(TIỂU LUẬN) INTERNATIONAL FINANCE COURSE ASSIGNMENT the following table shows vietnam’s balance of payments in 2009, when the economy was seriously affected by the global economic recession

University of Economics and Business Vietnam National University INTERNATIONAL FINANCE- COURSE ASSIGNMENT Lecturers: Mr Nguyễn Tiến Dũng, Mr Lê Minh Tuấn Student’s name: Khổng Gia Tường Date of birth: 12/01/2000 Student’s ID: 18050978 Class Code: International Finance INE3003-E Hanoi, 2021 End-of-Semester Assignment Problem 1: the following table shows Vietnam’s balance of payments in 2009, when the economy was seriously affected by the global economic recession (maximum 2000 words, including figures or tables) Table: Vietnam’s International Transactions, 2009 (Unit: billions U.S dollars) A Current account B Capital and financial account balance Trade in goods -6.6 -7.6 balance Direct investment (net) Foreign investment in Vietnam, 6.7 6.9 Exports, f.o.b Imports, f.o.b Trade in services Exports Imports Investment incomes Receipts Payments Unilateral transfers Private (net) Official (net) 57.1 -64.7 -2.4 5.8 -8.2 -3 0.8 -3.8 6.4 0.4 liabilities Vietnam's investment abroad, assets Portfolio investment (net) Medium - and long-term loans Disbursements ODA loans Commercial loans Debt payments Short-term capital (net) C Errors and omissions D Balance of Payments E Changes in international reserves 7.6 -0.7 -0.1 4.5 6.1 6.9 -0.8 -1.7 -4.5 -9 -8.9 -8.9 Source: IMF Staff Report a Calculate Vietnam’s current account balance, financial and capital account balance, t official settlement balance (or the balance of payment in short), and the changes in the official reserve assets Explain your calculations +)Current Account balance = (Export -Import) + Investment Income + Unilateral transfers = (57.1 + 5.8 – 64.7 – 8.2 ) + ( 0.8 – 3.8 ) + (6 +0.4) = -6.6 +)Capital and Finanical Account = Direct Investment + Porfolio investment + Medium and long-term loans + Short-term capital = 6.9 - 0.1 + 4.4 – 4.5 = 6.7 +)Balance of payment = Errors and omission + Current Account balance + Capital and Finanical Account = -9 – 6.6 + 6.7 = -8.9 +)Changes in international reserve = - Balance of payment = 8.9 b Based on the economic situation in 2009, discuss the disequilibrium (surplus or deficits) in the current account balance, financial account balance, and the balance of payment - After the world crisis in 2009, the US is still the leading nation drawing in capital inflows within the world, net capital inflows into the US have remained positive for numerous successive a long time, whereas net capital inflows into other nations have remained positive Developing countries are reliably negative, and net capital streams to EU nations are more unstable, with positive and negative for a long time Vietnam is one of the developing economies that's emphatically affected over all macroeconomic pointers In 2009, Vietnam's yearly GDP development rate was abating down from 7.5% in 2007 to about 6% in 2008 and after that 5.3% in 2009, sometime recently recuperating to 6.10% in the final year 2010 Trade development to the European Union, the primary showcase for the United States, has fallen from 60% to -30%, agreeing to the IMF, 2010 Inflation is additionally an disturbing issue, the level of the yearly increment within the the annual increase in the consumer price index 28% in September 2008 and increased to 65% for food (rice and cereals) - Current account shortfall (agreeing to the spreadsheet) reasons: + Import and export value of goods and services: Total export turnover in 2009 reached about 56.5 billion USD, down 9.9% compared to 2008 Total import turnover in 2009 was estimated at 68.8 billion USD, down 16.4% compared to 2008 Although both export and import turnover decreased, because the decrease in export turnover was slower than import turnover, the trade deficit in 2009 decreased to only about 11 billion USD, accounting for 16.5% total exports + Primary income: Vietnam's total investment income: Vietnam's investment income is mainly the interest on deposits of Vietnamese residents in foreign banks and it decreases because we withdraw foreign currency domestic lending Total payments for investment in Vietnam: payables are increasing due to interest payments on foreign debts Many FDI enterprises, branches of foreign companies tend to remit profits back home to support the parent company, increasing expenditures in the service balance Vietnam's income continues to have a higher deficit than in 2007 and previous years + Secondary income: In Vietnam's current transfer balance, the part that accounts for the majority is private transfers, while the government transfer portion accounts for a negligible proportion and tends to be stable The establishment of new money transfer channels has helped overseas Vietnamese feel secure in transferring money through official channels and helps reduce remittance costs and risks The policy of attracting remittances allows Vietnamese people to directly bring money back home without limiting the quantity, just declaring the customs, allowing overseas Vietnamese to buy houses or invest in Vietnam Remittances have been repatriated in recent years, causing Vietnam's private transfers to increase unceasingly, so that the Government has partially offset the current account deficit Vietnam's current account deficit is partly due to the state budget deficit The high budget deficit (in 2009: 6.9% of GDP) plus the public debt (and secured public debt) increasing to 45% of GDP is a testament to Vietnam's growing current account deficit - FA surplus: + Direct Investment (FDI): According to the Foreign Investment Agency, disbursed FDI in 2009 was about 10,000 million USD, equaling 89.6% over the same period in 2008 In 2009, the United States was the largest investor with a total registered capital of 9,800 million USD (accounting for 45% of total FDI capital into Vietnam) Coming in second is the Cayman