Cán cân thanh toán - Tài chính quốc tế UEL

UNIVERSITY OF ECONOMICS AND LAW FACULTY OF FINANCE AND BANKING Subject: International Finance Assignment: Balance of Payment Lecturer: Master HOANG TRUNG NGHIA Class: K17404 – Group: Members of group 9: Huỳnh Thị Kiều Dung K174040319 Lưu Nguyễn Mỹ Linh K174040348 Nguyễn Thị Huỳnh Như K174040380 Trần Thị Thu K174040402 Nguyễn Ngọc Uyên K174040429 Nguyễn Quang Vinh K174040432 Lê Phương Vy K174040434 Văn Huỳnh Thảo Vy K174040436 Contents Question a - Question b - Question c - Question d - Question e - Question f - Question g - Question h - Question i - 10 Question j - 10 Question k - 12 - LIST OF SYMBOLS BoP Balance of Payments C Consumption CA Current Account Ex Export FA Financial Account G Government GDP Gross Domestic Product GNI Gross National Income I Investment Im Import NFI Net Foreign Income SP Private savings T Tax US United States LIST OF TABLES Table Balance on goods and services of Vietnam in the period of 2014 – 2018 - Table Balance on goods and services of China in the period of 2014 – 2018 - Table Balance on goods and services of US in the period of 2014 – 2018 - Table Capital and Financial Account from 2014 to 2018 - Table Direct and portfolio investments of Vietnam, China and US from 2014 to 2018 - Table The current account of Vietnam, China and US in the period of 2014 – 2018 - Table Balance on current, capital and financial account from 2014 to 2018 - Table Current Account and Basic Balance of countries from 2014 to 2018 - 13 - TÀI CHÍNH QUỐC TẾ NHĨM Question a: Analyze the evolution (changes) of trade in goods and services in the period of 2014 – 2018 What countries become more competitive in world markets and what countries become less competitive Explain Comment on the balance of trade and balance of services of these countries Solution: Analyze the evolution (changes) of trade in goods and services in the period of 2014 – 2018 Table Balance on goods and services of Vietnam in the period of 2014 – 2018 2014 2015 2016 Balance on goods 12,126.0 7,374.0 11,042.0 10,846.0 16,539.6 Balance on services -3,530.0 -4,765.0 -4,258.0 -4,030.0 -3,679.5 8,596.0 2,609.0 6,784.0 6,816.0 12,860.1 Balance on Goods and Services 2017 2018 (Sources: IMF) As it can be seen from the data above, balance on goods and services of Vietnam was unstable from 2014 to 2018 but it was always surplus However, it had a fluctuation in a short period when the figures on goods fell rapidly from $12126 million in 2014 to $7374 million in 2015 before increasing to $11042 million in 2016 Since 2016, this number has started to increase rapidly again and has rose sharply from $10,846 million in 2017 to $ 16,539.6 million in 2018 While the balance on goods was always surplus, the one on services was deficit over the period This is a fact of developing countries such as Vietnam because these countries not have a good quality of services Importing services from others nation too much also caused a deficit on service balance Table Balance on goods and services of China in the period of 2014 – 2018 2014 2015 2016 2017 2018 Balance on goods 435,041.6 576,191.1 488,883.0 475,941.4 395,170.5 Balance on services -213,742.4 -218,320.3 -233,145.9 -258,931.5 -292,168.4 Balance on Goods and Services 221,299.2 357,870.8 255,737.1 217,009.9 103,002.1 -1- TÀI CHÍNH QUỐC TẾ NHÓM In general, China had a situation similar to Vietnam China’s balance on goods and services was always surplus from 2014 to 2018 However, from 2014 to 2018, China’s balance was more stable than Vietnam’s Table Balance on goods and services of US in the period of 2014 – 2018 2014 Balance on goods Balance on services Balance on Goods and Services 2015 2016 2017 2018 -751,493.0 -761,866.0 -749,801.0 -805,197.0 -887,366.0 261,159.0 263,334.0 246,820.0 255,075.0 259,679.0 -490,334.0 -498,532.0 -502,981.0 -550,122.0 -627,687.0 (Sources: IMF) US Balance on goods 400,000.00 200,000.00 0.00 2014 2015 2016 2017 2018 -200,000.00 -400,000.00 -600,000.00 -800,000.00 -1,000,000.00 -2- Balance on services Balance on Goods and Services The most different thing in America is the balance on goods of US was deficit while the balance on services had upward trend over the period United States is a developed country so it is one of the best countries at services in the world, therefore, US concentrates on exporting services more than goods TÀI CHÍNH QUỐC TẾ NHÓM What countries become more competitive in world markets and what countries become less competitive Explain Comment on the balance of trade and balance of services of these countries With higher surplus balance on goods and services than United States, Vietnam and China seem to become more competitive in the world markets The reason why both countries’ balances were always in surplus is that they have low