Managing foreign exchange rate vietnam,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty GRADUATION THESIS MANAGING FOREIGN EXCHANGE RATE VIET NAM Student name : Le Thi Hai Yen Class : ATCA-K11 Lecturers : Nguyen Hong Thang, Nguyen Thi Minh Hang June, 6th 2012 Graduation Thesis Banking Academy TABLE OF CONTENTS ACKNOWLEDGEMENT ABSTRACT List of tables List of figures List of abbreviations CHAPTER I: INTRODUCTION 1.1 Rationale of the research 1.2 Objectives of the research 1.3 Scope of the research 1.4 Research Methodology 1.5 Structure of the research .2 CHAPTER 2: THEORETICAL FRAMEWORK 2.1 Overview of exchange rate 2.1.1 Definition of ER 2.1.2 Classification of ER .4 2.2 Determinants of exchange rate 2.2.1 Monetary policy 2.2.2 Supply and demand for foreign currency 2.2.3 Differentials in inflation 2.2.4 Differentials in interest rates 2.2.5 Political stability and economic performance 2.3 Foreign exchange rate policy 2.3.1 Definition and goals of ER policy 2.3.2 Foreign exchange rate management regimes 2.3.2.1 Fixed exchange rate: 2.3.2.2 Floating exchange rate: .7 2.4 Tools for the exchange rate management: 2.4.1 Tools directly affect ER: Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy 2.4.2 Tools indirectly affect ER: .8 2.5 Experiences of some countries in the exchange rate management and lessons for Viet Nam 2.5.1 Experience of China 10 2.5.2 Experience of Thai Land 11 2.5.3 Lessons for Viet Nam 14 CHAPTER 3: THE EXCHANGE MANAGEMENT IN VIET NAM 15 3.1 The exchange management in Viet Nam 15 3.1.1 From 1992 to 1997 (Before Asia Financial Crisis) .15 3.1.2 From 1997 to 1999 (Asia Financial crisis period) 17 3.1.3 From 1999 to 2006 (After Asian financial crisis and before joining WTO) 18 3.1.4 From 2007 to present (After joining WTO) 21 3.2 Assessment of the ER management in Vietnam 30 3.2.1 Achievements 30 3.2.1.1 The ER management mechanism was more flexible 30 3.2.1.2 International balance of payment was improved 31 3.2.1.3 The forex was pushed up to develop .31 3.2.2 Drawbacks .31 3.2.3 The causes .32 3.2.3.1 Objective causes 32 3.2.3.2 Subjective causes 33 CHAPTER 4: RECOMMENDATIONS AND CONCLUSION 34 CONCLUSION References Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy ACKNOWLEDGEMENT I would like to acknowledge my heartfelt thanks to PhD Nguyen Hong Thang, Faculty of Banking and MBA Nguyen Thi Minh Hang, Faculty of Foreign languages, Baking Academyfor their guidance during the entire period of preparationof this thesis I would like to send my thanks to The Board of Director of Bank for development of Viet Nam, ThanhHoa branch, who allowed me to consult the company’s materials, always encouraged me as well as gave me much of time to domyresearch I would like to also express my special thanks to all lecturers in Faculty of Foreign Languages and Faculty of Banking, Banking Academy for their invaluable advices and their kind support to complete this thesis Without their support it is believed that this thesis is hardly to be finished Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy ABSTRACT For an open economy like Viet Nam, issues surrounding ER are often very important The determination of ER rate and the ER management policy have with components of aggregate demand, aggregate supply, as well as its impact on capital flows, on the independence of monetary policy, and on the effectiveness of macroeconomic policies are significant concern of policy-makers Therefore, it is necessary to study the ER management and find out some solutions to improve the ER management in Viet Nam in the coming time The research in this study attempts to give an overall picture of the ER and the ER management in Viet Nam and associated policies as well as to examine the ER’s impact on the main macroeconomic variables especially in the context of economic integration in Viet Nam before and after joining WTO (from 1992 to present) The focus of the research is as follows: - To find out the information content of ER and the ER management as well as tools affect ER - To identify the changes of ER and the impacts of these changes on the economy - To assess the capability of the SBV in managing ER during the period before and after joining WTO - To search for some solutions for the SBV to have smooth shift a more flexible and rational ER management Besides a description of ER management in Viet Nam from 1992 to present, and a review of the changes in the ER policy, the quantitative and econometric research methods are used in the analyses In discussing the ER management and the ER policy, reference is made to relevant theories and historical lessons of the other countries Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy List of tables Table 2.1: Exchange rate, trade balance and foreign reserve of China in the period 2002-2007 10 Table 2.2: Exchange rate and trade balance