EXCHANGE RATE POLICY OF VIETNAM pps

Powerpoint Templates Page 1 Powerpoint Templates EXCHANGE RATE POLICY OF VIETNAM Presented by: Tran Thi Thu Huong Powerpoint Templates Powerpoint Templates Page 2 Vietnamese currency: Vietnam dong (VND) Powerpoint Templates Page 3 We also have coins. But people don’t really like using them cause their inconvenience (easily being lost…) Powerpoint Templates Page 4 State Bank of Vietnam (SBV) is in charge of conducting monetary policy Powerpoint Templates Page 5 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 • Currency board 2. Intermediate regimes • Conventional fixed peg against a single currency or a basket of currencies • Pegged exchange rates within horizontal bands • Crawling pegs • Crawling bands 3. Floating regimes • Managed floating with no predetermined path for exchange rate • Independent floating Powerpoint Templates Page 6 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. • · Powerpoint Templates Page 7 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. Powerpoint Templates Page 8 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 Powerpoint Templates Page 9 Commercial banks were allowed to set exchange rates for their own transactions within a band of 5% (this band change according to economic situation) Powerpoint Templates Page 10 • 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 [...]... 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 Powerpoint Templates Page 18 Monetary policy moves... 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 Powerpoint Templates Page 16 the demand for and supply of foreign currencies is imbalanced • Vietnam continues to import... 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... 1999-2007… • Both official and parallel exchange rates remained stable and the differences between them were narrowed • 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) Powerpoint Templates Page 12 The VND has been depreciating a lot VND/USD exchange rate history... 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 Powerpoint Templates Page 21 • Now the trading of foreign currencies is totally done by commercial banks with listed rate This create difficulties for foreign exchange companies in buying... Templates Page 13 Latest data: The graph below shows historical exchange rates between the Vietnamese Dong (VND) and the US Dollar (USD) between 5/16/2011 and 6/14/2011 Transaction band: -/+ 1% Powerpoint Templates Page 14 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... 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 Powerpoint Templates Page 17 The outcome of loss in VND value • the loss in VND value may make... lead to the unstable in society and people lose faith in government Powerpoint Templates Page 19 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 Powerpoint Templates Page 20 Control inflation… • SBV asked commercial banks to significantly reduce outstanding loans for non-manufacturing... 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 Powerpoint Templates compared to many hard currencies Page 15 • In practice, inflation in Vietnam for over 3 years (2007-2009) was above 40 percent, while inflation . Templates Page 6 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. Templates Page 4 State Bank of Vietnam (SBV) is in charge of conducting monetary policy Powerpoint Templates Page 5 Overview of exchange rate regime 1. Hard peg • Regime with no separate legal tender. Templates Page 1 Powerpoint Templates EXCHANGE RATE POLICY OF VIETNAM Presented by: Tran Thi Thu Huong Powerpoint Templates Powerpoint Templates Page 2 Vietnamese currency: Vietnam dong (VND) Powerpoint