Brazils foreign exchange rate policy and lessons to vietnam a research of the 2016 2022 period

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATION SCHOOL MAJOR RESEARCH PAPER Brazil's foreign exchange rate policy and lessons to Vietnam: A research of the 2016-2022 period Supervisor : Dr Do Thi Huong Student name : Do Hong Quan Student ID : 11206659 Major : International Economics Class : EEP International Economics 62B Type of Education : Full time Hanoi, 2023 STATUTORY DECLARATION I hereby certify that this paper is entirely conducted by my own work Citations and materials used in the exercise are completely honest, sourced and guaranteed with the highest accuracy If anything is not true as stated above, I will take the full responsibility for my mistake ACKNOWLEDGEMENT I would like to express my deepest gratitude to all those who have supported and contributed to the completion of this thesis My heartfelt thanks go to my supervisor Dr Do Thi Huong for her invaluable guidance, mentorship, and unwavering support throughout the research process Moreover, I would like to acknowledge the countless researchers, scholars, and authors whose works have served as a foundation for my research Their pioneering contributions have been instrumental in shaping the academic landscape and have greatly enriched my understanding of the subject matter TABLE OF CONTENTS LIST OF ABBREVIATIONS AND GLOSSARY No Acronyms Full meaning ASEAN Association of Southeast Asian Nations BCB BRL Brazil Central Bank Brazilian Real COPOM Brazil’s Monetary Policy Committee FDI Foreign Direct Investment FED Federal Reserve FTA Free Trade Agreement GDP GSO Gross Domestic Product General Office of Statistics 10 IBGE Brazilian Institute of Geography and Statistics 11 IMF International Monetary Fund 12 OMO Open Market Operation 13 MERCOSUR Southern Common Market 14 SBV State Bank of Vietnam 15 16 SELIC USD Brazil’s benchmark interest rate US Dollar 17 VND Vietnam Dong 18 WB World Bank LIST OF FIGURES Document continues below Discover more from: Kinh tế quốc tế TMKQ11 Đại học Kinh tế Quốc dân 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foreign-invested sector, which includes crude oil, reached $245.22 billion, up 20.9% from 2020 A total of 35 products have an export turnover of over $1 billion in 2021 This is mainly due to the fact that Vietnam has always pursued a stable and competitive exchange rate policy to support its export-oriented economy Brazil is one of Vietnam's major commercial partners Statistics from TradingEconomics show that over the previous five years, Brazil imported goods worth a total of almost $11 billion from Vietnam The two economies greatly complement one another Vietnam exports consumer goods to Brazil to meet market demand Still, it also needs Brazilian agricultural products including maize, soybeans… to meet its rising material needs In terms of trade interaction with Brazil, Vietnam is leading the ASEAN membership Within the Southern Common Market, the two parties have kept up their study and negotiations for a free trade agreement (MERCOSUR) In recent years, Vietnam's exchange rate strategy has been linked to its innovation and integration policies Given the significance of exports and the effect of the Covid-19 pandemic on the global supply chain and the export-import market, Vietnam must seriously evaluate and take actions in order to cope with and adjust to the constantly shifting exchange rate policies of its trade partners, notably Brazil As a result, the topic chosen for this paper will be "Brazil's foreign exchange rate policy and lessons to Vietnam: A research of the 2016-2022 period" 1.2 Object and scope of the paper Object: This paper focuses on Brazil’s exchange rate policy, which can be based on tto suggest lessons for Vietnam to improve its exchange rate policy Range: + Time: The period of 2016 - 2022 and suggesting recommendations for the next 5-year period; + Space: countries: Brazil and Vietnam 1.3 Structure of the paper Besides the introduction and the reference list, this paper is divided into main parts: (i) Introduction (ii) Theoretical framework of exchange rate policy; (iii) Situations of Brazil’s exchange rate policy; (iv) Situations of Vietnam’s exchange rate policy; (v) Conclusion and recoommendations to Vietnam Theoretical framework 2.1 Definition and content of the exchange rate policy 2.1.1 Definition of exchange rate Exchange rate is the price of one currency in terms of another (Ngo Thi Tuyet Mai & Do Thi Huong, 2020) There are several ways to classify exchange rate, based on different criterias, including determination, form, timing, method of buying and delivering, trading operations, and regime (Cao Thi Y Nhi & Dang Anh Tuan, 2017) 2.1.1 Definition of exchange rate policy Exchange rate policy is an integral part of a nation’s foreign economic