group assignment international finance current exchange rate policy in vietnam

Exchange rate policy: Exchange rate policy is the activities of the government and the Central Bank to maintainor influence the exchange rate level of the national currency compared to o

BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC KINH TẾ - LUẬT

GROUP ASSIGNMENT

INTERNATIONAL FINANCE CURRENT EXCHANGE RATE POLICY IN

VIETNAM LECTURER: NGUYỄN THANH LIÊM

Group member MSSV

Lý Như Bình K204041262

Trần Trịnh Thu Thảo K204041281

Đặng Ngọc Mỹ Duyên K204041264

Đỗ Ngọc Thảo Vân K204041286

Trần Quang Duy K204040235

Abstract

The exchange rate policy is a critical cornerstone in the complex tapestry of Vietnam's economic framework, carrying enormous influence over the country's financial trajectory and international economic standing This essay attempts to delve into the intricate workings and significance of Vietnam's current exchange rate policy, elucidating the rationale for its adoption as well as the multifaceted impact it bears Situating the discussion within a broader economic context, an examination of the benefits and drawbacks of the chosen policy reveals its nuanced effects on various sectors such as trade dynamics, inflation management, foreign investment attractiveness, and the country's overall economic stability Furthermore, navigating the current challenges associated with managing this policy provides insights into the complexities involved in steering Vietnam's currency valuation amidst the global financial crisis

I CURRENT EXCHANGE RATE POLICY IN VIETNAM:

1 Concept of Exchange rate and Exchange rate policy:

a Exchange rate:

Exchange rate is a comparison of prices between two currencies of two different countries An exchange rate can also be called the price of one currency calculated by the price of another currency

b Exchange rate policy:

Exchange rate policy is the activities of the government and the Central Bank to maintain

or influence the exchange rate level of the national currency compared to other foreign currencies, in accordance with national economic goals Exchange rate policies vary across countries and timeframes but generally encompass three core approaches: a market-driven "floating" exchange rate policy, "fixed" exchange rate policy where governmental intervention aims to maintain a constant exchange rate between its currency and others Finally, an intermediary policy lies between these fundamental approaches, known as "managed floating." (Thanh, 2019)

2 Current exchange rate policy in Vietnam.

Currently, from 2016 to now, the exchange rate policy that Vietnam is using is a managed floating policy regulated through two indicators: the central exchange rate and exchange rate fluctuations (Thanh, 2019)

● The central exchange rate: Determined on the basis of a basket of currencies of countries that have trade, loan, debt repayment, and investment relationships with Vietnam in accordance with macroeconomic goals in each period Instead

of being "pegged" to the USD as before, 8 world currencies are referenced to calculate the central exchange rate: USD, EUR (European common currency), CNY (China), Japanese Yen, Singapore Dollar , Won (Korean), Taiwan Dollar and Baht (Thai)

This exchange rate is announced daily, accurately reflecting domestic and international market developments (Nguyễn, 2022)

● The exchange rate volatility: measures the range within which a currency's exchange rate can fluctuate It demonstrates the degree of fluctuation between different currencies within a specific period In Vietnam, it usually ranges from 1% - 5% depending on the period (Nguyễn, 2022)

Vietnam leverages both the central exchange rate and exchange rate volatility within a managed floating system This allows the country to maintain a stable exchange rate, thereby strengthening trade and investment, while also allowing for some flexibility to accommodate changes in the economic environment

II THE REASON FOR CHOOSING MANAGED FLOAT POLICY

1 Brief history of Vietnam's foreign exchange policy:

a Exchange mechanism before 25 February 1999:

Before 1999, during Vietnam's renovation period, the exchange rate mechanism was quite rigid The State Bank of Vietnam (SBV) announced exchange rates or based them on the closing rates at the foreign exchange trading center

Subsequently, rates were determined based on the closing rates in the interbank market of the most recent session, known as the central rate; commercial banks were allowed to announce rates within a certain range

