT OF EXCHANGE RATE POLICY ON VIETNAM TRADE BALANCE IN 1999 2018 PERIOD

FOREIGN TRADE UNIVERSITY FACULTY OF ENGLISH FOR SPECIFIC PURPOSES -*** INTERNATIONAL BUSINESS ENGLISH THESIS IMPACT OF EXCHANGE RATE POLICY ON VIETNAM TRADE BALANCE IN 1999-2018 PERIOD Topic number: Group: 13 Class: TAN432(1-1920).3 _LT Lecturer: MSc Phan Kim Thoa Hanoi, September 2019 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF MEMBERS Name Student code Presentation Lê Khánh Linh 1611110335 Part 1.1 Nguyễn Thị Nguyệt Ánh 1611110066 Part 1.2, 1.3 Trần Hoàng Dũng 1611110117 Part 2.1 Trần Minh Thu (Leader) 1611110558 Part 2.2, 2.3 Nguyễn Thị Thu Hà 1611110165 Chapter LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table of Contents Table of Contents Abstract Introduction Chapter General theory 1.1 Exchange rate 1.1.1 Definition of exchange rate 1.1.2 Classification of exchange rate 1.1.3 Main factors influencing exchange rate 1.2 Exchange rate policy 1.2.1 Definition of exchange rate policy 1.2.2 Classification of exchange rate policy 1.3 Trade balance 1.3.1 Definition 1.3.2 The relationship between exchange rate and balance of trade 10 Chapter Impacts of exchange rate policy on Vietnam trade balance since 1991 - today 13 2.1 Exchange rate policy from 1999 – 2015 and its effect on Vietnam trade balance 13 2.1.1 The period from 1999 to 2007 13 2.1.2 The period from 2008 to 2010 14 2.1.3 The period from 2011 to 2015 16 2.2 Exchange rate policy from 2016-2018 and its effect on Vietnam trade balance 19 2.3 Evaluation of exchange rate policy in 1999-2018 period 21 Chapter Recommendations 23 3.1 Effects of passed exchange rate policies and future market trend 23 3.2 Approaches to an appropriate exchange rate policy 24 Summary 26 References 27 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract This paper investigates the impact of the exchange rate policy on trade balance in Vietnam from 1999 to 2018 The paper compares the exchange rate policies over the period and the results show that exchange rate in different period affects differently on the export and import volume The paper shows that the implementation of central exchange rate has positive impact on Vietnam trade balance after the long-lasting period of trade deficit The paper concludes by suggesting some policy implications in managing the exchange rate system and promoting exports of Vietnam LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Introduction Exchange rate has played a very important role in international trade, especially in such a great open world economy Many countries pursue a development strategy using exchange rate as a main intervention, which is called the export-led growth model Vietnam is one among the countries pursuing such strategy The exports sector has experienced a structural change due to greater integration into the world economy Although globalization and trade liberalization has been beneficial for Vietnam, it also increases the exposure to external shocks Besides, one of main duties of exchange rate tool facilitating trade balance, stays remained despite the fact that the exchange rate regime has been adjusted many times during the last 20 years Notably, when the authority adjusts the exchange rate, they will have to face other unexpected impacts, given that there has existed twin deficits for a long time – trade balance deficit and budget deficit This paper aims to deal with the question of effectiveness of exchange rate policy on trade balance, the time period chosen is from 1999 to 2018 The paper is organized as followed: In the first chapter, we will give some rudimentary knowledge of the exchange rate and foreign exchange policy Chapter will take a closer look into the impacts of exchange rate policy on Vietnam trade balance from 1999 to 2018, and we conclude by putting forward some possible recommendations to enhance the effectiveness of foreign exchange market in the last chapter The purpose of this study is to help address Vietnam’s exchange rate policy since 1999 and its consequences for trade balance of Vietnam In pursuing these objectives, this study mainly employs analytical review and synthesis method of analysis, to provide an analysis of different but inter-related aspects of exchange rate policy and trade balance of Vietnam LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter General theory 1.1 Exchange rate 1.1.1 Definition of exchange rate An exchange rate is the rate at which one currency will be exchanged for another It is also regarded as the value of one country’s currency in relation to another currency For example, an interbank exchange rate of 23.150 Vietnam dong to the United States dollar means that VND23.150 will be exchanged for each US$1 or that US$1 will be exchanged for each VND23.150 In this case it is said that the price of a dollar in relation to Vietnam dong is VND23.150, or equivalently that the price of a Vietnam dong in relation to dollars is $1/23.150 1.1.2 Classification of exchange rate Flexible or Floating exchange rate systems: are ones whereby the rate of a currency is determined by the market forces of demand and supply Unlike the fixed exchange rate they not derive their value from any underlying Some economists argue that a floating system is more preferable since it absorbs the shocks of a global crisis and automatically adjusts to arrive at an equilibrium A forward rate: is a one that is determined as per the terms of a forward contract