production costs due to the low price of commodities/low labour cost Therefore, they are more competitive on markets than United States However, we cannot just rely on the balance on goods and services to conclude the US is not competitive since it is the largest economy in the world They export services with high value added, high science/ technology and good quality Therefore, despite the deficit on balance on goods and services, US is still one of the competitive countries in the world From the chart above, we can see a very clear difference in the balance of goods and services of countries: Vietnam, China and the US While the balance of goods and services of China and Vietnam was more and more surplus, the balance on goods and services of United States was more and more deficient during the period from 2014 to 2018 These happened because of the following reasons: - The United States is a leading developed country, mainly focuses on export - Vietnam is a developing country, does not have good service quality due to services imported from other countries which should causes a service deficit - China have balance on goods surplus due to its devaluation on exchange rate (making China’s goods’ price more attractive to other countries) Overall, Vietnam's surplus figure is too small compared to a strong country like China or the US -3- TÀI CHÍNH QUỐC TẾ NHĨM Question b: Analyze,673.0 Source: IMF ▪ The growth of direct anf indirect investments in Vietnam (2014 - 2018) 2016 2017 2018 Vietnam - Direct investment: foreign investment into Vietnam or foreign resident purchases of assets in Vietnam has been gradually increasing over the years In another hand, Vietnam’s investment capital abroad decreased dramatically from $1,150 million in 2014 to $480 million in 2017 Although this figure increased to $598 million in 2018, the variation was quite slight 18,000.00 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00  Vietnam has always been an attractive country for foreign direct investment because of its strategic location, young population which increases purchasing power, large workforce with competitive labour cost, stable economy… 6,000.00 4,000.00 2,000.00 0.00 2014 2015 2016 2017 - Indirect investment: inflow of indirect investment in Vietnam reached $3,021 million in 2018, up 3248.4% compared to the figure recorded in 2014 Vietnam’s indirect investment capital abroad figure was zero over the years, except when this number dropped to $-180 million in 2016 2018 -2,000.00 Direct investment, assets Direct investment, liabilities Portfolio investment, assets Portfolio investment, liabilities -5- TÀI CHÍNH QUỐC TẾ NHĨM The growth of direct anf indirect investments in China (2014 - 2018) 300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 0.00 2014 2015 2016 2017 2018 Direct investment, assets Direct investment, liabilities Portfolio investment, assets Portfolio investment, liabilities ▪ China: The inflows and outflows of direct and indirect investment in China fluctuated through the period of 2014 – 2018 In the first years, it can be seen that the investments China attracted from foreign were more than those of China invested abroad However, the situation has been reversed in recent years, indicating China has been pushing the investment capital abroad’s activities forward ▪ United States: - Direct investment: Foreign investment into the United States has been decreasing in recent years It dropped to $258,390 million in 2018, down 37.3% from 2017 The decline was perhaps due to the fall of one third in cross-border M&A sales The growth of direct anf indirect investments in US (2014 - 2018) The US investment capital abroad, meanwhile, fluctuated from year to year 900,000.00 In 2018, this figure dramatically dropped 800,000.00 to $-78,486 million, equivalent to -20.4% 700,000.00 compared to the number recorded in the 600,000.00 previous year However, US still remains 500,000.00 as one of the largest investors in the 400,000.00 world 300,000.00 200,000.00 100,000.00 0.00 2014 -100,000.00 2015 2016 2017 2018 -200,000.00 Direct investment, assets Direct investment, liabilities Portfolio investment, assets Portfolio investment, liabilities - Indirect investment: The capital flowing in the US dropped from $697,604 million in 2014 to $213,910 million in 2015 Although this figure rose to 792,525 million in 2017, it once again fell to $315,673 million the year following The capital flowing out of the US fluctuated the same way Question c: What countries have current account surplus, what country have current account deficit? For countries with current account deficit, what can they to reduce the deficit? What countries have current account surplus, what country have current account deficit? Table The current account of Vietnam, China