Islands, followed by Samoa and South Korea Accommodation and catering services are at the top with 8,800 million USD Next is the real estate sector with 7,600 million USD Investment capital from the non-state sector and FDI dropped sharply in the first quarter to only 12.7% and 6.2% of GDP compared to 16.5% and 13.0% of GDP in 2008 However, , investment capital from the state sector increased quite strongly (to 18% of GDP), which largely offset the decrease in investment capital from other sectors, helping the total investment capital of the whole society still account for a proportion of 37.4% of GDP Entering the second quarter, social investment has increased to 44.1% of GDP Entering the third and fourth quarters, investment capital from the FDI and non-state sectors has increased strongly as a percentage of GDP, returning to the high level of 2007-2008, even compensating for the decrease in investment capital from the public sector to GDP (reduced to only 14.9% of GDP) + Foreign debt + ODA: In 2009, the country's total foreign debt balance (including government external debt and government-guaranteed foreign debt) was 27.93 billion USD In 2009, the total amount of quick disbursement in the form of state budget support reached over 1.84 billion USD -> BOP deficit c How did the State Bank of Vietnam (SBV) respond to this situation through exchange rate policy and foreign exchange market intervention? Show that the SBV actually moved to a more flexible exchange rate policy during this period Exchange rate policy + 1955 - 1989: Multi-exchange rate regime + 1989 - 1991: Single exchange rate regime, adjusted for signals of inflation, interest rate, BOP + 1991 - 1999: Fixed the official exchange rate on the basis of bidding at foreign currency trading centers, limiting the exchange rate band + 1999 – present: Announcement of average interbank exchange rate, limit of exchange rate band Within the period of 2008 - 2009, the worldwide financial and money related emergency caused numerous impacts on the outside trade showcase in Vietnam, the State Bank of Vietnam presented a number of measures to reply, the tightening monetary policy was moved to cautiously loosening monetary policy: + The State Bank immediately announced to import gold to reduce pressure on gold supply; thereby, reducing the heat of the dollar on the free market + Buying and selling foreign currencies: The exchange rate on the free market continuously increased sharply, the foreign currency trading activity on the free market was the hottest ever, in mid-November, the exchange rate was adjusted hourly + Strengthening measures to shock foreign exchange The global economic crisis has affected the exchange rate in the market An import demand shock causes output to fall Exchange rate, E DD2 DD1 E1 AA1 AA2 Y3 Y2 Y1 Output, Y We have the DD-AA model in the situation of flexible and fixed exchange rate policy - In the status of using flexible exchange rate policy: In 2009, during the global economic crisis, the impact on Vietnam caused export demand to decrease, leading to a decrease in domestic output The chart above uses the DD - AA model to look at market volatility by comparing the response of the Vietnamese economy with fixed and floating exchange rates to reduced export demand Falling demand for Vietnamese exports reduces aggregate demand at all exchange rates, E, thereby shifting the DD curve to the left from position DD1 to position DD2 The short-run equivalent equilibrium of the economy is at point 2; relative to the initial equilibrium at point 1, the domestic currency depreciates (E increases) and domestic output decreases - In the status of using the fixed exchange rate policy: When there is a demand shock that causes the demand for exports to decrease, the Central Bank buys domestic money with foreign exchange reserves, causing AA to move from position AA1 to position AA2 Using a fixed exchange rate policy decreases more sharply than output when using a floating exchange rate policy By looking at the case of the global financial crisis, a global shock causes export demand to fall in the short term The drop in demand for exports as shown in chart b, if it occurs over a long period of time, will lead to a "fundamental imbalance" and we can see that the adoption of a flexible exchange rate policy helped the economy mitigate the negative impacts of the global recession d Using the DD-AA model, show that the adoption of a more flexible exchange rate policy assisted the economy in mitigating the adverse effects of the global economic recession (Hint: you should compare the effects of the global economic recession and the resulting fall in the aggregate demand under fixed and flexible exchange rates) Exchange rate, E DD E2 E1 AA1 Y1 Y2 AA2 Output, Y At the initial output level Y1 and given the fixed price level, an increase in money supply must push down the home interest rate, R An increased money supply shifts AA1 upward to AA2 but does not affect the position of DD The upward shift of the asset market equilibrium schedule moves the economy from point 1, with exchange rate E2 and output Y2 An increase in the money supply causes a depreciation of the domestic currency, an expansion of output, and therefore an increase in employment We have been assuming that the monetary change in temporary and does not affect the expected future exchange rate Ee In order to preserve the interest parity in the face of a declince in R ( given that the foreign interest rate, R* does not change ), the exchange rate must depreciate immediately to create the expectation that the home currency will appreciate in the future at a faster rate than what expected before R fell The immediate depreciation of the domestic currency, however, makes home products cheaper relatively to foreign products There is also an increase in the aggerate demand, which must be matched by an increase in output Problem 2: The following table shows the inflation rates