It stipulates the purchase or sale of a foreign currency at a predetermined rate at some date in the future A forward contract is generally entered into by exporters and importers who are exposed to Forex fluctuations The forward rate is quoted at a premium or discount to the spot price The spot rate: is the current exchange rate for any currency It is the rate at which your currency shall be converted if you decided to execute a foreign transaction “right now” They represent the day-to-day exchange rate and vary by a few basis points every day LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Dual exchange rate: In this type of system, the currency rate is maintained separately by two values-one rates applicable for the foreign transactions and another for the domestic transactions Such systems are normally adopted by countries who are transitioning from one system to another This ensures a smooth changeover without causing much disruption to the economy 1.1.3 Main factors influencing exchange rate Inflation Rates: Changes in market inflation cause changes in currency exchange rates A country with a lower inflation rate than another's will see an appreciation in the value of its currency The prices of goods and services increase at a slower rate where the inflation is low A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates Interest Rates: Changes in interest rate affect currency value and dollar exchange rate Forex rates, interest rates, and inflation are all correlated Increases in interest rates cause a country's currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates Country’s Current Account / Balance of Payments: A country’s current account reflects balance of trade and earnings on foreign investment It consists of total number of transactions including its exports, imports, debt, etc A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation Balance of payments fluctuates exchange rate of its domestic currency Government Debt: Government debt is public debt or national debt owned by the central government A country with government debt is less likely to acquire foreign capital, leading to inflation Foreign investors will sell their bonds in the open market if LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com the market predicts government debt within a certain country As a result, a decrease in the value of its exchange rate will follow Terms of Trade: Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to import prices A country's terms of trade improves if its exports prices rise at a greater rate than its imports prices This results in higher revenue, which causes a higher demand for the country's currency and an increase in its currency's value This results in an appreciation of exchange rate Political Stability & Performance: A country's political state and economic performance can affect its currency strength A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency A country with sound financial and trade policy does not give any room for uncertainty in value of its currency But, a country prone to political confusions may see a depreciation in exchange rates Recession: When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign capital As a result, its currency weakens in comparison to that of other countries, therefore lowering the exchange rate Speculation: If a country's currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near future As a result, the value of the currency will rise due to the increase in demand With this increase in currency value comes a rise in the exchange rate as well 1.2 Exchange rate policy 1.2.1 Definition of exchange rate policy The exchange rate policy refers to the manner in which a country manages its currency in respect to foreign currencies and the foreign exchange market The exchange rate is the rate at which the domestic currency can be converted into a foreign currency LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com In turn, this affects the costs of domestic production and finance relative to foreign products and capital In formulating exchange rate policy, a balance must be found between several differing, and sometimes conflicting, objectives In particular, the use of the exchange rate to promote the competitiveness of domestically-produced goods must be considered alongside the implication for the international purchasing power of the currency and, in particular, the impact of changes in the exchange rate on domestic inflation 1.2.2 Classification of exchange rate policy There are two major regime types: One is fixed (or pegged) exchange rate regimes The other one is floating (or flexible) exchange rate regimes  Floating rate A floating (or flexible) rate is a system in which currencies have no specific par value; value is normally determined by supply and demand Central bank are not required to intervene, but they often to avoid wild fluctuations A floating (or flexible) rate is determined by the open market through supply and demand on global currency markets Therefore, if the demand for the currency is high, the value will increase If demand is low, this will drive that currency price lower Of course, several technical and fundamental factors will determine what people perceive is a fair exchange rate and alter their supply and demand accordingly A floating (or flexible) exchange rate policy is one in which a country's exchange rate fluctuates in a wider range and the