and US in the period of 2014 – 2018 (in millions of US dollar) Vietnam China US 2014 9,359.0 236,046.6 -365,193.0 2015 -2,041.0 304,164.4 -407,769.0 -6- 2016 625.0 202,203.4 -428,350.0 2017 -1,649.0 195,116.7 -439,642.0 2018 5,899.4 25,499.2 -490,991.0 TÀI CHÍNH QUỐC TẾ NHĨM - Although Vietnam had current account deficit in 2015 and 2017, its current account is generally in surplus - China has current account surplus - United States has current account deficit For countries with current account deficit, what can they to reduce the deficit? For countries with current account deficit, there are some solutions to reduce the deficit based on the equations following: ▪ Linking the Current Account to National Income: GNI – (C + I + G) = (Ex – Im) + NFI = CA (1) With CA = ∆NFA, (1) => GNI – (C + I + G) = ∆NFA - Since overall BoP must always balance, if a country has a CA deficit, it must have a Capital account/Financial surplus Therefore, US should increase net foreign assets - Improving gross national income (GNI) by increasing net exports (e.g devaluate US’ exchange rate to make its exports cheaper, imports more expensive; propose side policies to improve the competitiveness of domestic industry and exports…), enhancing income from foreign sources - Reducing domestic consumption, investment and government spending (tight fiscal policy/higher taxes…) ▪ Linking the Current Account to National Savings and Investment: S – I = (Ex – Im) + NFI = CA (2) - If a country’s investment is greater than its saving, the country must have a CA deficit => the country should decrease investment activities or receive finances from abroad for its investments This will also lead to Capital/Financial accounts surplus - Enhancing national savings by increasing gross national income and reducing consumption of the private and public sectors ▪ Linking the Current Accounts and Government Deficits: (SP – I) + (T + G) = CA (3) - Improving net private saving by increasing private savings and decreasing investment - Improving national government saving by reducing total government expenditures and increasing taxes - Private savings perhaps are inadequate to finance both private investment and government budget deficit If this scenario happens, they shall need more funds from foreign investors Question d: Explain why developing countries are more likely to face current account deficit than developed countries? Developing countries are more likely to face current account deficit than developed countries which can be based on several reasons: ▪ Based on the formula of the current account and national savings-investment: CA = S-I, if S < I then CA < so CA deficit It means if country's saving is smaller than its investment, there will be a CA deficit ▪ Most of the developing countries have to build infrastructure to promote economic development Not only that they have to spend more to support local people and businesses but they also have to encourage the formation of new business These things make them face the deficit CA ▪ -7- TÀI CHÍNH QUỐC TẾ NHĨM ▪ Since science and technology in these countries are not really developed, they have to import equipment and machineries from abroad Besides, these countries are in the trend of population growth, so the demand is increasing, the domestic products are not enough and they have to import more and more, thus, leading to the deficit in CA ▪ They have limited capital supply and their populations are younger and less skilled which make them become countries with cheap labor and resources, thus attract foreign investment ▪ Budget issues in developing countries are different from those in developed countries (usually smaller) and financial markets in these countries are often not strong With limited budgets, it is difficult for these governments to help and finance their deficits Question e: What countries in what year had surpluses in both the current and capital/ financial accounts (twin surpluses) What are the reasons for this phenomenon? China had surpluses in both the current and capital/financial accounts in some years (twin surpluses) from 2017 to 2018 China has this phenomenon because it has a strong economy, in which exports are doing very well with the prospect that foreign investors are pouring money into it This means that both accounts are redundant Specifically based on a few reasons: ▪ Firstly, the Chinese government's intervention in the exchange markets to maintain the renminbi (RMB) has always been seen as an important factor, because the RMB undervalued will help to promote Chinese exports Like when any country closes its exchange rate, the government maintains a peg by buying or selling foreign reserves to prevent market changes in the supply and demand of the local currency Due to the demand