During this period, market rates fluctuated significantly, resulting in substantial disparities between the official rates and the free market rates Speculation and hoarding of foreign currencies were persistent, prompting the SBV to make frequent adjustments to the central rate and trading band, causing shocks in the exchange market (Lê, 2017)

b Rate mechanism from February 26, 1999 to December 31, 2015:

Since February 26, 1999, the State Bank of Vietnam (SBV) has implemented a more flexible exchange rate management system in line with market mechanisms According to Decision No 65/QD-NHNN dated February 26, 1999 (along with Decision 64) by the Governor of the SBV, the SBV used the average exchange rate of the most recent interbank foreign exchange trading session as the central exchange rate and publicly disclosed it Commercial banks were allowed to set buying and selling rates for USD within a permitted range (+, - % compared to the central rate) Initially, this range was relatively narrow at "+- 1%," then it increased to "+- 7%," and later decreased to a quite low level (from August 18 until now, "+- 3%") This exchange rate mechanism has persisted for about 15 years

Under this exchange rate mechanism, the SBV adjusted the exchange rate based

on market mechanisms, somewhat mitigating speculative pricing behaviors as before However, controlling the fluctuation range and commitments regarding these fluctuations are often considered by businesses to distort the market and could still lead to speculative activities The significant decline in foreign exchange reserves in late 2010 and early 2011 also indicates that committing to maintaining exchange rates has lessons to be noted (Lê, 2017)

2 The reason Vietnam choose the managed floating exchange rate system:

In 2016, The State Bank of Vietnam decided to implement a new exchange rate with the orientation of improving the position of VND and improving weaknesses in previous policies:

● Increasing flexibility in exchange management: Regular exchange rate

adjustment has become a major factor in Vietnam's monetary governance strategy This new mechanism also suggests more flexible governance, compatible with market and international economic change, and improves our ability to cope with market and business pressures

● Fighting speculation and enhancing foreign currency management:

The new policy is aimed not only at preventing speculation on foreign currency, but also towards preventing dollarization and gold in the economy This includes applying economic measures such as adjusting interest rates, and controlling foreign currency status to prevent banks from accumulating foreign currencies

● Zero hard exchange rate commitment: This policy does not commit hard

to keep dong to a specific level, to limit excessive interference in foreign exchange data or speculative currency actions This made SBV the market leader and created a more flexible exchange rate mechanism

● Control of exchange rate impact from state budget: State budget

imbalances are considered to avoid negative impact on exchange rates It also emphasizes the importance of budget balance

● Strengthening export competitiveness: Demonstrating that lowering the

VALUE of Vietnam's DONG for export stimulus is not the appropriate strategy, the paper proposes other measures to enhance the competitiveness

of Vietnamese export goods, such as increased value added and structural changes in exports

In short, the adjustment of exchange rate policy sets out clear strategies for improving economic competitiveness, limiting risk, and promoting the sustainable development of the Vietnamese economy in the future.”

III ADVANTAGE AND DISADVANTAGE

1 Advantages :

The managed floating exchange rate will help the fluctuation of domestic commodity prices balance with the fluctuation of world commodity prices, thereby helping the economy to allocate more optimally

● Increased flexibility: Flexible economies and businesses adapt to market

changes and minimize risks

● Increase export capacity: Managing floating exchange rates helps

facilitate international trade activities, thereby enhancing synchronization, increasing export capacity and economic growth

● Promoting foreign currency investment: The floating exchange rate also

helps promote foreign currency investment, improving the competitiveness

of businesses and enhancing the development of financial markets

● Increase redundancy: Helps minimize risks related to exchange rate

control and create favorable conditions for international business activities

● Increase protection: Increase transparency and fairness in determining the

value of money, thereby helping to increase trust and protect the stability of the financial market