in the U.S and European countries at the end of 1960s and the early 1970s (maximum 2000 words) Country Britain France Germany Italy United States 1966 3.6 2.8 3.4 2.1 2.9 1967 2.6 2.8 1.4 2.1 3.1 1968 4.6 4.4 2.9 1.2 4.2 1969 5.2 6.5 1.9 2.8 5.5 1970 6.5 5.3 3.4 5.1 5.7 1971 9.7 5.5 5.3 5.2 4.4 1972 6.9 6.2 5.5 5.3 3.2 Source: OECD a Discuss the trend in the inflation rates between the U.S and European countries during this period The table illustrates changes in the inflation rate between the U.S and European countries from 1966 to 1972 In the first years, Britain and Germany witnessed a fluctuation in the inflation rate with a drop in 1967 and then a recovery in the next year In contrast, France and Italy remained their inflation rate in 1967, however France’s rate nearly doubled in 1968 whilst Italy witnessed a fall from 2.1% to 1.2% The U.S’ rate increased gradually from 2.9% to 4.2% during this period 10 In the next years, Britain’s kept on its upward trend, reached 9.7% in 1971, the highest rate among those nations, but then this rate suddenly dropped to 6.9% in the last year of the period Italy’s inflation rate also followed a stable increasing course after a significant increase to 2.8% in 1969 Germany’s inflation ratio dropped nearly 1% to 1.9% - the lowest of 1969 then it followed an upward trend, finished at 5.5% in 1972 France however went through an unstable period with the inflation ratio, stood at 6.2% in 1972 America’s rate reached its peak in 1970 and then reached the bottom in 197 with the lowest inflation rate of the countries b Explain why, with the exception of the U.S., monetary policies were ineffective under the Bretton-Woods fixed exchange rate system (Hint: you should use the DD-AA diagram for this question) The Bretton Woods framework bound together settled rates for major monetary standards and permitted central banks to mediate within the cash markets The Bretton Woods administration stipulates that one ounce of gold costs $35 In the Bretton–Woods framework, central banks stay autonomous through capital controls In any case, capital markets have gotten to be progressively interconnected, particularly since the late 1950s, so the ability for central banks within the European Union to proceed to actualize free financial approach is exceptionally restricted The US has an independent and effective monetary policy For example, we have the DD - AA model in the UK using a fixed exchange rate: DD1 11 DD2 AA2 AA1 Y1 Y2 Y3 European nations counting the US are working their currency markets beneath the Bretton Woods framework, which binds together a settled rate for major currencies and permits central banks to intercede within the currency markets Subsequently, when European nations increment the money supply, due to the fixed exchange rate, currency interest rates diminish, putting weight on the domestic money to devalue To be able to adjust the exchange rate, keep interest rates settled and prevent currency devaluation, European governments had to offer foreign currency to other nations However, selling foreign currency reduces the money supply, causing the AA curve to shift to the left Because the AA curve is left-shifted, there is no effect on output growth or employment growth Other than, when the currencies of European countries devalue, the exchange rate between the EU/USD falls, driving to a diminish in equilibrium output, the DD curve shifts to the left Usually chosen as one of the reasons why financial arrangement in European nations isn't viable beneath the Bretton Woods fixed exchange rate framework 12 c Explain the observed close relation between the inflation rates in the U.S and European countries Use the diagram of internal balance and external balance to support your arguments The European economies are coming to both internal and external balance at point 1, where yield is calculated by the equation: Q= E x P*/P However, when inflation within the US increments as the US starts to extend the money supply, P* increases again And presently at that time, the European nations were within the Bretton Woods framework, so the exchange rate E was settled From this it can be seen that an increase in Q* output makes domestic products competitive Domestic goods compete for stick in a straight line and move down the stream, meeting each other to form a new equilibrium 13 In fact, the economies of European countries have not yet moved from equilibrium point At equilibrium point 1, according to the Four Economic Difficult Zones, point can be considered as being in the first quadrant of the economy line and, ie on lines and For that reason, in the short run, domestic output is larger than potential output, leading to an excessive balance of payments surplus Other than, within the long term, domestic prices change due to domestic output being larger than potential output, inputs being over-exploited As a result, input costs expanded strongly, costs increased, and product costs in European nations taken after the same drift, driving to an increment in inflation in these countries But according to the equation, when P * increases but P also increments, Q remains unchanged, line XX and line YY remain unchanged, returning to the initial position However, inflation has happened, which is what causes inflation within the US to cause “inflation imports” for other nations 14 ...End -of- Semester Assignment Problem 1: the following table shows Vietnam’s balance of payments in 2009, when the economy was seriously affected by the global economic recession (maximum... deficits) in the current account balance, financial account balance, and the balance of payment - After the world crisis in 2009, the US is still the leading nation drawing in capital inflows within the. .. of the global recession d Using the DD-AA model, show that the adoption of a more flexible exchange rate policy assisted the economy in mitigating the adverse effects of the global economic recession