of Thai Land from 2003 to 2008: 11 List of figures Figure 2.1: Fluctuation of the Baht/USD rate in the period 1994-2008 12 Figure 2.2: Thai Land trade balance in the period 1994-2008 13 Figure 3.1: Official ER fluctuation and free market ER in the1992- period 1996 16 Figure 3.2.: Official ER fluctuation and market ER in the 1999-2003 period 19 Figure 3.3: Daily VND/USD ER and bands, 2008-2011 23 Figure 3.4: Daily Official and Parallel Market ER, VND/USD, 2009-2011 .24 Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy List of abbreviations BOP Balance of Payment CNY Chinese Yuan C Private consumption CB Central bank ER Exchange rate EUR Euro Forex Foreign exchange G Government spending I Gross investment IMF International Monetary Fund JPY Japan Yen M Imports SBV State Bank of Vietnam USD United States Dollar VND Vietnam Dong X Exports Y Gross Domestic Product (GDP) WTO World Trade Organization Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy CHAPTER I: INTRODUCTION 1.1 Rationale of the research The young economy of Viet Nam is assessed to have many investment potentials and opportunities, therefore the globalization and regionalization are the inevitable trends That is the process with both opportunities and challenges for Viet Nam How to integrate in the international economic efficiently and reduce risks of integration is at the top concern of the developing countries like Viet Nam In an open economy, the exchange rate becomes a tool for the government to reduce impacts of shocks in the process of integration; therefore the country can integrate more actively The exchange rate is one of the complex matters, refer to many issues like inflation, interest rate, trade deficit, employment, foreign debts, budget deficit, etc and implementation of macroeconomic goals The exchange rate has impacted on the economy of each country in particular, and international economic relationships in general, especially the trade relations among countries, therefore it is always concerned Defining the suitable exchange rate policy will make the country more active in unexpected changes so as to keep balance and prevent many shocks from the economy As a result, it helps to stabilize the price and currency, attract investments, control inflation, curb unemployment and increase the confidence of the residents in the domestic currency and the economic policy In Viet Nam, although the management of exchange rate in recent years has showed a certain role, there are still many limitations that need to be overcome Additionally, in the new situation, the management of exchange rate must be more flexible and efficient From that fact, I choose the study “MANAGINGFOREIGN EXCHANGE RATE IN VIET NAM” in order to assess the situation of applying the current exchange rate regime, the exchange rate management policy especially in the period of after joining WTO and give some recommendations to improve the exchange rate policy in Viet Nam in the coming time Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy 1.2 Objectives of the research The thesis aims at studying the exchange rate management in Viet Nam from 1992 to present and bringing out some solutions to improve the exchange rate management in the coming time The thesis is designed to answer the following questions: - What is the exchange rate and how to manage it? - What are lessons for Viet Nam in managing the exchange rate policy? - How does the exchange rate in Viet Nam change? - What does the CB to deal with these changes? 1.3 Scope of the research The research is placed in the context of Viet Nam on the process of joining WTO, from which the changes of ER and the ER management before and after WTO are given to analyze and find out the solutions to improve the ER management in Viet Nam in the coming time 1.4 Research Methodology The methods used herein mainly include quantitative research method, sample selection, data analysis and descriptive statistic.The research is also used the secondary data such as websites, annual reports, financial statement and newspapers Meanwhile, the methods are combined with the modern economic theories and experiences of some countries in the exchange rate management, from which the orientation of improving the exchange rate management mechanism will be given to Viet Nam 1.5 Structure of the research The rest of this thesis is divided into three chapters accompanying with detailed discussion in each  Chapter presents an overview of existing literature on the exchange rate that helps to provide a solid foundation for the thesis  Chapter3 discusses about the situation of Viet Nam in managing the exchange rate from 1992 to present  Chapter gives some suggestions and recommendations for Viet Nam in managing the exchange rate basing on all previous researches and analyses Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy CHAPTER 2: THEORETICAL FRAMEWORK 2.1 Overview of exchange rate Le ThiHai YenClass ATCA –K11 Graduation Thesis 25 Banking Academy The above situation could have been worse without the followings: (i) the reduction in foreign exchange demand due to the decline in outflowremittances from foreign-invested enterprises (estimated at USD3 billion in 2009, compared to USD4.4 billion in 2008) and (ii) the increase in foreign exchange supply thanks to the sustained level of remittances from overseas at more than USD6 billion Disbursed FDI was estimated at USD10 billion in 2009 And even though net inflow of foreign indirect investment was negative during the first half of the year, the flows reversed at the end of the year The above analysis shows that during this sub period, SBV had been hesitant and inconsistent in its ER policy The widening of bands instead of official devaluation in March 2009 did not bring the desired results During the whole year, despite administrative measures (such as the regulation that requires all state-owned enterprises to sell foreign exchange to SBV) as well as various statements by SBV officials, parallel market rates continued to stay at levels higher than commercial bank rates In addition, trying to maintain the OER for prolonged period, SBV had to sell a considerable amount of USD, in effect reducing Vietnam’s foreign reserves By the end of 2009, there was still considerable expectation about further depreciation of VND The year 2010 continued with the same trends in the foreign exchange market as in the year 2009 In particular, commercial banks continued to quote at the upper band of the official ER for most of the year and the gap between parallel market rate and official rate rose to unprecedented high levels near the end of 2010 As the pressures were still high despite various attempts by SBV at the end of 2009, on 11/02/2010, SBV increased the official rate from 17,941 VND/USD to 18544 VND/USD, a 3.3% devaluation Together with this, SBV carried out various administrative measures to ease the pressure in the foreign exchange market such as reducing the required reserve ratio for foreign currency deposits, expanding credit in foreign currencies, stopping gold trading using foreign accounts by commercial banks and credit institutions, closed down gold trading floors, and increased the basic interest Le ThiHai YenClass ATCA –K11 Graduation Thesis 26 Banking Academy rate to 8% As a result, foreign currency credit growth reached 27% during the first half of 2010 while domestic credit in VND grew only by 4.6% At the same time, the amount of foreign transfers by Vietnamese overseas and the amount of FDI, ODA and FII disbursements both increased during the first two quarters of 2010 as compared to the same period of 2009 under the economic crisis All of these factors contributed to the increase in supply and the reduction in demand for dollars, thus reducing the gap between the official rate and the parallel market rate during the second quarter and the first half of the third quarter of 2010 (see Figure 3.2) However, despite this, commercial banks continued to quote at or near the upper band of the official ER And from the beginning of July 2010, parallel market rate started to climb though slowly at first These trends reflect the expectations for further devaluation of VND in the foreign exchange market The reasons for such expectation include (1) the ease in supply of dollar was mainly due to businesses taking advantage of the difference in interest rates between foreign currency denominated deposits and VND deposits; (2) many administrative measures by SBV are temporary and expected to be reversed; (3) fear of increased demand for foreign currencies as many of the debts in foreign currency taken out by businesses to take advantage of interest rate differences would soon be due; and (4) speculative behaviors by the public for trust in VND was waning Perhaps realizing these potential threats, on 17/08/2010, SBV unexpectedly increase the official ER by 2.1% to 18,932 VND/USD even when the pressures were not apparent and the gap between parallel market rate and the official rate had been staying at low level of around 500 VND/USD Immediately, commercial banks raised their rate to the upper limit SBV’s action might have been able to relieve the pressures and stabilize ER if it was not for many unfavorable factors that occurred during the last months of 2010 The first and perhaps most important factor was the rise in world gold price to record high level which led even to higher increase in domestic gold price due to speculation At the same time, after several months of low inflation rate, inflation started to climb since September 2010 making the CPI for the year 2010 Le ThiHai YenClass ATCA –K11 Graduation Thesis 27 Banking Academy increase