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UNIVERSITY OF ECONOMICS AND FINANCE FACULTY OF ECONOMICS THE IMPACT OF USD/VND EXCHANGE RATE ON THE IMPORT EXPORT ACTIVITIES OF VIETNAMESE ENTERPRISES IN THE PERIOD OF 2010 2021 Lecturer Tran Minh Tu[.]
UNIVERSITY OF ECONOMICS AND FINANCE FACULTY OF ECONOMICS THE IMPACT OF USD/VND EXCHANGE RATE ON THE IMPORT-EXPORT ACTIVITIES OF VIETNAMESE ENTERPRISES IN THE PERIOD OF 2010-2021 Lecturer: Tran Minh Tu Course: 221.FIN1117E.A02E No Full Name Student’s ID Contribution Nguyễn Văn Tấn Tài 205032386 100 % Nguyễn Tiến Thành 205084765 100 % Nguyễn Vân Thy 205084786 100 % Trần Thị Tố Nguyên 205084712 100 % Mai Phương Ánh Ngọc 205084092 100 % Ho Chi Minh City, October 2022 TABLE OF CONTENTS TABLE OF CONTENTS i LIST OF FIGURES ii I INTRODUCTION II LITERATURE REVIEW 1.Some concepts related to the foreign exchange rate 1.1 Definition 1.2 Classification 1.3 Exchange rate regimes 2 The factors affecting to the foreign exchange rate 2.1 Balance of Payments 2.2 Inflation 2.3 Interest rate 2.4 National Debt 2.5 Political situation 2.6 Economic situation 3.Balance of payments 3.1.Definition of balance of payments 3.2.Factors affecting the balance of payments III ANALYSIS The relationship between foreign exchange rate and import-export activities 1.1 Export 1.2 Import List of events impacting to the USD/VND rate in the period 2010-2021 3.The impact of USD/VND rate to the Vietnam’s balance of payments 18 4.Risks of USD/VND rate volatility impacting to Vietnamese companies 24 4.1 When the USD/VND exchange rate decreases 24 4.2 When the USD/VND exchange rate increases 26 Measures to prevent exchange rate risk 27 5.1.Using a parallel import-export contract 28 5.2.Using the reserve fund for exchange rate risk 28 5.3 Using a forward contract 28 5.4.Using swaps 30 5.5.Using futures contract 30 IV CONCLUSION 30 V REFERENCES 31 i LIST OF FIGURES Figure 2.1: The movement of VND/USD exchange rate in 2010 Figure 2.2: The movement of VND/USD exchange rate in 2011 Figure 2.3: The movement of VND/USD exchange rate in 2012 Figure 2.4: The movement of VND/USD exchange rate in 2013 .10 Figure 2.5: The movement of VND/USD exchange rate in 2014 .10 Figure 2.6: The movement of VND/USD exchange rate in 2015 .11 Figure 2.7: The movement of VND/USD exchange rate in 2016 .12 Figure 2.8: The movement of VND/USD exchange rate in 2017 .13 Figure 9: The movement of VND/USD exchange rate in 2018 14 Figure 10: The movement of VND/USD exchange rate in 2019 15 Figure 11: The movement of VND/USD exchange rate in 2020 16 Figure 12: The movement of VND/USD exchange rate in 2021 17 Figure 1: The relationship between exchange rate and balance of payments 18 Figure 2: The inflation rate in Vietnam in the period of 2010-2021 19 Figure 1: The fluctuation of USD/VND exchange rate in the period of 9/2019 - 1/2021 25 ii I INTRODUCTION In the conditions of an open economy, international trade becomes common, payments between countries necessarily use the currency of one country or another To perform the currency conversion of countries, countries must rely on exchange rates Exchange rate is one of the important macroeconomic policies of every country Exchange rates have always been a complex and sensitive issue for any economy Many economies are in a difficult situation caused by the exchange rate Therefore, it always attracts special attention of economists, scholars in Vietnam and in the world In an open economy, to integrate into the international market requires each country to choose an appropriate exchange rate mechanism The choice of an appropriate exchange rate mechanism will have a huge influence on the import and export activities and the trade balance of each country In order for a country to choose an appropriate exchange rate regime, it is necessary to understand the exchange rate, its role in the economy, and study the factors that affect the exchange rate exchange rate and the effect of the exchange rate on the import and export activities of a country Especially in the context of the current domestic and international economy, the study of exchange rates is a matter of high theoretical and practical significance Stemming from the above issues, our research team decided to choose the topic "The impact of USD/VND exchange rate on the import-export activities of Vietnamese enterprises in the period of 20102021" The research topic focuses on studying the exchange rate, the factors affecting the exchange rate, and the influence of the exchange rate on import and export From there, apply risk analysis of USD/VND exchange rate fluctuations in the period 2010-2021 II LITERATURE REVIEW Some concepts related to the foreign exchange rate 1.1 Definition An exchange rate is an index that measures the value of two currencies, an exchange rate that reflects the value of unit of one currency in exchange for another An exchange rate is the price at a time when the currency of one country or region can be converted to the currency of another country or region Accordingly, the exchange rate is calculated by the number of local currency units per foreign currency