(TIỂU LUẬN) 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)

COURSE: INTERNATIONAL FINANCE (INE 3003 E) FINAL ASSIGNMENT Instructor: Dr Nguyễn Tiến Dũng Name of student: Đỗ Duy Hùng Date of birth: 11/09/2000 Student ID: 18050467 Hanoi, 2021 Course: International Finance (INE 3003 E) Student Đỗ Duy Hùng-18050467 Word count 4519 (Excluding Title Page, Table of Contents and References) Course coordinator Dr Nguyen Tien Dung Date of submission: 4/6/2021 Plagiarism statement “I confirm that this assignment is entirely my own work and has not been submitted in full or in part for any other course within or outside UEB I confirm that all references are duly acknowledged.” Signature: Hùng 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 balance B Capital and financial account balance Trade in goods Direct investment (net) 6.9 Exports, f.o.b 57.1 Foreign investment liabilities Imports, f.o.b -64.7 Vietnam's investment abroad, assets -0.7 Portfolio investment (net) -0.1 Medium - and long-term loans 4.5 Trade in services Exports 5.8 Imports -8.2 Investment incomes Receipts 0.8 Payments -3.8 in Vietnam, Disbursements 6.1 ODA loans 6.9 Commercial loans -0.8 Debt payments Unilateral transfers -1.7 Short-term capital (net) -4.5 -9 Private (net) C Errors and omissions Official (net) 0.4 D Balance of Payments E Changes in international reserves Source: IMF Staff Report a Calculate Vietnam’s current account balance, financial and capital account balance, the official settlement balance (or the balance of payment in short), and the changes in the official reserve assets Explain your calculations 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 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 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) 7.6 a Calculate Vietnam’s current account balance, financial and capital account balance, the official settlement balance (or the balance of payment in short), and the changes in the official reserve assets Explain your calculations  The current account balance: The current account balance is the sum of: The balance of trade in goods= 57.1-64.7 = -7.6 The balance of trade in services = 5.8 – 8.2 = -2.4 Net investment income = 0.8-3.8= -3 Net unilateral transfer = 6+0.4=6.4 Therfore We have CA= -7.6-2.4-3+6.4= -6.6 billions USD  The Capital and Financial Account Balance The Capital and Financial Account Balance is the sum of: Net direct investment, Net Portfolio investment, Medium - and long-term loans and net short-term capital So we have: KA & FA = 6.9 -0.1 + 4.5-4.5 = 6.8 Billions USD  The official settlement balance (the balance of payment) is the sum of the current account balance, capital account balance and the financial account balance, Errors and omissions = -6.6+6.8-9= -8.8 billions USD  The changes in the official reserve assets= - the balance of payment  = 8.8 billions USD 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  Current account deficit Viet Nam’s Current account deficit was -6.6 Billion USD Currently, Viet Nam’s current account deficit has declined significantly from its peak in 2008 In 2008 Viet Nam’s current account balance reached -10.823 Billion USD We can see that the global financial crisis harmed the economies of many countries worldwide, including Viet Nam This crisis was original from the US financial crisis in 2007, and it continued until 2009 The trade balance deficit is still one of the leading causes leading to the current account deficit According to the data in the table, it can be seen that in transactions in goods and services, exports are always smaller than imports, which makes Vietnam's trade balance deficit According to the General Department of Customs, some essential Vietnam products such as oil, rubber, cashew nuts, and beans all went down Many export orders to the US, EU, and Japan, such as textiles and pepper, decreased by 20%-30%, the signing of new export activities encountered many difficulties Many export activities had to be postponed to the following year Vietnam imports 70-80% of raw materials for production; however, during the global economic downturn, the supply of raw materials of countries is being tightened to reduce the impact of the recession Therefore, Vietnam lacks input materials, leading to a decrease in exports and a decrease in imports In 2009, due to the global economic crisis, Vietnam's import and export turnover was still decreased Specifically, total import and export turnover of goods in 2009 reached 121.8 billion USD, down 11.4% compared to 2008, in which export turnover of goods reached 57.1 billion USD, down 8.9% compared to 2008; goods import turnover was 64.7 billion USD, down 13.3% compared to 2008 In 2009, Textile and garment exports surpassed crude oil and took the lead with a value of $9.1 billion in export turnover In addition, the volume of rice exported in 2009 also reached 5.96 million tons, an increase of 25.4% compared to 2008 and the highest level Until 2009, shows a bright future for our country's rice export industry The financial crisis and economic recession will directly affect several service industries with high foreign