to 11.75% compared to 7% in 2009 During the past few months of 2010, the foreign exchange market saw an increasing demand for foreign currencies due to (i) the increased need for paying up debts taken by businesses during the first and second quarters of 2010, (ii) increase demand for import as it often does at the end of the year and also for gold import to take advantage of the difference between domestic and world gold prices, (iii) the tightening of SBV on foreign currency credit, (iv) the increase in interest rate of deposits denominated in foreign currency to more than 5% per annum and (v) speculations In addition, the supply of foreign currencies was declining due to businesses’ unwillingness to sell foreign currencies to banks for fear of further devaluation As a result of the excess demand in the foreign exchange market, the parallel market rate started to climb again since September 2010 to 20,500 VND/USD in midOctober and to a record high level of above 21,500 VND/USD by late November (see Figure 3.2) Facing with such crisis, SBV again carried out various administrative measures such as declaring the increase in the supply of dollars for imports of necessary intermediate goods, tightening the trading and lending/borrowing in gold, and increasing quota for gold import to ease up domestic gold price Also, the basic interest rate was increased to 9% per annum in November Yet, the parallel market rate only eased up a little and stayed high at the end of 2010 and beginning of 2011 The first reason for this was that most measures by SBV, especially those applied in domestic gold market were temporary Secondly, foreign reserves had been declining continuously since 2009 and thus the guarantee by SBV to supply foreign currencies to the market was not fully backed Thirdly, inflation was high and continued to rise Fourthly, trade deficits for 2010 were still high at USD12.4 billion (already excluding USD2.8 billion in gold) This crisis was further fueled by speculative behaviors Unable to sustain ER further, SBV declared an unprecedented high rate of devaluation of VND (9.3%) in early February 2011, increasing the official rate to Le ThiHai YenClass ATCA –K11 Graduation Thesis 28 Banking Academy 20,693 VND/USD and narrowed the band to +/-1% This attempt did not show immediate results Parallel market jumped to over 22,100 VND/USD within a few days In March 2011, SBV tightened the activities in foreign exchange market, setting low interest rate ceiling for foreign currency deposits and thus effectively widening the gap between this rate and the VND deposit rate which were already at its ceiling level of 14% Ceiling rate for USD denominated deposits was reduced from around 5% to 3% At the same time, from March to June, SBV carried out various anti-dollarization measures such as lower ceiling rate for USD denominated deposits (from 3% down to 2%), tightened controls on black market activities and on domestic gold market Also as domestic gold price was lower than international price, gold export increased significantly, especially during May and June Thus, supply of dollar increased partly due to the conversion from USD deposits to VND deposits to take advantage of high VND deposit rate and partly due to the increased amount of USD obtained from gold export Also, SBV declared that it had acquired an additional of USD3 billion for foreign reserves Effectively, both the parallel market rates and the commercial bank rates went down and sometimes even lower than the official rates since April 2011 The sub-period of 2010-2011 show more responsive attempts by the SBV than in previous years In particular, the SBV tried to stay ahead of the market in August 2010 when the pressures in the foreign exchange market were relatively low Also, the SBV carried out larger one time devaluation (February 2011) These actions show that the SBV is less rigid and more oriented toward the market than before However, the SBV is still using many administrative measures instead of creating the environment for the market to adjust Although the pressures in the foreign exchange market have eased up somewhat, the lessons from similar situation in mid-2010 warn us not to take the market for granted There are undeniable similarities between these two periods of seemingly calm market conditions First, businesses and individuals have been converting USD deposits to VND deposits to take advantage of interest rate differences in both periods Second, in both periods, commercial banks have been Le ThiHai YenClass ATCA –K11 Graduation Thesis 29 Banking Academy easing up on their ERs, quoting below (though still close to) the upper limit Third, foreign currency credits have been expanding much faster than VND credits in both cases which means end of year demand for foreign currencies to pay back those debts will