MASTER IN FINANCIAL MANAGEMENT THE EFFECT OF EXCHANGE RATE MOVEMENTS ON VIETNAM’S TRADE BALANCE Graduate Student Nguyen Thuy Trang Supervisor Dr Nguyen Cam Nhung HANOI, 2021 ABSTRACT Thesis title The[.]
MASTER IN FINANCIAL MANAGEMENT THE EFFECT OF EXCHANGE RATE MOVEMENTS ON VIETNAM’S TRADE BALANCE Graduate Student: Nguyen Thuy Trang Supervisor: Dr Nguyen Cam Nhung HANOI, 2021 ABSTRACT Thesis title: The effect of exchange rate movements on Vietnam’s trade balance Pages: 48 University: Vietnam National University, Hanoi Graduate School: International School Date: October, 2021 Degree: Master Graduate Student: Nguyen Thuy Trang Supervisor: Dr Nguyen Cam Nhung Key words: Exchange rate, trade balance, Vietnam, SPSS, effect This study clarifies the impact of the fluctuation of the VND/ USD exchange rate on trade balance in Vietnam by using SPSS tool Variables used in this research included exchange rate and trade balance Trade balance was drawn from import and export value from the statistics of Vietnam Customs The time range for conducting data research was from 2000 to 2018, specifically data used are monthly statistics The nominal effective exchange rate data is taken from Vietnam customs from the first day of June 2000 to the first day of June 2018 for each The result of findings showed that the exchange rate appreciation had negative effect on the trade balance In details, revaluation in exchange rate had trend to make trade deficit; and devaluation in exchange rate had trend to make trade surplus ACKNOWLEDGEMENT I wish to express my sincere appreciation to my supervisor, Doctor Nguyen Cam Nhung, who has the substance of a genius: she convincingly guided and encouraged me to be professional and the right thing even when the road got tough Without her persistent help, the goal of this project would not have been realized The physical and technical contribution of ‘International School’ is truly appreciated Without their support, this project could not have reached its goal Thank you! Author Nguyen Thuy Trang TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 Rationale and background 1.2 Research objectives 1.3 Scope of research 1.4 Research methods CHAPTER 2: LITERATURE REVIEW 2.1 Concepts of exchange rate 2.1.1 Exchange rate 2.1.2 Effect of exchange rate movements on import and export 2.1.3 VND/USD (Jan, 2000 – Jan, 2018) 11 2.2 Exchange rate policy in Vietnam 13 2.2.1 Exchange rate regime 13 2.2.2 Exchange rate policy administration 15 2.3 Trade balance 17 2.3.1 Definition of trade balance 17 2.3.2 Trade deficit and trade surplus 18 2.3.3 Importance of trade balance in economy 20 2.3.4 Effect of trade surplus and trade deficit on economic indicators 22 2.4 Factors impacting trade balance 25 2.5 Theorical framework of relationship between exchange rate and trade balance 27 2.5.1 J-curve theory 27 2.5.2 Import and export elasticity and Marshall-Lerner 29 2.6 Trade balance in Vietnam from 2000 to 2018 31 2.7 Previous studies 37 2.8 Research gaps and aims 40 2.9 Conceptual framework 41 CHAPTER 3: RESEARCH METHODOLOGY 42 3.1 Methodology 42 3.2 Data collection procedures 44 3.3 Data analysis procedures 44 3.4 Analytical process 45 3.5 Reliability and validity 46 CHAPTER 4: FINDINGS AND DISCUSSION 46 4.1 Data analysis of VND/USD 46 4.1.1 Correlation analysis of variables 46 4.1.2 Regression analysis 47 4.1.3 Result of regression model 49 4.1.4 Suitability test 50 4.1.5 Multicollinearity test 50 4.1.6 Self-correclation test 51 4.1.7 Calibration distribution test of residual 51 4.2 Data analysis of NEER 53 4.3 Discussion 57 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 60 5.1 Summary of the findings 60 5.2 The implication of the research 60 5.3 Limitations of the research 61 5.4 Recommendations 62 LIST OF ABBREVIATIONS VND: Viet Nam Dong USD: United States Dollar SPSS: Statistical Package for the Social Sciences IMF: International Monetary Fund EURO: European- American Unity and Rights Organization GDP: Great British Pound JPY: Japanese Yen E: Exchange Rate GDP: Gross Domestic Product SBV: State Bank of Vietnam TB: Trade Balance VECM: Vector Error Correction Model CPI: Customer Price Index SVAR: Structural Vector Autoregressive VECM: Vector Error Correction Model VAR: Vector Autoregressive IRF: Impulse Response Function ARDL: Autoregressive Distributed Lag FDI: Foreign Direct Investment EX: Export EI: Import R2: R square F-Test: Fisher Test VIF: Variance Inflation Factor P-P: Probability LIST OF TABLES Table 3.1: Variables used in SPSS 43 Table 4.1 : Correlation analysis results 46 Table 4.2: Descriptive statistics 47 Table 4.3: the result of regression model 49 Table 4.4: Suitability of the model 40 Table 4.5: Analysis of variance 40 i LIST OF FIGURES/ GRAPHS Graph 2.1: the effect of devaluation on price and volume of imports and exports 10 Graph 2.2: the effect of revaluation on