currency turnover, such as transportation, insurance, tourism According to the General Statistics Office, export turnover in services for the whole year reached 5.8 billion USD and import turnover in goods was 64.7 billion USD We can see the negative impact of the economic crisis on our country's trade balance in 2009 Vietnam's import-export industry was hit even harder than it was in 2008  Financial account balance surplus Besides, we have a surplus of FA for the following reasons Firstly, because Vietnam is a developing country, borrowing from abroad is understandable to promote growth, build infrastructure, Attached to that we also not invest abroad Second, due to Vietnam's accession to the WTO, this is an opportunity to attract good foreign investment Although it is only 24.6% compared to 2008, this is quite a high number in the current economic crisis when investors limit their investment The investment income deficit of billion USD was partly due to the sharp drop in profits from the oil industry and the downward trend of crude oil prices in the world market  The balance of payment deficit To sum up, with the deficit in the current account balance being too large, the surplus in the financial account cannot cover this part, so our Vietnam has a deficiency in the balance of payments, at 8.8 billions USD In the context of economic recession, this happens even more seriously, and the state needs to have the necessary solutions to solve this problem 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 Monetary policy: In 2009, the SBV implemented a flexible and effective exchange rate system along with a signal-field-based loan discounting system; In addition, SBV also manages the exchange rate in line with market signals that encourage exports while controlling imports, stabilizing Vietnam's economy and ensuring payment Faced with this situation, the State Bank has implemented many measures synchronously: decided to widen the exchange rate band from +/-3% to +/-5%, applied from March 24, 2009, to reduce the price difference between the free market and the official market; strictly control foreign exchange trading activities of credit institutions to ensure that credit institutions strictly implement regulations on foreign exchange management on listing and trading; strengthen propaganda to stabilize people's psychology and implement measures to create consensus among commercial banks to agree to increase USD deposit rates and lower interest rates for foreign currencies to overcome the situation foreign currency supply-demand imbalance In the face of a sharp increase in the free USD price under the influence of the gold price fever, the bank immediately announced the import of gold to reduce the pressure on the gold supply, reducing the dollar's heat on the free market In addition, the State Bank decided to intervene strongly directly in the exchange rate when adjusting the average interbank exchange rate by 5.44% from 17,034 VND on November 25, 2009, to 17,961 VND/USD applied for the next day Narrowing the USD/VND trading price range from ±5% to ±3% and raising the introductory interest rate in VND, the SBV also committed to supporting the sale of foreign currencies to credit institutions with status from minus % go down In addition to the above decisions of the State Bank, the Prime Minister issued version No 2578/TTG-KTTH requesting seven state-owned corporations and corporations to sell foreign currencies in the form of deposits immediately and current revenue sources for credit institutions that are allowed to operate foreign exchange to reduce the pressure on the foreign currency supply 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 global economic recession As we all know, the central bank has applied a cautious expansionary monetary policy, supporting liquidity and creating conditions for credit institutions to expand credit effectively At the same time, the Central Bank also applied a flexible exchange rate policy to create liquidity in the market and restore the economy In this case, if the central bank using Monetary policy in fixed exchange rates regime Exchange rate DD E2 E1 AA2 AA1 Output, Y Y1 Y2 Hoping to increase output to Y2, the central bank decides to raise the money supply by buying domestic assets Because of that, AA1 shifts to the right to AA2 And we have a new equilibrium at point 2, where Vietnam's output and asset market at the exchange rate of E2 and output lever at point Y2 Both exchange rate and the output lever increase However, in the fixed exchange rate regime, The central bank must maintain the exchange rate at E1 So, they sell foreign assets for domestic currency to decrease the money supply They are shifting AA2 back to AA1 After all, the economy's equilibrium remains at point 1, with the exchange rate and the output lever unchanged at E1 and Y1 In case the central bank maintains a flexible exchange rate regime The central bank maintains a somewhat flexible exchange rate regime, specifically until November 2009 the central bank tries to increase the exchange rate, for example: Exchange rate DD E2 E1 AA2 AA1 Output, Y Y1 Y2 