certainly increase Fourth, pressures from trade deficits have been strong Lastly, parallel market rates and commercial banks rates stay close together (Despite the tightened controls in the black market, certain activities are still going on) Thus, if unfavorableconditions emerged during the last quarter of 2011 such as sudden and big changes in gold markets (both domestic and world), high inflation (both international and domestic), pressures in ER market will increase and may lead to fluctuations in the market as we experienced during the last quarter of 2010 There are, nonetheless, differences in the market conditions, both favorable and unfavorable conditions in the current period compared to that of mid-2010 First, the situation was more favorable in 2010 because the foreign exchange market was calm during a period of low inflation meaning higher trust in VND while in 2011, trust in VND ran low due to the past consecutive months of high inflation However, SBV had been able to and was still making more effort to increase foreign reserves Hence, SBV would have more reserves to help stabilize the market when needed Third, SBV’s last devaluation in February 2011 (9.3%) was almost twice as high as the sum of 2010’s two devaluations (5.4%) which means there may be fewer pressures for further devaluation in 2011 than in 2010  Vietnam dong ER outlook 2012 ANZs report released, government efforts to stabilize the foreign exchange market and restore confidence in the dong were having a positive effect The US dollar-Vietnamese dong ER is expected to hold steady to the endof this year, but ANZ and Standard Chartered Banks anticipates dong devaluation early next year The dong onshore trading rate has stabilized in the VND 20,550-VND 20,650 per US dollar range in some first month of the year In the offshore Non Deliverable Forward (NDF) market, the dong implied 12month discount has narrowed by 2.2 percentage points from its post-devaluation peak Le ThiHai YenClass ATCA –K11 Graduation Thesis 30 Banking Academy in February The dongs one-month NDF discount has also stabilized around per cent, The SBV more aggressive stance on inflation and changes in its forex policy are behind the recent stabilization However, both ANZ and Standard Chartered Bank assumed that depreciation pressure would resume the year 2012 due to rising inflation, a widening trade deficit, low foreign currency reserves, and the risk of new policy mistakes “The change in our forex forecasts reflects encouraging steps by the Vietnamese authorities to tighten monetary policy and their commitment to maintaining a stable ER” Standard Chartered Bank said Standard Charter factors in dong devaluations of 6.8 per cent this year is comparable to the average yearly dong devaluation between 2008 and 2010 Vietnam yearly inflation climbed to 19.8 per cent in May, marking a 29-month high-the fastest rise in any of the 14 Asian economies tracked by Bloomberg Vietnam trade deficit reached $ 1.7 billion-its greatest level in 17 months In April it stood at $ 1.49 billion The May deficit brought the total for the year to $6.59 billion, wider than the %5.46 billion deficit at the same point last year, putting further pressure on authorities to address imbalances in the economy 3.2 Assessment of the ER management in Vietnam 3.2.1 Achievements 3.2.1.1 The ER management mechanism was more flexible Vietnam has always paid attention to analyze the situation and changed the ER management mechanism From managing the fixed ER rigidly during the period from 1992 to 1997, Vietnam changed to manage ER mechanism more flexibly and ER was assessed more objectively That helped to reflect the real value of the currency, curb the inflation, stabilize the price and change the market psychology The confidence of the residents in the economy policy in general, the monetary policy and the ER management in particular were increased Besides, ER defining and the continuously adjusted band expressed the flexibility in managing ER That adjustment also changed step by step without causing the strong and unexpected impacts on the economy, and Le ThiHai YenClass ATCA –K11 Graduation Thesis 31 Banking Academy also in line with each development period to prevent the economy from big shocks’ influence 3.2.1.2 International balance of payment was improved Basically, the ER management of SBV was efficient, and had positive impacts on many sides of the economy such as: Real ER had upward trend making the international competitiveness of Vietnam goods increase; the export continuously increased therefore it contributed to improve trade deficit On the other hand, the long-term stability of ER helped to attract oversea capitals into Vietnam and therefore the capital balance was surplus, accordingly As a result, the foreign currency reserve of Vietnam continuously increased 