EXCHANGE RATE POLICY OF VIETNAM pps

EXCHANGE RATE POLICY OF VIETNAM Presented by: Tran Thi Thu Huong... Exchange rate arrangements in Vietnam • Before March 1989: A multiple exchange rate system with three-tier exchange r

EXCHANGE RATE

POLICY OF VIETNAM

Presented by: Tran Thi Thu Huong

Vietnamese currency: Vietnam

dong (VND)

We also have coins.

But people don’t really like using them cause their inconvenience

(easily being lost…)

State Bank of Vietnam (SBV) is in charge of conducting monetary policy

Overview of exchange rate regime

1 Hard peg

• Regime with no separate legal tender – incl another currency as legal tender (formal dollarization) and currency union

Exchange rate arrangements in

Vietnam

• Before March 1989: A multiple exchange rate

system (with three-tier exchange rate

system), fixed exchange rate policy

• Three-tier ER system: official ER for foreign trading, non-trading ER and internal ER used

in business relations between banks and other domestic business entities

• These rates were also used in state

budgeting in regard to foreign aid mainly coming from the former Council for Mutual Economic Assistance (CMEA) and the former Soviet Union using the Transfer Ruble.

• ·

Before March 1989 …

• ERs were set by the government at fixed levels based on economic and granting agreements between the government of Vietnam and other related countries

• This led to high trade deficit and the large difference in the official and parallel

exchange rate

 caused problems for the government

budget promoted illegal activities in the black market

Mar 1989 - Feb 1999:

VND has been pegged to the USD with

several discrete realignments

The multi-tier ER system was unified into a single official ER (OER) set by the State Bank

of Vietnam (SBV)

· The OER was adjustable in principle, based

on inflation rates, interest rates, balance of

payment (BOP) stance and the ER in the

parallel/free foreign exchange market; based on

Commercial banks were allowed to set exchange rates for their own

transactions within a band of 5% (this

band change according to economic situation)

• Establish some facilities: two transaction floors (hanoi-HCMC), inter-bank FE

market

• The official ERs followed the rates of free market but were still at levels that

overvalued the VND

• ER policy played an important role on

controlling inflation, attracting FDI, and encouraging domestic currency deposits

From Feb 1999 to 2007

• ER system was reclassified as a crawling peg (A situation in which one currency links its value to that of another currency, but allows it to fluctuate within certain limits) effective in the following day, an average inter-bank rate of exchange would be official ER.

• Instead of determining the official ER, the SBV announced the interbank average ER and the fluctuation band was stipulated around the interbank average ER.

• Trading band was narrowed to 0.1%(extended

to 0.25% for spot transactions since 2002)

• The new regulation seemed to make the ER

management more market-oriented.

• ER has de facto been pegged to the

US dollar in recent years, then REER has appreciated by about 4.5 percent since the end of 2004 (IMF)

• The import coverage of reserves has remained low (8.5 weeks)

VND/USD exchange rate

history

The VND has

been depreciating

a lot

Latest data:

The graph below shows historical exchange rates between the Vietnamese Dong (VND) and the US Dollar (USD) between 5/16/2011 and 6/14/2011Transaction band: -/+ 1%

WHY VND IS CONTINUNING LOSE VALUE AGAINST USD?

• First is about inflation

• Vietnam reaches the very high inflation rate

in recent years.

• Domestic inflation may add together with

inflation in the world Over the past time, the deflation has been happened all over the

world: the increase in prices of oil,

foodstuffs…

• Furthermore, domestic prices are under the

“double” increased pressure because VND loses its value compared to USD while USD loses its value compared to many hard

currencies.

• In practice, inflation in Vietnam for over 3 years (2007-2009) was above 40 percent, while inflation in America was only around

20 percent in the same period

• Secondly, the rapid increase in credit and

total payment means over many years

when implementing loosen monetary

policies to ensure the high economic

growth rate is an important reason that makes VND price reduce compared to

USD regardless of USD price reduction trend in the world When this adjustment meet the necessary threshold, the

exchange rate between USD/VND shall close to the general exchange rate in the world.

the demand for and supply of

foreign currencies is imbalanced

• Vietnam continues to import a lot

• In 2009: Trade deficit is around 12 billion USD The balance of payment is minus at 1.9 billion USD

• Facing to domestic inflation, persons who have money have found their safe in USD and gold

• Because of these above factors, demand for USD has increased a lot and the

imbalance of USD’s demand and supply rise also

The outcome of loss in VND value

• the loss in VND value may make national debt burden higher Our national debts now are relatively high, nearly the warning level If the exchange rate of VND/USD is 18,000, total foreign debts shall be VND 396,000 billion, higher than the estimated state budget revenue of 2009 (VND

390,000 billion) If the exchange rate is VND 20,000, total foreign debts shall be VND 440,000, VND 44,000 billion higher, accounting for 11 percent of the estimated state budget revenue of 2009

Monetary policy moves to tight

to control inflation

• People worries and complaint a lot about inflation

• They feel like losing money when

shopping, decrease their living standard

• If inflation is too high, it can lead to the

unstable in society and people lose faith in government

Actions from government

• Agree to trade off between

inflation and growth rate

• Now the primary objectives is

to control inflation.

• SBV conducts a tighten

monetary policy

Control inflation…

• SBV asked commercial banks to

significantly reduce outstanding loans for non-manufacturing sectors, especially real estate and securities, compared to figures recorded in 2010.

• Under the SBV's current regulations, the interest rate for dong deposits is capped at

14 percent per annum while the annual

lending rate stands at between 17 and 18 percent.

• Remove foreign trading in black market to control VND/USD rate

• Now the trading of foreign currencies is totally done by commercial banks with

listed rate This create difficulties for

foreign exchange companies in buying and selling foreign currencies However it

is the price to be paid for lower inflation

Thank you