country's monetary authority makes no attempt to fix it against any base currency A movement in the exchange is either an appreciation or depreciation There are two types of floating rate: LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Free float: Free float, also known as clean float, signifies that a currency's value is allowed to fluctuate in response to foreign-exchange market mechanisms without government intervention Managed float (or dirty float): Managed float, also known as dirty float, involves government intervention in the market exchange rate in different forms and degrees, in an attempt to make the exchange rate change in a direction conducive to the economic development of the country, especially during an extreme appreciation or depreciation A monetary authority may, for example, allow the exchange rate to float freely between an upper and lower bound, a price "ceiling" and "floor."  Fixed rate A fixed exchange rate, sometimes called a pegged exchange rate, is one in which a monetary authority pegs its currency's exchange rate to another currency, a basket of other currencies or to another measure of value (such as gold), and may allow the rate to fluctuate within a narrow range To maintain the exchange rate within that range, a country's monetary authority usually needs to intervenes in the foreign exchange market A movement in the peg rate is called either revaluationor devaluation A fixed (or pegged) rate is determined by the government through its central bank The rate is set against another major world currency (such as the U.S dollar, euro, or yen) To maintain its exchange rate, the government will buy and sell its own currency against the currency to which it is pegged Some countries that choose to peg their currencies to the U.S dollar include China and Saudi Arabia (the currency is tied to another currency, mostly reserve currencies such as the U.S dollar or the euro or the British Pound Sterling or a basket of currencies) 1.3 Trade balance 1.3.1 Definition LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter Impacts of exchange rate policy on Vietnam trade balance since 1991 - today 2.1 Exchange rate policy from 1999 – 2015 and its effect on Vietnam trade balance From 26/02/1999, the central bank operated more flexible exchange rate in accordance with the market mechanism The central bank took the average exchange rate of the trading session on the latest forex market as interbank rates 2.1.1 The period from 1999 to 2007 This period was marked by the unified circulation of EUR in all EU countries and becoming a serious competitor of USD In this context, Vietnam has applied an operating exchange rate anchoring mechanism, and the Vietnam exchange rate is tied to a "currency basket" in which the proportion of EUR is raised During this period, the exchange rate band was extended from +/- 0.1% to +/- 0.25% for spot operations and from +/- 0.4% to +/- 0.5 % for term service as of July 1, 2002 The local currency exchange rate was squeezed higher than the real value, causing the Vietnamese dong to be valued by 10-20% higher than the USD Vietnam's exports in this period were difficult due to not competing with Chinese goods Export turnover increased slowly (at least more than 3% in 2001), and the export growth rate was always smaller than the import growth rate, leading to a high trade deficit: to October 2003, the Trade deficit was 4.55 billion USD In addition, the high valuation of Vietnam dong has also led to a series of imports, including those that can be produced domestically because the import prices are cheaper than domestic goods prices In summary, changes in exchange rate and trade balance of Vietnam during 19992007 show that the impact of exchange rates on the trade balance is relatively clear, the 13 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com fluctuations of exchange rates and the trade balance tend to sticking closely: the exchange rate tended to increase, while the trade balance at the beginning tended to run a deficit but gradually improved However, during this period, along with the process of international economic integration, Vietnam's import and export activities improved markedly, both exports and imports increased sharply, contributing significantly to process of national construction and renovation However, in the name of Vietnam, imposing a regulated exchange rate mechanism, but in fact the Vietnam dong was rigidly anchored, causing losses to Vietnam's trade balance 2.1.2 The period from 2008 to 2010 On November 7, 2006, Vietnam was admitted to the World Trade Organization (WTO) For our country, this event has a special meaning This is the result of the renovation process aimed at building a socialist market economy and international economic integration Facing these opportunities and challenges, choosing the right and appropriate steps in the exchange rate management mechanism is the concern of policy makers During this period, the government continued to carry out the exchange rate policy in the direction of encouraging export and controlling imports However, in the context of USD depreciating against strong foreign currencies and large capital flows pouring into Vietnam further complicates the effort to prevent VND's appreciation Compared to the end of 2007, the exchange rate of USD / VND in 2008 has increased by 9%, far exceeding the change of around 1% in recent years, while the US dollar still accounts