In addition, a managed floating exchange rate helps us not be dependent on a specific unit, partner, or country, so the country's economy will not be subject to strong fluctuations due to any shocks from other countries' currency markets.Basically, a managed floating exchange rate regime is a regime between a fully floating exchange rate regime and a fixed exchange rate regime That's why most countries around the world choose a floating exchange rate regime for their countries However, the government will intervene in this regime so that they are not completely dependent on the market And our country is also implementing this managed floating exchange rate regime

2 Disadvantage:

● Uncontrolled Exchange Rate Risks:

○ Vietnamese dong (VND) depreciates significantly, businesses may face challenges in predicting and managing costs related to importing raw materials and equipment from abroad, especially when energy and raw material prices rise sharply

● Increased Input Costs: Significant exchange rate fluctuations can increase

input costs for many industries, impacting profit margins and the final prices of products and services

● Impact on Business Competitiveness:

○ Rising Costs of Imported Goods: If the VND depreciates, imported goods become more expensive This can lead to an increase in the selling prices of goods and services produced domestically, reducing the competitiveness of Vietnamese businesses on the international market

● Loss of Price Advantage: If the VND depreciates too quickly,

export-oriented businesses may lose their price advantage against international competitors, reducing profitability and competitiveness

● Inflationary Risks:

○ Price Increase in Goods and Services: Currency depreciation can create inflationary pressures, especially if the devaluation of the currency is accompanied by an increase in the prices of imported goods, potentially raising costs for consumers and domestic businesses

● Fraud and Black Market:

○ Opportunities for Fraud: If exchange rate policies are not carefully managed, they may create opportunities for black market activities and fraud in controlling foreign exchange and taking advantage of exchange rate fluctuations

● Potential for Exchange Rate Pressure:

○ Pressure on Exchange Rates: If people and businesses anticipate that the government will intervene strongly to keep the VND stable, this could create pressure on the exchange rate and pose difficulties in maintaining stability

IV CURRENT DIFFICULTY

Inflation is at risk of rising and interest rates are difficult to reduce Short-term inflation is

at risk of increasing; if not adjusted to keep prices from increasing further with appropriate credit, monetary and public finance policies, it will turn into long-term inflation and require continued devaluation of the currency, creating an inflationary spiral Inflation will lead to greater pressure on the currency Tightening monetary policy

by applying high interest rates will cause difficulties for businesses, affecting the economy In addition, when the exchange rate is adjusted with a large difference, Vietnam's foreign debt will have to be paid more

Businesses and consumers are greatly affected when exchange rates increase, causing the prices of imported goods to also increase After the exchange rate increases, VND will lose value Prices of goods from imported to domestically produced consumer goods will also increase, due to increased input material prices, affecting the financial ability of businesses and people to pay, resulting in higher inflation For businesses when adjusting exchange rates, foreign currency debt when calculated into VND increases Businesses that borrow foreign currency must bear exchange risk because Vietnam has not applied risk dispersion tools In Vietnam, tools to combat foreign exchange risks in the foreign exchange market are not yet developed, so there are some limitations for businesses The stock market will also be greatly affected, especially for non-professional investors Usually the investment psychology of Vietnamese stock speculators is mostly influenced

by crowd psychology, causing turmoil in the market For foreign investment funds, their net asset value will be affected, because the net assets of foreign investors are calculated

in USD, so when the exchange rate adjusts to decrease, the asset value will decrease Investor net will decrease This of course has a negative impact on foreign investors Therefore, it is necessary to have solutions to limit the negative consequences of gradually adjusting the exchange rate between VND and USD (Nguyễn, 2011)

V CONCLUSION

The current exchange rate policy in Vietnam aims to maintain a stable and competitive value for the Vietnamese dong against other international currencies This policy is managed by the State Bank of Vietnam, which employs a managed floating exchange rate system The goal is to balance the currency's stability while allowing it to reflect market supply and demand forces within a certain range This approach was chosen to foster export competitiveness, attract foreign investment, and control inflation However, managing this policy faces challenges due to external market fluctuations, global economic changes, and maintaining a balance between competitiveness and stability

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