When Vietnam faces an economic crisis, the Government wants to increase output to recover the economy Hoping to increase output to Y2, the central bank decides to increase the money supply by buying domestic assets Because of that, AA1 shifts to the right to AA2 For that, AA1 shifts to the right to AA2 And we have new equilibrium at point 2, where the output and asset market of Vietnam at the exchange rate of E2 and output lever at point Y2 Both exchange rate and the output lever increase Summary: When Vietnam using Monetary policy in As the data above shows, when the economy is in recession, only applying monetary policy in a flexible exchange rates regime can increase the total output; in return, this causes our exchange rate to grow and our currency to devalue But the devaluation of our money will cause us to increase exports when our goods are cheaper than foreign goods The central bank must maintain the exchange rate in the fixed exchange rate regime, so the total output doesn’t change when using monetary policy Therefore, the use of this policy is ineffective 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 1966 1967 1968 1969 1970 1971 1972 Britain 3.6 2.6 4.6 5.2 6.5 9.7 6.9 France 2.8 2.8 4.4 6.5 5.3 5.5 6.2 Germany 3.4 1.4 2.9 1.9 3.4 5.3 5.5 Italy 2.1 2.1 1.2 2.8 5.1 5.2 5.3 United States 2.9 3.1 4.2 5.5 5.7 4.4 3.2 Source: OECD a Discuss the trend in the inflation rates between the U.S and European countries during this period 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) 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 10 a Discuss the trend in the inflation rates between the U.S and European countries during this period - In the period from 1944-1971 after the Bretton wood conference, the world leaders decided to establish the Bretton wood system, more specifically, the leaders decided to attach the world currencies to the dollar, the cash that continued, then they agreed to exchange it for gold at $35 an ounce The Bretton Woods system stipulates that the US dollar is the only fully convertible currency into gold Other currencies cannot be directly converted to gold Countries use gold or US dollars as a means of international payment It can be said that the Bretton Woods system is a gold standard exchange system based on the US dollar - Countries that follow the Bretton Woods system will have foreign exchange reserves in the form of a single country's currency, and only that country will follow the gold standard system (the United States) - From there, we can see the central position of the United States in the world economy at that time This means that countries around the globe maintain their economies with fixed exchange rates in the Bretton Wood system The inflation rates in the U.S and European countries during 1966-1972 (unit: %) 12 10 1966 1967 Britain 1968 France 1969 1970 Germany Italy 11 1971 United States 1972 European Countries: Inflation rates of European countries in the period from 1966 to 1972 fluctuated wildly during this period Specifically, from 1966 to 1967, the inflation rate of Germany and the UK fell Specifically, Germany decreased from 3.4 to 1.4%, the UK declined from 3.6% to 2.6%, while the rest of the countries were maintained Inflation was relatively stable as France kept an inflation rate of 2.8% Italy was 2.1% Then, from 1968 to 1969, Germany's inflation rate had many fluctuations when in 1968 the German inflation rate increased to 2.9% but decreased to 1.9% in 1969 At the same time, the inflation rate in Germany increased to 2.9% France's inflation rate during this period increased steadily from 4.4% to 6.5% England also had a similar situation when the inflation rate increased from 4.6 to 5.2% in 1969 Finally, Italy had an inflation rate Inflation fell to 1.2% in 1968 and then rose again to 2.8% in 1969 In 1970 Britain, Germany, and Italy both had increased inflation rates when inflation rates reached 6.5%, 3.4%, and 3.4%, respectively The last rate was 5.1%, while the inflation rate of France in this period went 5.3%, down from 1969 In the previous two years, 19701971, Britain peaked the inflation rate at nearly 9.7%, reaching 9.7% In addition, Germany and Italy also achieved inflation of 5.3% and 5.2% in 1971 At the same time, France has had moderate inflation rates since 1971, specifically 5.5 % Finally, in 1972 the UK's inflation rate went down after rising sharply in 1971 and stopped at 6.9%, while the rest of the country rose slowly at 6.2% in France, 5.5% in Germany, 5.3% in Italy United States: The US inflation rate showed signs of increasing steadily and continuously in the period from 1966 to 1971 (When the Bretton system was still in effect); in particular, in 1966, the US inflation rate only reached 2.9%; however, this figure in subsequent years came 3.1% in 1967, 4.2% in 1968, 5.5% in 1969, 5.7% in 1970 By 1970, the US inflation rate had almost reached double the 1966 inflation rate of 5.7% to 2.9% The US balance of payments is constantly overspending America also has to spend a lot on wars in other countries Hundreds of billions of dollars of inflation abroad flooded the world market, causing