unit When the exchange rate falls, it means that the domestic currency appreciates and the foreign currency depreciates, conversely, when the exchange rate increases, the domestic currency decreases and the foreign currency appreciates The Central Bank uses exchange rate tools to regulate macroeconomic indicators such as: Trade balance, inflation, gold price stability, market interest rate stability in the basket of foreign currencies traded in Vietnam In the foreign exchange and foreign trade markets, USD is the foreign currency accounting for the largest proportion, selected by the State Bank as one of eight foreign currencies to calculate the central exchange rate in exchange rate policy management and administration The exchange rate mentioned in this article is the exchange rate between USD and VND, which is the average annual central foreign currency rate announced by the State Bank of Vietnam Foreign exchange rate risks exist on both sides of positive” and “positive”, in other words, risk is considered as the difference between the obtained results actual versus expectation Because the impact of exchange rate risk is seen received from both sides is positive and negative, so exchange rate risk is defined as follows: Exchange rate risk is the potential for earnings volatility unexpected net when exchange rate changes affect affects accounts receivable and accounts receivable payable in foreign currency 1.2 Classification Depending on different classifications, there are different types of exchange rates However, if classified based on exchange rate value, there will be two types of exchange rates: The Nominal Exchange Rate is the rate at which the currency of one currency is exchanged for the currency of another The nominal exchange rate represents the amount of foreign currency per unit of the local currency The Real Exchange Rates (RER) is the rate at which a person can exchange the goods and services of one country for the goods and services of another country The real exchange rate is expressed as the ratio of the prices of goods between two countries in terms of the same currency In other words, the real exchange rate reflects the exchange rate of goods between two countries 1.3 Exchange rate regimes The exchange rate regime of a country is a set of rules and regulations that determine and regulate the exchange rate of a country, in order to create an exchange rate mechanism to implement economic development policy in general and foreign economic relations in particular of that country Depending on the level of government intervention, the Government through the Central Bank (Central Bank) to implement certain exchange rate regimes can be completely fixed, according to the increasing level of government intervention can There are three typical exchange rate regimes: Fixed exchange rate regime: An exchange rate regime in which the central bank announces and commits to intervene to maintain a fixed exchange rate, called the center rate, within a narrow band predetermined The country's central bank is responsible for maintaining the exchange rate of the local currency by buying and selling the local currency in the foreign exchange market In order to intervene in the foreign exchange market, it requires the central bank to have a certain amount of foreign exchange reserves available, so when the country maintains a fixed exchange rate regime, it encounters many difficulties Floating exchange rate regime: A regime in which the exchange rate is determined completely according to the law of supply and demand in the foreign exchange market without any intervention of the central bank In the floating exchange rate mechanism, exchange rate fluctuations always reflect changes in the supply and demand relationship in the foreign exchange market The Government participates in the foreign exchange market as an ordinary member, which means that the Government can buy or sell a certain currency to serve the purposes of the Government's operations, not for the purpose of to intervene to affect the exchange rate or to fix the exchange rate Managed floating exchange rate regime: A regime in which the exchange rate is allowed to change in line with market conditions, but sometimes the Government intervenes to prevent it from moving out beyond certain limits The factors affecting to the foreign exchange rate 2.1 Balance of Payments A country's balance of payments is the difference between all money flowing into that country during a particular period and outflows to the rest of the world These financial transactions are carried out by individuals, companies and government agencies to compare the revenues and expenditures arising from the trade in goods and services When the balance of payments shows signs of overspending, it means the demand for foreign currency increases, the decrease of the domestic currency will cause the exchange rate to rise In contrast, when the balance of payments is favorable, the demand for the domestic currency increases and the foreign currency decreases This causes the exchange rate to fall 2.2 Inflation Changes in domestic