for the dominant share in international payment (about 70%) %) This remarkable increase has pushed up import costs, production and business costs of industries with large inputs from imported raw materials, and the cost of foreign currency debt increased This is also a prominent year when in the financial statements of many businesses, the cost of exchange rates increased sharply 14 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Unpredictable fluctuations of the exchange rate are also reflected in the opposite in the first half of 2008 (sharply reduced in the first months of the year, surging immediately thereafter), causing disturbance to business and production plans of many enterprises In the first five months of 2008, the trade deficit was too high (14.4 billion USD), higher than the trade deficit of 2007 (14 billion USD) In the first half of 2008, rising inflation and trade deficit led many people and businesses to transfer assets from VND to USD The exchange rate on the free market sometimes reached 19,000 VND / USD, even 20,000 VND, while the USD price in commercial banks was still in the range of 1600017000 VND In fact, some enterprises that imported USD loans from banks at the beginning of the month to import raw materials were charged an exchange rate of VND 16243 / USD exchange rates reduce businesses gain interest Meanwhile, there are export enterprises earning USD 100,000, if they collect export money in August 2007, they will be transferred to VND at an exchange rate of VND 16245 / USD, but exported at January 2008 then only 15599 VND / USD, businesses will lose 26 million VND With the strong fluctuations of the exchange rate 2008 has greatly affected the economy, first of all import-export activities 2009 can be considered as a "currency" year in Vietnam The exchange rate of USD / VND increased sharply, the trade deficit was high, inflation faced pressure to increase again in 2010, the local scarcity of USD, the fever of gold price, and bank interest rates hit the ceiling The official exchange rate between USD and VND in 2009 has undergone adjustments, once in March (+ 2%) due to an increase in trading band from 3% to 5% and the last one was in November ( + 3.4%) Although after each adjustment, the official exchange rate hit the ceiling, the unofficial market rate (free market rate) is always outside the permitted range of the State Bank In fact, this has been happening since the beginning of the year, showing that the forex market is always tense 15 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com By 2010, the State Bank decided to raise the exchange rate between USD / VND by 2.1% from 18,544 to 18,932, with the amplitude unchanged at +/- 3%, applied from August 18 / 2010 With this expansion, the ceiling USD / VND exchange rate will increase to 19500 This is the second adjustment in 2010 and the third since November 25, 2009 State interbank rates Although the USD / VND exchange rate is still rising, Vietnam still has a large trade deficit Although, in theory, an increase in the USD / VND exchange rate (USD appreciates and the VND depreciates), it will boost export activities and restrict imports But in fact, when the USD / VND exchange rate increases, not only does exports increase, but imports also increase, notably the increase of imports is stronger than that of exports, meaning that the trade balance is still in deficit This is because in Vietnam there is a high reliance on exports and imports Because of the heavy reliance on imports and exports, the increase in the exchange rate increases the increase in imports as well as the increase in exports, which is why the trade balance is still in deficit Although exports increased when the VND depreciated 2.1.3 The period from 2011 to 2015 Entering 2011, was a relatively successful year of foreign exchange management policy with relatively stable exchange rate, the domestic gold price has continued to increase, but has closely followed the world gold price Right from the beginning of 2011, the State Bank of Vietnam (SBV) strongly adjusted the interbank average exchange rate with the Decision No 230/2011 / QD-NHNN dated February 11, 2011: USD / VND exchange rate increased (decreased VND price) 9.3% from 18932 to 20693 VND / USD; The trading band decreased from +/- 3% to +/- 1% The new exchange rate reflects more closely the supply and demand of foreign currencies in the foreign exchange market As a result, the effective exchange rate of REER is close to the original 16 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com axis of 100% and the free market rate decreases, the difference narrows gradually from 1500VND / 1USD at the beginning of the year to 500VND / 1USD in the first week of March / 2011 As a result, the trade balance in 2011 was significantly improved compared to 2010, the trade balance from the deficit of USD 12,602 million decreased to USD 9,844 million Although the world economy in 2012 continued to develop complicatedly, the global financial market still carries risks due to the unresolved Eurozone public debt crisis, many banks in the region Europe has been downgraded in credit, Vietnam economy is facing the risk of slowing economic growth, production and business activities of enterprises face many difficulties but basically, market movements The domestic and foreign exchange markets were not volatile The exchange rate has remained stable, after a period of strong adjustment