(TIỂU LUẬN) đề bài analyze the dollarization in vietnam and forecast the trend of dollarization

NATIONAL ECONOMICS UNIVERSITY -*** - THE ECONOMIC OF MONEY BANKING AND FINANCIAL MARKET Đề bài: Analyze the dollarization in Vietnam and forecast the trend of dollarization Name students : 1.Nguyễn Bảo Hà My 2.Vũ Hương Mai 3.Trần Hồ Nam 4.Nguyễn Hoàng Minh Tuấn 5.Trần Thùy Trang Group : 10 Class: Coporate Finance 61A Hà Nội- 2021 INDEX I.The dollarization in Vietnam Dollarization definition Current status of dollarization II Causes of Dollarization High inflation and exchange rate targeting (fixation) Macroeconomic volatility The fear of the floating exchange rate induced by the gap in positions Credit risk undervaluation by unhedged borrowers III The impact of dollarization on the economy Advantages Disadvantages IV Forecast of dollarization trend in the coming years in Vietnam CONTENT I The dollarization in Vietnam Dollarization definition Dollarization is the term for when the U.S dollar is used in addition to or instead of the domestic currency of another country - Informal dollarization: A case in which the dollar is widely used in the economy, although not officially accepted by that country In this circumstance, most citizens of this country are used to using dollars while the government still prohibits listing prices of goods in dollars and using dollars to pay for domestic transactions - Semi-formal dollarization (partial dollarization): A condition in which the dollar is used as a unit of account, medium of exchange, store of value and means of payment, while the domestic currency is used as a unit of account Besides, local currency still exists and circulates The dollar has functions as the second legal currency of the economy, and the country still maintain a central bank to conduct their monetary policy - Official dollarization (full dollarization): A situation occurs when foreign currency is the only legal currency which is in circulation That is, foreign currency is not only legally used in contracts between private parties but also legally in Government payments If foreign currency exists, it has a secondary role and is usually only coins or small denominations Typically, countries only apply official dollarization when they have failed to implement economic stabilization programs 2 Current status of dollarization Over the past decade, although inflation has been controlled and tends to be stable at low levels, dollarization is still a common phenomenon in developing countries and economies in transition, in which there is Vietnam In general, Vietnam's economy is always in a state of unofficial dollarization, the dollarization rate is usually greater than 20% (before 2010) and greater than 10% (after 2010) Specifically, the state of dollarization in the Vietnamese economy could be generalized through the following stages: - Period 1992-1996: The level of dollarization in Vietnam was quite high, especially in years (1992, 1993 and 1994), this rate was always higher than 30%, This showed that Vietnam's economy at that time was in a state of semiofficial dollarization In 1992, along with the economic growth and recovery since the innovation, the number of deposits in USD accounted for 40% of the total deposits in banks This was a very alarming number in the context that Vietnam's economy had just stepped out of the period of stagnation and subsidies and gradually shifted to a socialist-oriented market mechanism - Period 1996-2001: The level of dollarization in the Vietnamese economy was still quite high and always above 20% Within years, the proportion of foreign currency deposits in total deposits into the banking system in Vietnam increased from 20% to 31.5% This was because people and businesses had increased the deposit of foreign currency into bank accounts for the purpose of ensuring asset safety due to concerns about the signs of Thailand's economic bubble, which was growing dramatically compared to other countries in the region As a result, the dollarization rate in Vietnam increased rapidly during this period, despite the regulatory policies of the Government and the State Bank - Period 2001-2003: The dollarization rate of Vietnam's economy remained above 20%, which meanned that Vietnam was still in the state of unofficial dollarization However, there had been positive signs Specifically, within years, with the efforts of the Government and the State Bank, the dollarization rate dropped sharply from 31.5% to only 21% - Period 2003-2010: It could be seen that dollarization in Vietnam was still a dilemma for policy makers, because after certain efforts to curb the rate of increase of Foreign currency deposits in the economy's total means of payment, this ratio was always above 20%, Vietnam's economy was still in the state of unofficial dollarization - Period 2010 - August 2015: The domestic foreign exchange market was under great pressure from unusual fluctuations in the international market (China devalued CNY), the exchange rate rose to the ceiling, and the psychology of hoarding foreign currency increased The State Bank had reduced the USD deposit interest rate ceiling to 0%/year