the US dollar to depreciate continuously US gold reserves fell to the lowest level The US must suspend the exchange of dollars for gold for foreign central banks and suspend the stabilization of the world gold price The US dollar has nothing to with gold anymore The US dollar standard collapsed, and the Bretton Woods fixed exchange rate system was also terminated in August 1971 However, the US inflation rate has decreased since 1970, when in 1971 1972 US inflation rate reached only 4.4% and 3.2%, respectively 12 Between 1965-68, President Johnson had an expansionary monetary policy and increased the money supply to finance the Vietnam war, leading to a gradual increase in inflation, reaching 5.5% in 1969 The excess liquidity stimulated the economy, and people spent more on imports which reduced the positive trade balance In spring 1971, The U.S reported its first trade deficit since 1945, which caused speculators to buy massive quantities of the German mark The German central bank purchased large amounts of U.S dollars in an attempt to stop the revaluation of its currency but the pressure by speculators were more significant, and it was inevitable to allow the mark to float The dollar had to be devalued to prevent the system from going haywire In an attempt to solve the problem in 1971, Nixon eliminated the convertibility of the U.S dollar to gold, and in an agreement with trading partners, the dollar was devalued From the table and graph above, we have several comments: -Europe: + Britain has the highest inflation rate among European countries at 9.7% in 1971 The inflation rate in Britain generally increases but tends to fluctuate: from 1966 to 1971, the inflation rate growth tends to overgrow, rising from 3.6 to 9.7%, nearly three times Until 1972, the inflation rate tended to decrease rapidly, from 9.7% to 6.9% Despite the decline, Britain still has the highest inflation rate + France: The inflation rate of France has many fluctuations In the period 1966-1967, the inflation rate remained at 2.8%, then gradually increased By 1969, the inflation rate in France reached its highest at 6.5% In the period 1970 - 1971, the inflation rate was only 5.3% and 5.5% In 1972, the inflation rate in France increased slightly to 6.2% Ranked 2nd after Britain + Germany: In general, the inflation rate in Germany is relatively low and volatile over the period In 1966, the inflation rate reached 3.4%, then dropped suddenly to 1.4% in 1967 By 1968, the inflation rate increased to 2.9% and decreased to 1.9% in 1969 In the period 1970-1972, the inflation rate increased again and increased to 5.5% in 1972 + Italy: This is the country with the lowest inflation rate in 1966-1972 in Europian From 1966 to 1968, the inflation rate fell from 2.1% to 1.2% In 1969, this rate increased again to 2.8% and continued to grow steadily from 2.8% in 1969 to 5.3% in 1972 - USA: In 1972, the USA had the lowest inflation rate with 3.2% The period 1966-1970 marked a rapid increase in the inflation rate in the US, rising from 2.9% to 5.7% By 1971, the inflation rate had dropped to 4.4% and continued to fall to just 3.2% in 1972 13 b Explain why, with the exception of the U.S., monetary policies were ineffective under the Bretton-Woods fixed exchange rate system A’ E A D G E* F A’ D A Y1 Y£ Suppose England fixes its exchange rate to the dollar at the rate E* This is indicated on the adjoining diagram as a horizontal line drawn at E* Suppose also that the economy is originally at a super equilibrium shown as point F with original GNP level Y1 Next, suppose the central bank, the BoE, decides to expand the money supply by conducting an open market operation The purchase of treasury bonds by the BoE will lead to an increase in the pound money supply Money supply changes cause a shift in the AA curve More specifically, an increase in the money supply will cause AA to shift upward (i.e., ↑MS is an AA-upshifter) This is depicted in the diagram as a shift from the red AA to the blue A’A’ line The money supply increase puts upward pressure on the exchange rate in the following way First, a money supply increase causes a reduction in interest rates This lead to reduces the rate of return on England assets below the rate of return on similar assets in the US Thus, international investors will begin to demand more dollars in exchange for pounds on the FOREX to take advantage of US assets In a floating exchange system, excess demand for the US would cause the US to appreciate and pounds to depreciate In other words, the exchange rate would rise In the diagram, this would correspond to a movement to the new A’A’ curve at point G However, because the country maintains a fixed exchange rate, excess demand for dollars on the FOREX will automatically be relieved by BoE intervention The BoE will supply the excess dollars demanded by selling reserves of dollars in exchange for pounds at the fixed exchange rate BoE sales of foreign currency result in a reduction 14 in the England money supply This is because when the BoE buys pounds in the FOREX, it is taking those pounds out of circulation and thus out of the money supply