for RMB for trade and investment purposes, the Chinese government bought foreign exchange, mainly in the form of dollars and sold the RMB, to prevent an increase in RMB demand in a free market system, promote the value of RMB The RMB is undervalued makes nominal exchange rate increases, increased capital inflows and diminish capital outflows ▪ Secondly, from the data shows that Chinese tend to save more than investment, which by definition will create a current account surplus That is the savings-investments gap ▪ Thirdly, FDI attraction can be considered as one of the most important criteria It is a common practice in China that all major officials at all levels of government are assigned goals to attract capital and FDI at all costs Those who attract the largest amount of FDI are the most likely candidates to be more promoted ▪ The final factor that is reduction of exchange rate and tax in the export promotion policy of China government To prevent FDI from current account deficits, the government requires foreign investors to ensure foreign exchange balance for important foreign investment projects Question f: What countries are going to devaluate/ valuate the value of their currency? To determine whether a country will devaluate or valuate their currency, the balance of payments should be considered In theory “Balance of Payments (BOP) is a data sheet that provides information about the results of a country's international transactions with the rest of the world represented by three main accounts, including Current account (CA), capital account (KA) and financial account (FA)” Simply put, BOP = CA + KA + FA Moreover, BOP also includes statistical errors (EO) and changes in foreign exchange reserves (ΔFR) Therefore, BOP is directly related to the state of supply and demand in the foreign exchange market This theory indicates that if BOP is in surplus, the supply is greater than demand in the foreign exchange market, so the domestic currency may rise, the country accumulates and increases FR In contrast, if BOP deficit, the demand greater than supply, the domestic currency may depreciate and reduce FR Table Balance on current, capital and financial account from 2014 to 2018 Vietnam China US 2014 14,930.30 184,652.8 -71,571 2015 -1,074.00 -129,981.6 -88,158.0 2016 11,352.00 -214,211.2 -44,373.0 -8- 2017 18,379.00 304,562.0 -64,798.0 2018 14,365.35 197,613.1 -37,297.0 TÀI CHÍNH QUỐC TẾ NHĨM The data would seem to suggest that the balances of payment of China and Vietnam are in surplus with BOP > 0, it means supply was greater than demand on the foreign exchange market Predictably that CNY and VND may rise in the following years On the other hand, US’s Balance of Payment has in deficit for five years It can be seen that BOP < and tends to increase each year, shows that demand was greater than supply on the market For this reason, USD will be depreciated and undervalued in the future Question g: China has a large stock of reserves Why China has such a large stock of reserves and why it needs to keep such a large stock of reserves? The phenomenon that China has such a large stock of reserves can be explained by the fact that China’s economy mainly is a manufacturing and export-driven economy China focuses on export growth to help create jobs for people Therefore, it sells more goods and services to foreign countries than ones they sells back to China Obviously, the countries which import goods and services from China will pay their purchase by USD But Chinese exporters need RMB or yuan to pay their employee and to trade in daily activities that results in the demand of Yuan raises In order to redress the balance between the U.S dollar and Yuan in markets, the government buys the available excess U.S dollars from the exporters through some financial instruments and takes Yuan back to them Actually, this leads to an increase in China’s foreign exchange reserves Indeed, China needs to retain foreign currency reserves for these reasons: ▪ To relieve fixed exchange rates volatility: The purpose of a fixed exchange rate system is to make the value of a currency within a narrow range Particularly, China will keep the renminbi exchange rate lower than the U.S dollar It helps to keep the price of Chinese exports at a lower price than other countries So China’s goods and services are always able to compete in the international market ▪ Affected by monetary policy: after China’s initial liberalization of currency policy in 2005, the Chinese central bank had maintained higher interest rates In 2014, however, the bank began follwing the loose moneary policy that means local interest rates decreased to boost a slowing economy ▪ Foreign reserves is also considered a safe reserve instead of gold China has found that investing in US Treasure