policy, including principles, policies, instruments, and measures, aimed at regulating the relationship between the domestic currency and other foregin currencies, in order to achieve the intented socio-economic objectives of that nation, during a specific period (Ngo Thi Tuyet Mai & Do Thi Huong, 2020) 2.1.2 Exchange rate regimes According to the book “Foreign Economic Policy” published by National Economics University (Ngo Thi Tuyet Mai & Do Thi Huong, 2020), there are exchange rate regimes that a nation can implement: Vietnam's GDP has been steadily increasing over the past decade According to data from WorldBank, in 2012, Vietnam's GDP was approximately $US 195 billion, and by 2021, it had risen to around $US 366 billion (Source: data.worldbank.org) Figure 2.3 Vietnam’s GDP per capita, PPP (current international $) As shown in the chart, while Vietnam’s figure was relative higher than the aggreate figure of lower-middle-income countries (represented by the line below), it was still much lower when comparing to the aggreate number of East Asia & Pacific countries (represented by the grey line above) (Source: tradingeconomics.com; GSO of Vietnam) Figure 2.4 Vietnam’s GDP growth rate 2020-2022 Vietnam's GDP growth rate has also been relatively high, averaging around 6% to 7% per year during the last decade However, due to the negative impact of the COVID-19 pandemic, Vietnam's GDP growth rate drastically slowed down in 2020 and 2021 Especially, the last two quarters of 2021 witnessed a negative growth, as a result of the widespread of the epidemic, and lockdowns in major cities Regarding Vietnam’s unemployment rates, they have been remaining at a relatively low level (under 3%) for the majority of the 2012-2022 period, with an exception of 2022’s beginning due to Covid-19 lockdowns (Source: tradingeconomics.com; GSO of Vietnam) Figure 2.5 Vietnam’s Unemployment Rate, 2014-2022 In terms of inflation rate, similar to the GDP growth rate, Vietnam’s inflation rate also remained relatively stable during the aforementioned period 2016-2022, despite the negative effects by the pandemic around this time (Source: data.worldbank.org) Figure 2.6 Vietnam’s Inflation Rate, 2016-2021 When it comes to foreign exchange reserves, Vietnam has also been seeing consecutive positive signs In 2012, Vietnam's foreign exchange reserves were around $24 billion USD, and by 2022, they had risen to approximately $108 billion USD This increasing trend stopped in 2022 when there was a decrease in forex reserves due to the Central Bank selling its reserves to maintain the exchange rate stability (Source: CEICdata.com) Figure 2.5 Vietnam’s foreign exchange reserves 2013-2022 Situations of Brazil’s exchange rate policy from 2016 to 2022 3.1 Pre-covid policy (before 2020) Brazil's foreign exchange rate policy before the COVID-19 pandemic (before 2020) was characterized by a managed float exchange rate regime In this regime, the Central Bank of Brazil (Banco Central Brasil - BCB) would partially intervene in the foreign exchange market to influence the exchange rate Brazil's economy continued its slow recovery in 2019 after the 2014 recession Following its inauguration in January 2019, the new government implemented a set of foreign exchange rate policy, aiming at at promoting export competitiveness, maintaining price stability, and managing external imbalances Considering low inflation and weak economic activity, the BCB also cut its benchmark interest rate (SELIC) to an all-time low of 5% to promote economic activities As a result, the BRL depreciated and, in November 2019, the exchange rate stood at 4.24 BRL to the USD In an effort to stabilize the exchange rate, the BCB conducted multiple interventions, selling US dollars through spot market interventions and currency swap contracts, and purchasing BRL to make the BRL appreciate again They suceeded in this effort, the BRL started appreciating again and reached the peak in October 2020 They also reduced the reserve requirements ratio in the local economy from 45% in 2016 to just over 20% at the end of 2020 This is with a view to stimulate investment and economic growth, which lead to higher demand for goods and services, thus increasing the demand for the domestic currency, which can also help appreciating the BRL (Source: CEICdata.com; Central Bank of Brazil) Figure 3.1 Brazil’s Reserve Requirements Rates: Cash, 2016-2020 However, when looking at the bigger picture, Brazil experienced high exchange rate volatility, or wilder fluctuations in the exchange rate From January 2016 to December 2020, the exchange rate between the USD and the BRL varied from around 3.10 BRL per USD to 5.74 BRL per USD (Source: Statista.com) Figure 3.2 USD/BRL foreign exchange rate, 2016-2020 3.2 Post covid policy (2020-2022) In response to the COVID-19 pandemic, Brazil, like many other