inflation will affect international trade activities and directly affect foreign currency supply and demand, causing exchange rate changes If the domestic inflation rate is higher than that of foreign countries, the exchange rate will increase, that is, the value of the domestic currency will decrease On the contrary, the domestic inflation rate is lower than that of foreign countries, which means that the exchange rate decreases, the value of the domestic currency increases 2.3 Interest rate Interest rates have a significant impact on foreign investment activities This affects the exchange rate An increase in interest rates in a country will make that country's currency more attractive This increase will stimulate capital imports When the domestic interest rate increases, it will attract capital from abroad and increase the source of foreign currency This causes the exchange rate between the foreign currency and the local currency to decrease And vice versa, in the case of low domestic interest rates, the exchange rate between the foreign currency and the local currency increases 2.4 National Debt National debt is the cause of the national budget deficit When facing a budget deficit, countries will tend to mobilize funding from abroad through debt This causes the supply of foreign currency to increase and the exchange rate of the foreign currency relative to the domestic currency to decrease Besides, when the country mobilizes foreign currency to pay interest debt, to a certain stage, the debt has been paid off, the value of foreign currency decreases, the exchange rate also decreases accordingly 2.5 Political situation Most foreign investors tend to want to invest in countries with stable political situation Because of a stable political system, without wars and riots, they will be assured of production and business, and people will also consume more On the other hand, for countries that are politically stable, they will also have many priority policies for economic development, interested in investors, etc 2.6 Economic situation Besides politics, the economic situation also affects the decision to pour capital of foreign investors When a country's economy develops, people's income and consumption needs increase, foreign investors will pour capital in for the purpose of expanding the market, making the supply of foreign currency increase increase, thereby causing the exchange rate to change accordingly Balance of payments 3.1 Definition of balance of payments The position of the International Monetary Fund, presented in the “Balance of Payments and International Investment Position Manual”, 6th edition (BPM6) on the concept of the international balance of payments that members when establishing international balance of payments to be followed The balance of payments is a systematic statistical balance sheet that records all economic transactions between residents and non-residents during a given period (usually quarterly and annually) 3.2 Factors affecting the balance of payments The export value of goods is calculated by multiplying the export volume by the unit price Since unit prices can be denominated in local or foreign currencies, we will analyze the impact of exchange rates on export value in domestic and foreign currencies With other factors constant, when the exchange rate increases, the price of export goods in foreign currency decreases, stimulating an increase in export volume Thereby increasing the export value in domestic currency a Inflation With all other factors held constant (the exchange rate does not change), if the domestic inflation rate is higher than abroad, it reduces the competitiveness of this country's goods in the international market, causing the export volume to decrease decrease and imports increase Then the trade balance deteriorated b An increase in the world price of exported goods With all other factors constant, an increase in the world price of a country's exports will increase the demand for local currency 53 and increase the supply of foreign currency in the foreign exchange market by Foreigners will increase imports of the country's goods Increasing the value of exports in domestic and foreign currencies helps to improve the trade balance c Income of non-residents With all other factors unchanged, when the real income of non-residents increases, the demand for exports by non-residents increases Therefore, increasing the demand for domestic currency and increasing the supply of foreign currency, which increases the value of exports in domestic and foreign currencies, the trade balance is improved d Tariffs and quotas abroad With all other factors unchanged, the value of a country's exports will decrease if the foreign party applies high tariffs, low import quotas as well as other goods Non-tariff barriers such as quality requirements and bureaucracy lead to a decrease in the demand for local currency Then the trade balance deteriorated - The rate of increase in the price of exports relative to the price of imports: assuming other factors are constant, if the rate of increase in the price of exports is higher