securities or buying US debt would be safer and more stable By purchasing US debt, China will continue to have a large export market for goods in the long term China holds large exchange reserves, which have been built over time due to a constant surplus in the current account, to prevent cash flow from trade and investment destabilizing the domestic economy ▪ Moreover, money has the function of storing value, storing foreign exchange instead of Yuan will help to ease the risk of declining value in yuan If a country is in a state of rising inflation, its currency holders will spend more instead of saving In other words, the currency of this country is losing its purchasing power in the future This causes citizens to use currencies from other countries as a temporary The U.S dollar is commonly used in international transactions Therefore, the reserve of this currency will be convenient Question h: Assume that Vietnam experienced usually high inflation a year ago, how does this affect the current account of Vietnam (i.e make it more surplus or more deficit)? Inflation is the continuous increase in the general price level of goods and services in an economy over a period of time When the general price level rises, each unit of currency buys fewer goods and services than before Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy In this case, assume that Vietnam experienced usually high inflation a year ago It affect the current account of Vietnam When Vietnam’s inflation rate is higher than other countries, goods and services become more expensive Therefore, people will specialize in using foreign goods and services instead of domestic ones This affect the exchange rate of Vietnam For example, if Vietnam’s inflation rate is higher than China’s inflation rate, Vietnamese will tend to choose Chinese goods and services over Vietnam because the price paid for them will -9- TÀI CHÍNH QUỐC TẾ NHĨM be cheaper The market will import Chinese goods that leads to demand for renminbi increase Also, Chinese people will restrict to use Vietnamese goods due to high price As a result, the supply of renminbi decrease that makes the exchange rate of renminbi with VND rise It means Vietnam’s exchange rate will decrease, so trade balance is more deficit Besides, it can be seen that a high inflation rate tends to increase imports and decrease exports, resulting in increasing the current account deficit A negative current account is though to reflect lost jobs in a country, which is unfavorable However, the foreign import reflects a strong competition from foreign producers, which might keep prices inflation In addition, inflation causes the decreasing in currency’s value leading to the decline in the value of savings Also, high inflation can lead to a distribution of income in society In some circumstances, high inflation can lead to a fall in real wages In addition to, inflation can make an economy non-competitive Therefore, a higher rate of inflation in Vietnam can make Vietnam’s exports non-competitive, and then the current account will be deficit and Vietnam will have to face the lower economic growth Question i: Why a country should be worried about a large current account deficit or surplus? Large deficit or surplus can be the result of some underlying economic problems As for the deficit, the current account deficit represents the imbalance between the imports and exports of a country That could be explained by some below reasons: ▪ The current account deficit is large due to the reduction of total domestic savings so affect long-term growth If a current account deficit through borrowing, it is said to be more unsustainable Because borrowing is unsustainable in the long term and countries will be burdened with high interest payments ▪ A large current account deficit can lead to risk of value for currency fall If there is insufficient capital flows to sponsor the deficit, the exchange rate will fall to reflect the imbalance of foreign flows of funds ▪ If the deficit reflects an excess of imports over exports, it may be the signal of the problems about competitiveness However, because the current account deficit also implies an excess of investment over savings caused by the reckless fiscal policy or the consumption patterns, it could be claimed that this country is a highly productive, growing economy As regards the surplus, the current account surplus means an economy is exporting a greater value of goods and services than it is importing ▪ A country may have a large current account surplus because of relatively low domestic demand This low demand leads to lower consumer spending and lower spending on imports ▪ If a country has a large current account surplus, the goods or services are produced more but domestic residents consume