a few years ago, even a sharp adjustment in early 2011 Remittances increased sharply (up to billion USD in months and the whole year about 11- 12 billion USD), creating favorable conditions for the SBV to buy large quantities of foreign currencies On the basis of exchange rate stability, Vietnam has also increased its foreign currency reserves in a stable way: foreign currency reserves in 2012 reached 23 billion USD, reaching the highest level in the past three years Export is also growing strongly In the first months of 2012, the trade deficit of the whole country can be said to be very low, there are a few months Vietnam has balanced the trade balance Typically, in consecutive months and 7, Vietnam had a trade surplus (trade surplus in June was 360 million USD, in July was 579 million USD) By the end of 2012, Vietnam had a trade surplus of US $ 749 million In 2013, on the basis of following macro-economic developments, the SBV continued to commit to keep exchange rate fluctuations around 2-3% for the whole year To fulfill this commitment, exchange rate management will continue to be flexibly implemented in conjunction with the SBV's trading activities In accordance with the interest rate situation, to maintain a stable foreign exchange market, on June 28, 2013, 17 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com the State Bank adjusted the average interbank exchange rate from 20828 VND / USD to increase 1% to 21036 VND / USD; simultaneously implementing a series of other support solutions, including the regulation of maximum interest rates applicable to demand deposits and terms of less than months with a ceiling of 7% / year; adjust the maximum interest rate for USD deposits of organizations from 2% / year to 0.25% / year, individuals from 2% / year to 1.25% / year at credit institutions to support to maintain the profit gap between holding VND and USD to ensure that the exchange rate adjustment does not cause changes in the market As a result, the exchange rate and foreign exchange market in 2013 remained stable, the SBV continued to buy foreign currencies to increase the State's foreign exchange reserves As a result, Vietnam's trade balance in 2013 continued to maintain a surplus of 2012, estimated that the trade balance rose to USD 900 million The trade balance shifted to trade surplus not only reflected the transformation of Vietnam's position in trade relations with foreign countries but also contributed significantly to improving the overall balance of payments and increasing the ability of foreign reserves foreign exchange rate, contributing to stabilizing the exchange rate between foreign currencies and VND The trade surplus also means that the export of goods has increased, in the context of the domestic economy is still difficult, the market has not prospered, the proportion of inventories of enterprises is still quite high This is really a good sign However, the assessment from another perspective that the trade surplus achieved in the current context is probably still due to the difficult economy, demand for investment in production, business of enterprises and consumption of the market limiting the demand for imported raw materials, machinery and equipment for production and consumer goods decreased 18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table 1: Vietnam balance trade from 1997 to 2016 (Source: General Statistics Office of Vietnam) 2.2 Exchange rate policy from 2016-2018 and its effect on Vietnam trade balance On December 31, 2015, the SBV issued Decision No 2730 announcing a central exchange rate between the VND and the USD, and cross exchange rates with the eight strong currencies including the USD, the Euro, the Yuan, the Japanese Yen, the Singapore Dollar, the South Korean Won, the Thai Baht, and the Taiwan Dollar Together with the fluctuations of the world financial markets, diffificulty to predict of the major economies like the US and China, Vietnam economy itseft revealed many issues like deficit trade balance, high inflation,etc If Vietnam does not change the operational mechanism of the exchange rate, the foreign exchange market will be often in tension As a result, the central bank will have difficultied in the implementation of monetary policy to control inflation and ensure liquidity for the entire credit system in the country 19 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Therefore, from 01/04/2016, instead of using the interbank average rate as previously, SBV announced the central rate every day with amplitude +/- 3% in accordance with the change of the domestical and international market The announcement of the central rate was considered the next step in order to improve the position of Vietnam dong, stabilize exchange rate and foreign exchange market, contribute to macroeconomic stability, support manufacturing and business of enterprises In addition, central rate mechanism is also deemed to a positive factor attracting capital foreign investment in Vietnam thanks to its ability to easily converse between foreign currencies and VND It is obvious that the announcement of central rate by the SBV had a positive impact on Vietnam trade balance Both value of export and import increased dramatically It showed the fact that before implementation of new exchange rate policy, there was a deficit of $ 3.6 billion in the trade balance of Vietnam in 2015 A year after the central rate was public, the Vietnam balance