(Tiểu luận) 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: h 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 h 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 h TABLE OF CONTENTS h 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 SBV State Bank of Vietnam 15 16 SELIC USD Brazil’s benchmark interest rate US Dollar 17 VND Vietnam Dong 18 WB World Bank h 14 LIST OF FIGURES h Document continues below Discover more from: Kinh tế quốc tế TMKQ11 Đại học Kinh tế Quốc dân 999+ documents Go to course Kinh tế quốc tế - dịch chuyển quốc tế vốn 30 Kinh tế quốc tế 100% (7) Chính sách tỷ giá hối đối Việt Nam từ năm 2011 đến Kinh tế quốc tế 100% (6) h Trình bày phân tích phương thức tốn tín dụng 26 chứng từ ngân hàng thương mại Việt Nam Kinh tế quốc tế 100 92% (13) THÚC ĐẨY PHỤC HỒI KINH TẾ VÀ CẢI CÁCH THỂ CHẾ SAU ĐẠI DỊCH COVID-19: ĐỀ XUẤT CHO VIỆT NAM Kinh tế quốc tế 100% (5) Chiến lược thâm nhập thị trường Việt nam Honda 17 Kinh tế quốc tế 100% (5) Cac dang bai tap mon kinh te quoc te thi cuối kỳ Kinh tế quốc tế 100% (5) LIST OF TABLES h BRAZIL'S FOREIGN EXCHANGE RATE POLICY AND LESSONS TO VIETNAM: A RESEARCH OF THE 2016-2022 PERIOD Introduction 1.1 The rationale of the topic Vietnam is a growing nation with significant export and economic potential Vietnam successfully maintained its trade surplus in 2022, with exports totaling $336.31 billion, a 19% increase from the previous year The domestic economy reached 91.09 billion USD, increasing 14.2% from 2021 The 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 h 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 h 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) h (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 h (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 h 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 h (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 h (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 h 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 h 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