for organizations in the second half of 2015; at the same time, actively selling foreign currency intervention; active communication; from 2016, switched to operating under the central exchange rate mechanism Thanks to the synchronous implementation of the above solutions, from 2015 up to now, the exchange rate and the foreign exchange market had been basically stable, market sentiment The market was cleared, market liquidity improved, foreign currency hoarding decreased, so the dollarization rate in the economy continued to decrease - In August 2019, USD/VND was almost unchanged compared to the beginning of the year In ASEAN region, VND was the only currency that was stable against USD in the context of CNY continuously falling II Causes of Dollarization 1.High inflation and exchange rate targeting (fixation) The fact that dollarization results, to a significant extent, from monetary policies that cannot restrain inflation is illustrated by country comparisons (Figures and 4) Tough control of the exchange rate only strengthens motivation for dollarization Research and practice in certain countries (for example, Turkey and Poland) suggest that restoring the floating rate and taking measures to reduce and stabilise inflation are the key conditions, without which any other efforts to dedollarize would most probably be fruitless It should be taken into account that these macroeconomic conditions can influence business savings and investment decisions faster than those of households, which need more time to overcome negative remembrances of high inflation [9] In this connection central banks should, for a significant time, not only send consistent signals to the public about their firm intention to ensure monetary stability and flexibility of the exchange rate and to prevent any steps back in their policies, but also take supporting measures to promote a favourable environment in the financial market and create additional economic stimuli for de-dollarization Macroeconomic volatility Inflation volatility – if it is higher than the volatility of the nominal depreciation of the exchange rate – is one of the causes of dollarization In particular, the policy of disinflation (aimed at reducing and stabilising inflation) by means of controlling the exchange rate when it stabilises faster than inflation – tend to stimulate dollarization Here’s the example of Armenia: on the one hand, it had stably low inflation rates for a long time but the banking sector had one of the highest asset and liability dollarization rates in the EAEU This is because the Armenian monetary policy has many peculiarities, not typical of net inflation targeting Therefore, a stable exchange rate, in combination with other factors, create preconditions for high dollarization Expectations and trust among market participants are also important If economic players not believe that the recent good results of a macroeconomic policy would be reversed the medium term, dollarization may not go down even if the policy has been changed fundamentally The fear of the floating exchange rate induced by the gap in positions (having significant open foreign exchange positions) In a highly dollarized economy the central bank may want to fix or control rigidly the exchange rate in order to protect economy players against devaluation effects However, when international reserves are insufficient and the economy is affected by significant adverse external shocks such exchange policy becomes a hostage to “the fear of the floating exchange rate.” 4.Credit risk undervaluation by unhedged borrowers Borrowers and lenders may undervalue the credit exposure associated with extending foreign currency loans to unhedged borrowers The inability to foresee a sharp and significant impairment of the exchange rate makes borrowers accept extreme foreign exchange risks, on the one hand, and induces lenders to provide loans in foreign currencies, on the other hand In addition, the significant gap between interest rates, which favours foreign currencies, can result – through adverse selection – in that riskier projects will concentrate in the segment of unhedged borrowers An efficient deep and liquid foreign exchange market (spot and forward markets) equipped with reliable pricing mechanisms reduces the need for foreign currency as an “insurance” as it provides its participants with unrestricted access to financial resources and foreign exchange hedges Without an efficient foreign exchange market businesses will try to attract finance in alternative currencies, exposing themselves to foreign exchange risks The best hedging policy for importers, in the absence of a developed hedging mechanism, is to fix prices in foreign currencies III The impact of dollarization on the economy Advantages: - Dollarization helps prevent currency and balance of payments crises Without domestic currency, there will be no abrupt devaluation or sudden capital outflows caused by concerns about devaluation - Further integration into the global economy will be less costly Besides, dollarization guarantees stable prices as per the dollar or the selected foreign currency - Dollarization is employed in some