trade was in surplus of $ 1,8 billion, in contrast to excess of imports over exports in 2015 In the next two year, the trade balance was constantly surplus Especially, trade balance surplus in Vietnam in 2018 is $ 6.8 billion, nearly times higher than it in 2016 20 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table 2: Export, Import and balance trade of Vietnam in 2014-2018 period (Source: General Department of Vietnam Customs) $ 6.8 billion – the record number of Vietnam on trade surplus in 2018 launched by the General Statistics Office is a meaningful outcome for Vietnam's economy in the context that our country had just gone through a period of prolonged trade deficits 2.3 Evaluation of exchange rate policy in 1999-2018 period The exchange rate mechanism from 1999 to 2015 based on averaging of the previous day’s interbank exchange In general, that was suitable with the prevailing condition It helped control inflation, stabilize the macro-economy and increase financial capacity during this period However, this machnism seems to be imperfect since it is merely a technical procedure without analytical linkage with economic fundamentals Since exchange rate policy and operational rules are not defined in the terms of economic fundamentals, it is hard to know the policy intention of the SBV Without an effective criterion, it is also difficult to evaluate whether or not the current level of VND is appropriate And the fact that Vietnam had to go through a long-lasting period of trade deficits, constantly from 2000-2015 21 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Because of these factors, the SBV had to consider changing the exchange rate regime From the beginning of 2016, the SBV will announce a central exchange rate every day for VND/USD Besides announcing the central rate daily, each week the SBV will calculate the cross exchange rate between the VND and the eight other currencies This is an important movement in the process fighting dollarization and increasing the position of the VND in international markets, stabilizing the foreign currency market The announcement of central rate by the SBV put a positive impact on Vietnam trade balance, turning deficit of trade balance into surplus from 2016 Indeed, after the central rate was implemented, the Vietnam balance trade was in surplus of $ 1,8 billion in 2016 In the next two year, the trade balance was constantly surplus, respectively $2,11 billion and $6,8 billion, which becames the positive signal for the economy of Vietnam 22 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter Recommendations 3.1 Effects of passed exchange rate policies and future market trend Since the US Federal Reserve has adjusted interest rates, the domestic foreign exchange market has been constantly fluctuating with the exchange rate between Vietnam dong and USD being adjusted to the ceiling by many banks This unwanted exchange rate movement takes place globally Due to the large openness of the Vietnamese economy, it will suffer significant impacts From an economic perspective, exchange rate fluctuations will naturally affect many sectors of the economy, directly affecting production, business, export and import activities of Vietnamese enterprises For exporters, the exchange rate increases are beneficial when we sell goods and collect foreign currencies However, the increase in exchange rate will also cause the rise of raw material prices (mainly imported by businesses), and the competitiveness and profitability of enterprises For importers and domestic businesses, the increase in exchange rate will affect prices of products and services that must be imported, which is not conducive to controlling inflation under the goals assigned by the National Assembly Psychologically, many people are afraid that the rising USD exchange rate may cause people to withdraw VND to buy USD to save However, according to some financial experts, this concern is unfounded, because the savings interest rate in USD is still 0% today, while the interest rate in dong deposits is 7% then saving in VND is still more attractive Given that context, which direction should Vietnam's exchange rate management policy be? First and foremost, in the past years, it is significant that the State Bank of Vietnam's exchange rate management policy has been on the right track 23 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Keeping the exchange rate stable for a long time not only stabilizes prices, facilitates the fight against inflation, but also stabilizes the psychology of investors, helping them feel secure in investing and developing real estate activities business According to financial experts, the use of central exchange rate tools is an appropriate choice However, every policy has two sides, in the context that the exchange rate is accelerating at the present time, if we keep on holding a "pegging" exchange rate position, that stability will be only a formality In fact, the central exchange rate has been increasing in recent days, although the increase is not large, but obviously still has to follow the movement trend of the international monetary market The objective and subjective factors show that it is time for the exchange rate management policy to be more flexible, allowing the central exchange rate to fluctuate in the general direction, with the amplitude suggested by many experts to be no more than 3% Only thus can the positive impact on our