3.2.1.3 The forex was pushed up to develop Because of the flexible ER management together with the foreign exchange transactions diversification as well as the widening members in the foreign currency transactions, the ER management mechanism in this period made Vietnam forex market operate more lively with high revenue, the considerable increase of foreign currency transactions and the abundant supply for foreign currency for the economy 3.2.2 Drawbacks  The ER management mechanism was slowly reformed in line with the economy development process at each period As a result, the economy was put under pressure of foreign currency  ER has not reflected the relation between supply and demand for foreign currency in the market The revenue of foreign currency transaction in the interbank market has not yet adapted the demand of the economy At present, the operation scale of the interbank forex market does not match with its stature ER fluctuated one way meanwhile ER of commercial banks was always at the ceiling rate, which reflected supply and demand for foreign currency insufficiently and impacted considerably on the import-export  The fluctuation band of ER was not flexible Sometimes, the band was too high at 10% or too low at 0.1%, which created ER differentials in the free market Le ThiHai YenClass ATCA –K11 Graduation Thesis 32 Banking Academy and the official market As a result, the speculation occurred ER has not been major tool to manage the foreign currency market  ER has not been defined according to the relation of supply and demand for foreign currency The VND was usually overestimated making difficulties in the export ER mechanism during the previous time has not stimulated the export with Vietnam and therefore it has not become the motivation to improve the trade balance On the other hand, the VND overestimation in this period makes the price of foreign currency cheaper, it stimulates export in order to not only serve production but also import consumer goods Strictly, it stimulates to import the technology which needs many capitals, whereas the labor resource is available but not be utilized In addition, ER decreased the import and put pressure under domestic production, which is opposite to the stable economic growth development strategy based on the export and gradually replace the import  The announcing the VND/USD of SBV in the forex market isolated with the USD, therefore the USD appreciation or depreciation compared to other currencies almost did not affect the VND/USD Thereby the market used much more USD without concerning the forex risks The calculation of commercial trade of Viet Nam goods in terms of price almost based on real bilateral ER 3.2.3 The causes 3.2.3.1 Objective causes Firstly, Viet Nam reformed the economic slowly; thereby it was confusing in managing the economic policy, especially foreign policy and ER policy Secondly, Vietnam learnt by experiences of the ER management mechanism from similar countries with Vietnam not very well From a developing country, also in the reform process, China had strong and flexible steps in managing ER and gained success Now, China becomes an economic power of which the development speed is highest in the world This is actually a mirror for Viet Nam to follow Thirdly, the forex market developed quite slowly; the revenue was too small; Le ThiHai YenClass ATCA –K11 Graduation Thesis 33 Banking Academy Supply for foreign currency was not sufficient to adapt the demand for foreign currency; ER was not defined according to the supply-demand relation Therefore, they affected the price of the import goods in terms of the domestic currency and reduced the international commercial competitiveness of Viet Nam Lastly, the competitiveness capacity of the export goods from domestic was still limited; the export-import market was not widened The increasing trend of using the technical fences to protect domestic production of countries was also the factor causing the limitation of the ER impacts on the export-import and on gross demand of the economy 3.2.3.2 Subjective causes Firstly, the State has not built the goal of managing ER in the long term as well as in each particular period because the macroeconomic goals were contradictory between the stipulation of ER and the stability of economic, between the import goods and the improvement of the competitiveness capacity of the export, between the curb of inflation and economic growth Secondly, the coordination of ER policies, forex policy, and monetary policy has not created the interaction, downstream.Thereby the impact of these policies on the economy declined Sometimes, the goals of these policies were far from each other, even contradictory in the concrete content related to the management of ER For example, through analyzing the changes of ER over the past few years, it can