than the price of imports, the country needs to export less to buy in a certain quantity of imports Thus, helping to improve the balance of trade e National income Assuming other factors are constant, if the national income increases, the income of residents will increase, the demand for foreign goods will also increase, causing the import volume to increase and trade balance deteriorated f Taste Assuming other factors remain constant, if the taste of domestic people prefers to use foreign goods, the demand for imported goods will increase This leads to increased imports and a worsening trade balance Factors affecting the value of imports are similar to those affecting exports but have opposite effects g Terms of Trade (ToT) For terms of trade ToT indicates how many units of export are required to purchase one unit of imports The ToT is used as an indicator of the economic health of 54 countries, but it can lead analysts to draw wrong conclusions Changes in import and export prices affect the ToT and it is important to understand what causes prices to rise or fall ToT measurements are often recorded as an indicator for economic monitoring purposes Signs of improvement in a country's ToT often indicate that export prices have increased while import prices have remained or declined In contrast, export prices may have fallen but not as significantly as import prices A country can buy more imports for each unit of exports it sells when its ToT improves Therefore, an increase in ToT can be beneficial because the country needs to export less to buy in a certain quantity of imports The ToT indicates whether a country is in an advantageous or disadvantageous position in international exchange when it comes to price fluctuations If the ToT increases, it is greater than 1, the export value will increase and the trade balance will improve III ANALYSIS The relationship between foreign exchange rate and import-export activities 1.1 Export Export activities bring foreign currency for the country, increasing the supply of foreign currency abundantly, so reducing the exchange rate When the exchange rate is low, it means the high value of the domestic currency will make the price of Vietnamese goods abroad increase, more expensive than the other countries’ goods, reduce the competitiveness and limit consumption Thereby limiting the development of export activities On the other hand, when the exchange rate is high, that is, the value of the domestic currency is low, which will make the prices of Vietnamese goods abroad become cheaper and cheaper than those of other countries, increasing competitiveness and consumption, goods will be quickly purchased Therefore, it is the way to create conditions to expand and develop export activities This is the one of reasons why countries devalue their domestic currencies to boost exports However, the devaluation of the local currency entails many consequences and is bound by many other conditions, so government cannot easily devalue their owned currency 1.2 Import Import activities are spending foreign currency abroad to purchase goods and services back home, when increasing imports will increase the demand for foreign currency, thus having the effect of increasing the exchange rate The exchange rate is high, the prices of imported goods and services in the country are more expensive than domestic goods, reducing competitiveness, limiting consumption, thereby limiting the development of activities At the same time, it creates conditions to promote domestic production In contrast, when the foreign exchange rate is low, imported goods are sold at a cheaper price than domestic goods, increasing competitiveness, benefiting importers, but limiting the development of domestic production It’s the reason why, governments often use the policy of appreciation of the exchange rate: devaluation of local currency to limit imports in order to encourage the development of domestic product In conclusion, governments need to control the volume of foreign currency circulating in the economy, adjust the exchange rate reasonably so that the domestic currency does not depreciate as well as encourage domestic production of goods List of events impacting to the USD/VND rate in the period 2010-2021 2.1 In 2010 Figure 2.1: The movement of VND/USD exchange rate in 2010 The world's leading economy almost fell into a double recession, but fortunately escaped this risk However, the speed of economic recovery is still weak, not enough to reduce unemployment, which is at an extremely high level To support the economy, the US continued to maintain the policy of loosening credit, record low-interest rates and pumping more money into the market On November 2, the US announced the second quantitative easing package, with a value of 600 billion USD This US plan was strongly condemned by the international community, led by China and Germany, at the G20 summit in Seoul (VnEconomy, 2010) In terms of the structure of growth in 2010 by commodity groups, the highest increase was in the education group (up by nearly 20%); ranked second is the group of food and catering