countries, faced economic challenges that impacted its exchange rate policy The Brazilian economy experienced a contraction in 2020 due to the pandemic's effects on global trade and domestic demand In response, the Brazilian government and central bank implemented several measures to manage the exchange rate and support the economy According to an analysis by KPMG (2020), in 2019 and 2020, the BCB conducted several foreign exchange auctions, buying a total of approximately US $93 billion to support the exchange rate and prevent excessive depreciation of the BRL during the pandemic The BCB also reduced the benchmark interest rate (SELIC) from 4.25% in February 2020 to a record low of 2.00% in August 2020, and kept it at that level until March 2021 The interest rate was gradually increased by COPOM to 3.50% by September 2021 in response to rising inflation pressures, before returning to the normal level at 13.5% in September 2022 Moreover, the reserve requirement rates were also kept stably at 21% throughout the two years 2021 and 2022 (Source: tradingeconomics.com; Banco central Brasil) Figure 3.3 Brazil’s Interest Rate (SELIC), 2020-2022 Despite these efforts, the BRL still experienced significant depreciation against the US dollar during the post-COVID-19 period In January 2020, the exchange rate was around 4.00 BRL per USD, and by December 2022, it had weakened to 5.29 BRL per USD, reflecting the impact of the pandemic on Brazil's economy and global economic conditions (Source: Statista.com) Figure 3.4 USD/BRL foreign exchange rate, 2020-2022 Situations of Vietnam’s exchange rate policy from 2016 - 2022 4.1 Pre-covid policy (before 2020) During the period from 2016 to 2020, Vietnam's exchange rate policy was generally characterized as a managed floating exchange rate regime, with the State Bank of Vietnam (SBV) playing a central role in managing the exchange rate The SBV used a combination of tools and interventions to maintain exchange rate stability, prevent excessive volatility, and promote export competitiveness One of the key policy is that the SBV set a reference exchange rate for commercial banks and other financial institutions to follow Table 4.1 Reference Exchange Rate for VND, 01/12/2016 (VND) No Currency Name Buying Selling USD EUR US Dollar 22.300 22.741 Euro 22.752 24.159 JPY Yen 187,75 199,37 GBP Pound 26.865 28.527 CHF Franc 21.115 22.421 (Source: State Bank of Vietnam) Table 4.2 Reference Exchange Rate for VND, 01/12/2020 (VND) No Currency Name Buying Selling USD US Dollar 23.125 23.797 EUR Euro 26.822 28.481 JPY Yen 215 229 GBP Pound 29.966 31.820 CHF Franc 24.736 26.266 AUD Austrailian Dollar 16.525 17.547 CAD Canadian Dollar 17.304 18.374 (Source: State Bank of Vietnam) Ignoring minor fluctuations, we can see from the two tables that the reference foreign exchange rates between VND and other currencies experienced slight increases between 2016 and 2020 This was but the effect of inflation rate as Vietnam has sucessfully maintained the inflation rate of around 3% during this period Another worth-mentioning difference in policy during this period is that instead "anchoring" to the USD as before, several world currencies are referenced to calculate the central exchange rate, making this reference exchange rate more realistic and suitable This rate has also been updated on a daily basis, with a view to be able to make necessary changes daily Vietnam has also allowed an exchange rate band, within which the exchange rate was allowed to fluctuate without government intervention The SBV set a +/3% band during the period, which provided a certain level of flexibility to accommodate short-term fluctuations in the exchange rate while still aiming to maintain stability The SBV also intervened in the foreign exchange market by buying or selling foreign currencies to influence the exchange rate (Source: CEICdata.com) Figure 4.1 Vietnam’s Foreign Exchange Reserves, 2016-2020 Figure 4.1 shows that Vietnam’s foreign exchange reserves had a tendency of linearly increasing As shown in the chart, the data had been rising a relatively higher rate since 2018 till 2020, reaching over $US 90 billion at the end of the period This trend was due to the fact that during the mentioned period, the SBV had actions of purchasing more USD from the market to their reserves, as a method to a buffer against external shocks, such as sudden changes in exchange rates or capital outflows Vietnam's State Bank during this period also used a low-interest-rate policy, aiming at stablizing the exchange rate, as well as promoting export competitiveness (Source: data.worldbank.org) Figure 4.2 Vietnam’s Real Interest Rate, 2016-2020 By maintaining a relatively low interest rate (under 6%), the government encouraged more investment than savings in the local economy As a result, this led to a higher demand for the