less, leading to the scenario that people have a larger savings and they use it to invest rather than consume But they not want to invest in their country as a rate of return on investment will be lower than others and the capital flows are running out this country Therefore, the development of a country will significantly decline Question j: The U.S has had a large trade deficit with China for years In 2008, President Trump imposed tariffs and other trade barriers on China to makes changes to what the U.S says “unfair trade practices” How this would affect the current account of the U.S.? - 10 - TÀI CHÍNH QUỐC TẾ NHĨM United States, BOP Analytic Presentation (Millions of U.S Dollars) 2014 Current account (excludes reserves and related items) Goods, credit (exports) Goods, debit (imports) Balance on goods Services, credit (exports) Services, debit (imports) Balance on services Primary income, credit Primary income, debit Balance on primary income Secondary income, credit Secondary income, debit Balance on secondary income -365,190.0 2015 2016 2017 2018 -407,769.0 -428,350.0 -439,642.0 -490,991.0 1,635,560.0 1,511,383.0 1,457,394.0 1,553,591.0 1,674,330.0 2,385,480.0 2,273,249.0 2,207,195.0 2,358,788.0 2,561,666.0 -749,920.0 -761,866.0 -749,801.0 -805,197.0 -887,336.0 741,090.0 755,306.0 758,445.0 798,958.0 826,975.0 480,760.0 491,972.0 511,625.0 543,883.0 567,326.0 260,330.0 263,334.0 246,820.0 255,075.0 259,649.0 824,550.0 810,075.0 835,511.0 933,308.0 1,084,184.0 606,156.0 606,465.0 636,857.0 707,506.0 830,203.0 218,394.0 203,610.0 198,654.0 225,802.0 253,981.0 140,570.0 130,524.0 137,159.0 158,971.0 150,191.0 234,580.0 243,371.0 261,182.0 274,293.0 267,476.0 -94,010.0 -112,847.0 -124,023.0 -115,322.0 -117,285.0 As shown in the table, we can see that the US has had a large trade deficit for years In 2018, the United States accused China of commercial fraud and stealing U.S intellectual property Right after the accusation President Trump had imposed tariffs and other trade barriers on China These policies weakened the Chinese economy but also led to a reduction in demand for the US’ goods since China was their largest goods trading partner The balance of USA goods with China thus decreased However, the total export and import of US’ goods still increased compared to remaining years, In particular, the pair of exports and imports of US from 2014 to 2018 was 1,635,650 and - 2,385,480; 1,511,383 and - 2,273,249; 1,457,394 and - 2,207,195; 1,553,591 and - 2,358,788; 1,674,330 and - 2,561,666 million dollars, respectively Perhaps it was because American businesses had found other suppliers and consumer markets to replace the Chinese market, but the balance on goods is still in deficit in 2018 (-887,336.0 million) On the contrary, the balance of services in the US increased and had a surplus of $ 259.65 million in 2018, greater than the previous years This happened because the US is a famous nation that easily attracts abroad students, insurance companies or tourists around the world, etc Therefore, the fact that Trump imposed tariffs and other trade barriers on China didn’t affect the balance of services in the United States too hard About the balance on primary income, the US’ human resources were more qualified, so they had the advantage in working abroad In addition, United States focused on pushing the investments abroad, which made the US have the primary income (credit) recorded 1,084,184.0 million dollars, larger than those of the years from 2014 to 2017: 259,634; 274,109; 248,673; 150,876 million dollars Besides, the United States also had a high labor import rate, a large investment options which can bring high return such as stocks, bonds, etc for foreign investors Therefore, Primary income, debit (2014 - 2018) of the US reached a high number over the years The US had a balance on secondary income in deficit of 117.29 million dollars in 2018 since the US provided too much foreign aid for international organizations such as the WTO or countries affected by floods, disasters, etc Those were larger than the amount of received aid of the US, thus, led to secondary income deficit - 11 - TÀI CHÍNH QUỐC TẾ NHÓM Picture The line graph of Current account (excludes reserves and related items) Picture The chart of Balance on goods In conclusion, the tariffs and other trade barriers that President Trump put on China affected chiefly on the balance on goods, the remaining parts of current account worked normally However, due to the large deficit of balance on goods, the US’ current account was still in deficit Question k: Is it possible for a country to have a current account deficit at the same time it has a surplus in its BoP? Do you see it from the BoP of China, the U.S and Vietnam? Solution: The current account, the capital