country's economy depend heavily on exports 3.2 Approaches to an appropriate exchange rate policy From the current market situation, our group proposes a number of policy recommendations to help the national central bank stabilize the exchange rate and foreign exchange market as follows: Firstly, it is important to continue to be consistent with the goal of stabilizing the macro-economy, promoting production and restructuring the economy, with emphasis on curbing inflation The national central bank also needs to regulate monetary policy in a cautious easing Second, we should keep following with measures to limit the dollarization, the goldenization of the economy At the same time, special attention should be paid to the dollarization of cash in the economy, since it can reduce the size of the statistical errors in the international balance of payments 24 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Thirdly, thoroughly implement the policy of transferring all from foreign currency borrowing relations to foreign currency trading relations In fact, the promulgation of Circular No 24 in 2015 advocating foreign currency lending to enterprises with foreign currency revenue is an appropriate choice in that context, aiming to achieve such goals as: contributing to promoting credit growth for the economy, at the same time helping businesses access cheaper capital compared to VND loans, lowering product costs, increasing competitiveness However, this has partly put pressure on the foreign exchange market when loans in foreign currencies are due In principle, the national central bank will only lend to foreign-currency-earning enterprises, but the balance of foreign currency inflows in and out at certain times (at the end of the year) can also stress the market Therefore, the national central bank needs to closely follow developments in foreign currency credit growth in order to have timely interventions to the economy Fourthly, the SBV needs to send more powerful messages, consistently controlling the stability of exchange rates and the foreign exchange market At the same time, it is necessary to strengthen the application of econometric models to be able to predict more quickly the sharp fluctuations in the foreign exchange market and take timely measures 25 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Summary It can be seen that in the period from 1999 up to now, Vietnam's exchange rate management policy has changed greatly Since rigid policies have caused many adverse shocks to the market, Vietnam has changed to be more open after 1999 In 1999-2015 period, the exchange rate mechanism based on averaging of the previous day’s interbank exchange It could help to control inflation but Vietnam had to go through a long-lasting period of trade deficits After the SBV announced a central exchange rate every day since 2016, it has impacted positively on Vietnam trade balance It can be seen that the exchange rate has a strong and profound influence on foreign economic relations, the balance of payments of economic growth, inflation and unemployment Understanding the mechanism of operation as well as the role of exchange rates will help provide many solutions to stabilize the economy Vietnam is in the process of deep integration into the international economy, identifying the effects of exchange rates on Vietnam's trade balance is necessary in the context of tariff and quota barriers to gradually dismantled the trade protection of In short, in addition to the efforts of members in the market, establishing a satisfactory exchange rate, stimulating import and export, and supporting economic development are always a headache for policy makers Therefore, within the framework of the article's research and according to financial experts, the use of central exchange rate tools is an appropriate choice 26 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com References Canales-Kriljenko & Ivan, J., 2003 Foreign Exchange Intervention in Developing and Transition Economies: Results of Survey IMF Working Paper IMF, 2004 From Fixed to Float: Operational Aspects of Moving Toward Exchange Rate Flexibility IMF Staff Paper Frankel, J A., 1999 No Single Currency Regimes Right for All Countries or at All Time NBER Working Paper Nguyen, T P., 2012 Exchange Rate Policy and the Foreign Exchange Market in Vietnam, 1985-2009 Nghiem, V B., 2016 Question in operating the exchange rate policy of the State Bank of Vietnam in the current period Journal of Economy and Business Hoai, N & Khanh, H., 2016 New foreign exchange regime underway [Online] Available at: vneconomictimes.com [Accessed May 2019] Cường, Đ X & Nhung, N T., 2017 Thị trường ngoại hối Việt Nam sau năm thực Available chế tỷ giá at: trung tâm [Online] sbv.gov.vn [Accessed May 2019] 27 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ... exchange rate and balance of trade 10 Chapter Impacts of exchange rate policy on Vietnam trade balance since 1991 - today 13 2.1 Exchange rate policy from 1999 – 2015 and its effect on Vietnam trade. .. through a period of prolonged trade deficits 2.3 Evaluation of exchange rate policy in 1999- 2018 period The exchange rate mechanism from 1999 to 2015 based on averaging of the previous day’s interbank... implication for the international purchasing power of the currency and, in particular, the impact of changes in the exchange rate on domestic inflation 1.2.2 Classification of exchange rate policy