Since a reduction of the money supply causes AA to shift back down, the final effect will be that the AA curve returns to its original position This is shown as the up and down movement of the AA curve in the diagram The final equilibrium is the same as the original at point F The AA curve must return to the same original position because the exchange rate must remain fixed at E* This implies that the money supply reduction due to FOREX intervention will exactly offset the money supply expansion induced by the original open market operation Thus, the money supply will temporarily rise, but then will fall back to its original level Maintaining the money supply at the same level also assures that interest rate parity is maintained Recall that in a fixed exchange rate system, interest rate parity requires equalization of interest rates between countries (i.e., i$ = i£) If the money supply did not return to the same level, interest rates would not be equalized Thus, after final adjustment occurs, there are NO EFFECTS from expansionary monetary policy in a fixed exchange rate system United States: First, initial equilibrium is the point where the output and asset market of Vietnam at the fixed exchange rate of E1 and output lever at point Y1 The US government wants to push the economy To that, they use monetary policy to increase total output(Y), this will create jobs for the American people, restore the economy To this, the US increases the money supply by printing more money, which causes the AA curve to shift to the right and become AA2 And we have new equilibrium at point 2, where the output and asset market of the U.S at the exchange rate of E2 and output level at point Y2 Both exchange rate and the output lever increase Exchange rate 15 E2 E1 DD Y1 Y2 AA1 AA2 Output, Y Explain: -In Bretton-Woods fixed exchange rate system, the world currencies peg to the dollar, the currency that continued then they agreed to exchange it for gold at $35 an ounce Countries use gold or US dollars as a means of international payment So in case the US uses its monetary policy, we will affect all other countries (here European countries) when they peg their currencies to the US dollar - In the Bretton-Woods system, central banks retain their independence through capital controls However, capital markets have become increasingly interconnected, especially since the late 1950s, so the ability for central banks in the European block to continue to implement independent monetary policy is minimal - The US has an independent and effective monetary policy c Explain the observed 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 Real Exchange rate 16 XX1 XX2 (1) (E ∆P*)/P* II1 II2 (2) Fiscal expansion(G  or T ) Has: US is the foreign market  Price in EU: Peu  Price in US: P*us Because European countries have been practiced the Bretton – Wood system with USD is the central So, the exchange rate in this situation in EU not change At the same time, because of the inflation rates so P*us increases while Peu not change and E as well We use the XX-II model to analyze this case P*us rises, lead to q= (E.P*)/P go up (EU goods devaluation and rise the competitive in EU goods)  Domestic goods, particularly EU increase  XX, II shift to under  The initial equilibrium belongs to the first area compare with new lines in XX,II  It means that Y > Yf and also CA > X  In long run, both Y > Yf and input cost of European countries, leads to Peu go up  As a result, q=q = (E.P*)/P back to the first place, but Peu still increases - Relationship explanation: The close connection is due to Import European countries are affected by imported inflation from the US 17 The monetary policy of the country that owns the reserve currency can affect other economies in the reserve currency system In fact, the acceleration of inflation that occurred in the United States in the late 1960s also occurred internationally during that period + Evidence shows that the growth rate of money supply in other countries even exceeds that in the US This may be due to the impact of speculation on the foreign exchange market European central banks are required to buy large amounts of dollars to maintain a fixed exchange rate, which increases their money supply at a faster rate than occurs in the United States This leads European countries to import inflation directly from the US 18 REFERENCES Krugman, Paul R._ Melitz, Marc J._ Obstfeld, Maurice – International Finance _ theory et policy (2018) Chính phủ (2008) “Số: 319/TTg-KTTH V/v tăng cường biện pháp kiềm chế lạm phát Chính phủ (2008) Gary Moss (2020), “The Collapse of the Fixed Exchange Rate System”, The University of the Cumberlands 19 ... 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... number in the current economic crisis when investors limit their investment The investment income deficit of billion USD was partly due to the sharp drop in profits from the oil industry and the. .. Staff Report a Calculate Vietnam’s current account balance, financial and capital account balance, the official settlement balance (or the balance of payment in short), and the changes in the official