domestic currency (VND), thus helping it appreciate compared to the USD, which contributed to a more stably increasing USD/VND exchange rate during the period since it somewhat mitigated the effect of inflation on VND As shown in the following chart, the votality of VND against USD was relatively low, as the distance between the peak and the low was only VND 1000 (Source: data.worldbank.org) Figure 4.3 USD/VND official exchange rate, period average, 2016-2020 4.2 Post-covid policy (2020-2022) Table 4.2 Reference Exchange Rate for VND, 01/12/2022 No Currency Name USD US Dollar Buying Selling EUR Euro 23.468 JPY Yen 164 182 GBP Pound 27.204 30.068 24.840 25.938 CHF Franc 23.860 26.372 AUD Austrailian Dollar 15.309 16.921 CAD Canadian Dollar 16.763 18.528 *Note: USD/VND selling exchange rate is a spot rate, the SBV stopped providing reference exchange rate for buying operations (Source: State Bank of Vietnam) (Source: CEICdata.com) Figure 4.1 Vietnam’s Foreign Exchange Reserves, 2016-2020 Figure Noi ve viec exchange rate tang cao -> dong noi te mat gia -> ngan hang ban ngoai te (giam du tru ngoai hoi) de on dinh ty gia Conclusion and recommendations to Vietnam 5.1 The vice-versa relationship between Brazil’s and Vietnam’s exchange rate policy 5.1.1 Pre-Covid 19 (before 2020) According to statistics from the General Department of Vietnam Customs (2022), two-way trade between Vietnam and Brazil hit about 5.2 billion USD in the first ten months of 2021, up nearly 40 percent year-on-year Vietnam is a leading ASEAN member nation in terms of trade cooperation with Brazil The two sides have continued to study and negotiate a free trade agreement within the Southern Common Market One of the major exporting/importing commodities between the two countries is coffee (Source: nippon.com) Figure 5.1: Import of Vietnamese and Brazilian Coffee According to the book “International Economics 11th Edition” (Dominick Salvatore, 2013), a weaker domestic currency means that the price people pay for foreign goods will generally rise significantly As a corollary, a stronger domestic currency may reduce the prices of foreign goods to some extent In this case, as the BCB and SBV both succeeded in monitoring the exchange rate to keep it in a stable state, while price level and inflation were also kept in check, international trade between Vietnam and Brazil flourished since the commodity prices was consistent and attractive enough to raise demand in the local economy This was proven correct as two-way trade of coffee from Vietnam and Brazil were increasing annually during this period 5.1.2 Post-Covid 19 (2020-2022) Despite the negative effects of Covid, Vietnam and Brazil trade relationship has still been going stronger than ever Export turnover from Brazil still increased during the peak of the pandemic In the first quarter of 2021, total export turnover from Vietnam reached $689.04 million, exceeding 13,4% to that from last year Brazil reduced their interest rate during Covid-19, which results in an increase in consumption This was a great opportunity for Vietnam to further expand their trade in Brazil However, that was a temporary policy, so Vietnam needed to be highly aware, and be well-prepared for unexpected changes to occur 5.2 Lessons learnt from the situations of Brazil (i) Exchange rate stability is crucial for economic stability: Brazil has experienced significant exchange rate fluctuations in recent years, which have had implications for its economy, including inflation and investment levels, with its exchange rate fluctuations reaching over 100% during the period Vietnam could learn from this and prioritize exchange rate stability to avoid potential adverse effects on its economy (ii) Coordination between monetary and fiscal policies is essential: Brazil has faced challenges in coordinating monetary and fiscal policies to manage its exchange rate For example, there have been instances where Brazil's central bank has adjusted interest rates to influence the exchange rate, while the government has pursued fiscal policies that impact the country's fiscal deficit and debt levels Vietnam could learn from this and ensure effective coordination between monetary and fiscal policies to maintain exchange rate stability and avoid potential conflicts between policy objectives (iii) Prudent management of capital flows is critical: Brazil has experienced significant capital inflows and outflows, which have impacted its exchange rate policy as capital outflows usually happen when there is uncertainty in the local economy Vietnam could adopt prudent management of capital flows, including appropriate regulations on capital inflows and outflows, to prevent potential disruptions to its exchange rate policy (iv) Flexibility and diversity in exchange rate policy management tools may be necessary: Brazil has employed