be seen that the use of ER to curb the inflation and hide the VND devaluation only made the international commerce competitiveness of Viet Nam in both domestic and oversea market decline Meanwhile, the export goods faced with more difficulties and the import goods cannot be controlled As a result, VND could not stable for that Thirdly, the modest foreign currency reserve and the slow intervention of SBV on the forex market curbed the effectiveness of the intervention and made the problem of supply-demand for foreign currency often stressful Finally, the cooperation among the macroeconomic management units was not united; therefore, the economy was affected more or less Le ThiHai YenClass ATCA –K11 Graduation Thesis 34 Banking Academy CHAPTER 4: RECOMMENDATIONS AND CONCLUSION RECOMMENDATIONS Over the past few years, ER policy was improved basically in line with the open market economic development trend The transactions of trading foreign currency Le ThiHai YenClass ATCA –K11 Graduation Thesis 35 Banking Academy according to the international requirements are increasingly applied However, the ER management of Viet Nam still needs to be improved to further promote the efficiency of the foreign-economic activity by encouraging export, controlling import and improve the balance of payment To so, the following key issues should be focused on: Firstly, concentrate on consolidating and developing the interbank forex market The interbank forex market is considered the nuclear of forex market Therefore its operation efficiency has the crucial role in the performance of the Forex market In fact, during the previous time, the amount of transactions in the interbank forex market in Viet Nam made up the very low proportion in the total forex transactions In other word, commercial banks operated partly with self-sufficient trend in which the foreign currencies bought from customer were firstly sold to their customers After that the surplus was sold in the interbank forexmarket, that curbed the development of the forex market and badly impacted on the forex market and the economy in general On the other hand, the intervention of SBV has not been flexible due to the slow decision compared to the real change Thus, in order to promote the interbank forex market to develop, the SBV needs to implement some measures such as: continue managing the supply-demand for foreign currency through the role as the final trader; actively take part in the forward and swap operation to make favorable conditions for commercial banks to take part in the market positively The intervention of SBV in the foreign currency market needs to be given promptly with the suitable scale; otherwise, it will rise the shy psychology, make the market quiet, stimulate speculation, put pressure on ER and reduce the effectiveness of interventions Therefore, the State should make conditions to expand the number of market participants, improve the transaction regulations, modernize the payment, improve the business level for transaction staffs, etc Secondly, increase foreign currency reserve of the State In order to implement the ER management mechanism more flexible, SBV needs to increase the foreign currency reserve and ensure the necessary minimum reserve level to have enough resources for SBV to intervene promptly and adequately Le ThiHai YenClass ATCA –K11 Graduation Thesis 36 Banking Academy by the open operations measures to adjust ER to benefit the economy in general and ER in particular On stabilizing ER by selling foreign currency in the market, if pressure of increasing ER is continuous, the foreign currency reserve will be gradually exhausted Again, SBV has to use the administrative measures to intervene in ER causing the distorted supply- demand relationship in the market and the unstable ER, etc On the other hand, the foreign currency reserve needs to be strong enough to cope with plot of exciting speculation in the market Therefore, the increase of foreign currency reserve is very important to stabilize ER and avoid fluctuations that destabilize the economy Thirdly, improve and widen foreign exchange trade operation In Viet Nam, at present, commercial banks are allowed to execute some operations such as: spot, forward, swap, and option In fact, only the spot e ER is focused on whereas other operations are rarely used because they cannot reflect the full roles of the forex market In order for the forex market to act with its role, the development and broadening foreign exchange operations is very necessary Regardless of the spot ER, other operations which are being applied in Viet Nam (Forward, Swap, and Option) are used to prevent ER risk and execute speculation (option) If ER is defined closely to supply- demand rule in the market, these operations will promote their significant roles much more Clearly, when ER