countries as a means to restrain inflation and promote the roles of their financial institutions, and stimulate both domestic and foreign investment Disadvantages: - Dollarization causes macro-instabilities and high inflation - A fully dollarized country tends to deprive itself of the possibility of having independent monetary policies and exchange rates, including the right of the central bank to provide commercial banks in need with liquidity This takes away the inherent role of the central bank - The substitution of a foreign currency for a country’s domestic currency can badly affect its national emblem and cause internal political conflicts IV.Forecast of dollarization trend in the coming years in Vietnam Although there is no official data from the regulatory agency, it is not difficult to confirm that the dollarization level in the economy continues to decrease Limiting dollarization is a problem that the State Bank has focused on solving for many years The ceiling interest rate on USD deposits in Vietnam was reduced to 0%/year in the second half of 2015 Circular No 24/2015/TT-NHNN regulates lending in foreign currencies by credit institutions and bank branches Foreign loans for borrowers who are residents issued on December 8, 2015, also "tightened" the demand for foreign currency loans for businesses, limiting only objects to access to USD loans Thanks to that, if 10 years ago, the total balance of USD deposits on the total deposit balance of the whole economy accounted for about 25%, now this figure is about 8% According to the regulations of the State Bank, from September 31, 2019, credit institutions will not be allowed to provide medium- and long-term foreign currency loans to pay abroad for imported goods and services, including foreign currency when the borrower has enough foreign currency from production and business revenue to repay the loan After the move to tighten short-term foreign currency loans to pay abroad for imported goods and services in order to implement the plan for production and trading of goods to serve domestic demand in early April this year, this move of the management agency is considered by experts as the last "move" in the journey to stop lending to switch to foreign currency trading in order to concretize the Government's policy on limiting capital urbanization in the economy Accordingly, foreign currency credit will only be granted to essential national goods for overseas payment such as gasoline, oil, etc And businesses that need to pay in foreign currencies can borrow in VND and then buy foreign currency for payment Experts estimate that despite recent fluctuations in the financial and monetary markets, VND is one of the two regional currencies (along with the Thai baht) that has not depreciated against the USD in the context of the trade war The US and China are increasingly escalating, and the yuan is depreciating continuously The VND exchange rate as of the end of August 2019 was almost unchanged against the USD, while the yuan was close to the threshold of 7.2 The fact that the VND/USD exchange rate remained stable also reduced the need to hold foreign currencies of people and businesses According to the explanation of economic experts, the basis for the VND to maintain stability is the increase in domestic production capacity and the source of foreign currency, which is mainly used to import intermediate goods, produce goods for export Therefore, the supply and demand of foreign currency for production is quite balanced Along with that, the abundant foreign exchange reserves while the high difference between VND and USD interest rates (1.8%) is a factor that continues to support VND to keep its price soon To further solve the problem of dollarization of the economy, Decision No 986/QD-TTg on "Strategy for development of Vietnam's banking industry to 2025, orientation to 2030" issued by Prime Minister Nguyen Xuan Phuc issued on August 8, 2018 has set the goal of gradually reducing the ratio of foreign currency credit to total credit, striving for the ratio of foreign currency deposits to total means of payment to be below 7.5% by 2020 and 5% by 2030; proceed to stop lending foreign currency so that by 2030 at the latest, basically overcome the dollarization in the economy Thus, with the policies that the government has put in place to overcome dollarization in Vietnam and the adjustments made by the State Bank, we can predict that in the coming years, the dollarization will continue to decrease gradually, and the VND/USD exchange rate will remain stable  ... IV Forecast of dollarization trend in the coming years in Vietnam CONTENT I The dollarization in Vietnam Dollarization definition Dollarization is the term for when the U.S dollar is used in. .. restrain inflation and promote the roles of their financial institutions, and stimulate both domestic and foreign investment Disadvantages: - Dollarization causes macro-instabilities and high inflation... Specifically, the state of dollarization in the Vietnamese economy could be generalized through the following stages: - Period 1992-1996: The level of dollarization in Vietnam was quite high, especially in