various exchange rate policy tools, including both monetary and fiscal policies, to manage its exchange rate For example, there have been instances where the BCB has adjusted interest rates to influence the exchange rate, while the government has pursued fiscal policies that impact the country's fiscal deficit and debt levels Vietnam could consider adopting a fiscal policy that also aims to stablize the exchange rate like this, besides its monetary policy, which has been showing positive results during the period (v) Long-term policy consistency is crucial: Brazil has experienced changes in its exchange rate policy over time, which may have impacted market confidence, inflation rate, and investment levels Vietnam could prioritize long-term policy consistency in its exchange rate policy to maintain stability and build investor confidence, thus reaching one of its most important socio-economic target – to attract more FDI intro the country (vi) Build foreign exchange reserves: Accumulating an adequate level of foreign exchange reserves can provide a buffer against external shocks and help support exchange rate stability Vietnam could follow the example of Brazil, which maintainted a foreign reserves level of 15.307% of its GDP, as of December 2022, thus considering building and maintaining a more sufficient foreign exchange reserves with a diversity of currencies, instead of purely USD or gold, with a view to mitigate potential risks associated with sudden exchange rate fluctuations 5.3 Recommendations for the Vietnam’s government in the next 5-year period Despite learning from Brazil’s achievements and failures, it is important to note there is no one-size-fits-all approach Vietnam's government should conduct a thorough analysis of its own economic conditions, trade dynamics, and policy objectives when considering any lessons from Brazil's exchange rate policy or other countries' experiences as well (i) Foster a stable macroeconomic environment: Ensuring stability in key macroeconomic indicators, such as inflation, fiscal deficit, and public debt, can help create a conducive environment for exchange rate stability Sound monetary and fiscal policies should be implemented to manage domestic demand and maintain price stability, which can support a stable exchange rate (ii) Enhance exchange rate flexibility: Allowing for some flexibility in the exchange rate can help absorb external shocks and promote market-based adjustments Vietnam could consider adopting a managed float or a crawling peg exchange rate regime, which would allow the exchange rate to adjust gradually in response to changing economic conditions (iii) Prudent management of capital flows: Implementing appropriate regulations on capital inflows and outflows can help prevent potential disruptions to the exchange rate policy Careful monitoring and management of capital flows, including measures such as capital controls, can help reduce volatility in the foreign exchange market and support exchange rate stability (iv) Strengthen policy coordination: Ensuring effective coordination between monetary and fiscal policies is essential for exchange rate stability The Vietnamese government could improve coordination between relevant agencies to align monetary and fiscal policies with exchange rate objectives, and avoid conflicting policies that may impact exchange rate stability (v) Enhance market monitoring and supervision: Robust monitoring and supervision of the foreign exchange market can help detect and address potential speculative activities or market disruptions Vietnam could strengthen its regulatory framework and surveillance mechanisms to prevent illegal activities and ensure transparency in the foreign exchange market (vi) Promote long-term policy consistency and transparency: Providing clear and consistent exchange rate policy guidance to market participants can enhance market confidence The Vietnamese government could communicate its exchange rate policy objectives and strategies transparently, and maintain long-term policy consistency to build investor confidence and stability in the foreign exchange market (vii) Build foreign exchange reserves: Accumulating an adequate level of foreign exchange reserves can provide a buffer against external shocks and help support exchange rate stability Vietnam could consider increasing its foreign exchange reserves and setting up a foreign reserves requirement for commercial banks and othere financial institutions, to mitigate potential risks associated with exchange rate fluctuations BIBLIOGRAPHY Obstfeld, M., Shambaugh, J C., & Taylor, A M (2005) The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility Review of Economics and Statistics, 87(3), 423–438 https://kpmg.com/xx/en/home/insights/2020/04/brazil-government-and-institutionmeasures-in-response-to-covid.html to be continue