is defined in the narrow band, it is difficult to create the favorable conditions for those operations to develop Therefore, widening the band and then eliminating it completely should be taken into account However, the application of some particular operations (especially the Option) needs to be executed step by step in line with the characteristics and conditions of Viet Nam’s forex market Meanwhile, the State must consider gradually broadening and applying more other transaction operations in the forex market such as: future, forward, etc Finally, implement the multi-currency policy At present, Viet Nam mainly uses USD in payment According to the statistics of IMF, in 2009 the reserve distribution ratio of USD was even times higher than Le ThiHai YenClass ATCA –K11 Graduation Thesis 37 Banking Academy EURO (the currency in the 2nd position in the total foreign currency reserve) Therefore, Viet Nam needs to build a reasonable foreign currency mechanism on the basic of diversifying the strong foreign currency basket, making foundation for defining the VND rate The diversified foreign currency mechanism will make favorable conditions for commercial banks to provide with the risk insurance of interest rate, ER, allow the strong foreign currencies in Viet Nam to be freely changed to make USD’s role become more limited Especially, the State needs to pay attention to EURO and JPY because of European as a big market and Japan as the leading credit system in the world Meanwhile, the State should stimulate the export-import companies to diversify the monetary mechanism in the international commerce transactions to increase the balance of supply-demand for foreign currency contributing to diversify monetary of the economy in a balanced way Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy CONCLUSION Together with the reform process which brings Viet Nam’s economy a chance to integrate with the world economy, under the urgent needs of widening the economic relations, understanding ER - one of the most important macroeconomic variables of the economy- is very important All fluctuations of ER affect the subjects taking part in the import-export trade; therefore ER can make the trade balance better or worse That is the reason why ER is always at the top concern of the policy makers and is considered the important tool in the macroeconomic management strategy of the country In order to serve the goal of rapid and sustainable economic growth, promote the export and curb the import, increase the international commerce competitiveness of Viet Nam, ER policy in the coming time needs to be set more flexibly in line with the more complicated changes of the domestic and oversea economic relations To that, the plan for ER change in the long term must be in consideration of the trend of transition economy With these requirements, ER policy makers must be sensitive in looking, assessing the factors that impact on ER at present or in the future In chapters, the study “Managingforeign ER in Viet Nam” has dealt with some basic things Firstly, I give overview of ER, determinants of ER and the ER policy together with its tools Next, the research studiesthe changes of ER at each period from 1992 to present and measures that the SBV applied to manage ER Then, I make assessment on the capability of the SBV in managing ER in Viet Nam from 1992 to present by indicating the achievements and drawbacks Finally, from the analyzed issues, I suggest some solutions for the SBV to have smooth shift a more flexible and rational ER management in the coming time Despite of many efforts to finish this study, with the very wide research thesis,the limitation of time and capacity, and the complicated problems about the ER, it is impossible to avoid the defects Therefore, I hope to receive contributions from the teachers and other people who concern this matter so that this study reaches to the good results and have practical significance Le ThiHai YenClass ATCA –K11 Graduation Thesis Banking Academy References In Vietnamese: - GS.TS TrầnNgọcThơ, TS NguyễnNgọcĐịnh (2005), “Tàichínhquốctế”, NXB ThốngKê, Tp HồChí Minh - GS TS NguyễnVănTiến (2005), “Tàichínhquốctếhiệnđạitrongnềnkinhtếmởcửa”, NXB ThốngKê - GS TS NguyễnVănTiến (2009), “Giáotrìnhtàichínhquốctế”, Xuấtbảnlấnthứ 3, NXB ThốngKê In English: - Nguyen Thi Thu Hang(2010) “Exchange rate in Viet Nam: Trends and management” - IMF (2009), “Annual report on Exchange Arrangements and Exchange restrictions” - IMF (2010), “Annual report on Exchange Arrangements and Exchange restrictions - Doan Phuong Thao (2011) “Solutions to improve the exchange rate policy to promote the export in Viet Nam” - WEO (2011), “World Economic Outlook Statistics” Websites: www.google.com www.wikipedia.org www.vietcombank.com www.adb.org www.imf.org http://tailieu.vn Le ThiHai YenClass ATCA –K11