price and volume of imports and exports 11 Figure 2.1: Exchange rate of VND/USD (1/1/2000- 1/1/2018)(Vietnam customs, 2019) 12 Figure 2.3: J curve effect 28 Figure 2.4: Trade balance of Vietnam from 2000 to 2018(Vietnam customs, 2019) 32 Figure 2.5: the conceptual framework of effect of exchange rate volatility on trade balance 42 Figure 4.1: Frequency histogram of normalized quadrant 52 Figure 4.2: P-P plot of standardized regression residuals 53 Figure 4.3 The result of research model 53 ii CHAPTER 1: INTRODUCTION 1.1 Rationale and background Since the early 20th century (supplanting an earlier French term mundialisation), the term ‘globalisation’ has been appeared, developed its current meaning some time in the second half of the 20th century, and came into popular use in the 1990s The development of ‘globalisation’ has continuously affected almost every countries in modern economy Thereby in the context of globalisation and international economic integration, mechanisms and policies to regulate exchange rates are very important to directly affect the trade balance and macroeconomic stability in each country As a result, imbalance in the trade balance has become a favoured research topic within community of economists Manyara (2017) concentrates on effects of exchange rates volatility on imports and exports in Kenya Volatility of exchange rates has both positive and negative impacts on trade balance; while exchange rate and trade balance have a positive correlation with each other in a long-run Osoro (2013) share a common opion with Manyara (2017) about the positive relationship between these two variables in Kenya in long term Positive relationship between exchange rate volatility and trade balance usually happens to developed countries because these countries have high volume and value in exports In terms of negative relationship, Clark (1973) explains that the volatility of exchange rates reduces international trade transactions and makes profit change Hooper and Kohlhagen (1978) states a greater risk for personal decision making posing by exchange rate Economic agents experience greater uncertainty with international trade when they cannot predict the value of foreign transaction; thus, it is difficult for firms to project their trade activities Chowdhurry (1993) also shows that the exchange rate volatility has a significant negative impact on exports for the G-7 countries The other study about the impact of exchange rates movements on trade of the G-7 countries done by Kroney; and Lastrapes (1993) states that the effect of exchange rate uncertainty on trade may vary across countries because of the differences in the level of competition, the use of hedging instruments, the economic scale of production and openness to international trade In addition, they found that export prices are much more impacted than export volumes One more time, Caporale and Dorodian (1994) affirm a significant negative relation between exchange rate uncertainty and trade flows through their study on the effect of exchange rate variability on US imports from Canada The result of a Vietnamese study of Vinh Nguyen and Duong Trinh (2019) about “the impact of exchange rate volatility on exports in Vietnam: bounds testing approach” shows that export performance is influenced by the volatility of exchange rate in long run This is a negative relationship as a one percent increase in exchange rate volatility reduces export volume significantly about 0.11 percent Thuan Dong (2016) states that real depreciation in exchange rate significantly plays a positive role on improving the trade balance in both aggregate model and disaggregate models Income of domestic enterprises and its trading partners have negative and positive significant impacts on the trade balance respectively Passing many years of economic construction, Vietnam has had to face with the situation of trade deficit for a long time due to many different reasons (CEIC, 2019); and exchange rate is one of the important reasons influencing the change of trade balance In the case that the trade deficit is prolonged; it will lead to a shortage of foreign currency as a consequence, which leads to the insolvency of transactions outside the country and leaves serious ... show how the exchange rate policy affects the balance of trade 1.3 Scope of research The thesis studied fluctuations of exchange rate and trade balance in Vietnam in the period from the second quarter... All of these factors are subject to change based on the actual situation of each country Therefore, the exchange rate also suffers the same effects Thus, the ratio of the exchange rate is only... 2.1.2 Effect of exchange rate movements on import and export 2.1.2.1 Effect of devaluation of currency on imports and exports The movements of exchange rate occur when there is appearance of devaluation