account, and the financial account combine to form the basic balance This balance is one of the most frequently used summary measures of the BOP It describes the international economic activity of the nation, which is determined by market forces, not by government decisions (such as currency market intervention) - 12 - TÀI CHÍNH QUỐC TẾ NHÓM Table Current Account and Basic Balance of countries from 2014 to 2018 (Currency: millions US dollar) Vietnam China US 2014 2015 2016 Current Account (CA) 9,359 (2,041) 625 BoP (basic balance) 14,930 (1,074) Current Account (CA) 236,047 BoP (basic balance) 2017 2018 (1,649) 5,899 11,352 18,379 14,365 304,164 202,203 195,117 25,499 184,653 (129,982) (214,211) 304,562 197,613 Current Account (CA) (365,193) (407,769) (428,350) (439,642) (490,991) BoP (basic balance) (71,571) (88,158) (44,373) (64,798) (37,297) (Source: Calculated Analysis by Team) As can be seen from the table, it is possible for a country to have a current account deficit at the same time it has a surplus in its BoP Typically, the number of CA and of BoP in Vietnam in 2017 is - $1,649 million and $18,379 million, respectively That means Vietnam had the CA deficit and the BoP surplus simultaneously Actually, the country that was likely to appear this phenomenon is Vietnam; for some below evidences: 1/ According to formulas / theory: ❖ In terms of Current Account deficit: Let see the connection between the Current Account (CA) to GDP, we can employ these formulas: CA = ∆NFA = GNI - (C + I + G) = (Ex - Im) + NFI (1) CA = ∆NFA = S – I = (Ex - Im) + NFI (2) CA = ∆NFA = (SP – I) + (T – G) (3) Also, we know: GNI = GDP + NFI, and we assume that NFI will unchange As a result, it is easy to see that developing countries are likely to face current account deficit (Vietnam is a prime example) for some reasons: ▪ First, although developing countries’ population has lower income than one in developed countries, their national income could be increase gradually, and then they would tend to have more disposable income to consume goods If domestic producers cannot meet the domestic demand, consumers will have to import goods from abroad ▪ Second, developing countries have low science and technology That means the low economies of scale leading to nation products are more expensive than the same or similar imported products It is possible that total imported value is higher than total exported value, despite a developing country is often an exportoriented country ▪ Third, the government not only has boosted investment in infrastructure to increase productivity and to attract foreign investment , but also has to expand spending on supporting the people and businesses in the country This makes domestic investment and spending greater than domestic savings ❖ In terms of Balance of Payment surplus: Despite the current account deficit, Balance of Payment could be surplus The reason for this is that Current account is just one of the components which affect the balance of payment, but not the only component Current account along with capital account and financial account put together determines the Balance of Payment position of a country - 13 - TÀI CHÍNH QUỐC TẾ NHÓM Therefore, if a country, Vietnam for instance, in 2017, was running a current account deficit of, say, $1,649 million but there was a financial account surplus of $20,028 million and Capital account was zero, then the Balance of Payments had a $18,379 million surplus The situation described above could happen in a developing country because of the possibility of more attraction of financial flows on domestic productive capacity (either short-term portfolio investment or long-term direct investment); then these flows on the financial account will enable the country to finance a larger current account deficit Without financial flows, the currency would depreciate until equilibrium is restored 2/ According to the realities in Vietnam in 2017: We gathered some information needed to keep an eye on: ▪ Economic growth (real GDP growth) has increased from 5.9% in 2014 to 6.8% in 2017 However, the contribution of net exports to real GDP growth was negative in 2017 In volume terms, imports have rised even faster than exports Import demand was higher by robust domestic consumption and investment, and by the high import content of exports in the foreign-invested sector In Vietnam, this content was even higher as there were fragile relationships between local and foreign enterprises in the supply chain According to the World Bank, only 68% of foreign-owned firms in Vietnam used domestic inputs in 2015, compared 96% in Thailand Economic growth accelerates in most sectors ▪ In addition, investment growth into Vietnam continued to pick up in 2017, reaching 12.1% y/y in value in the first quarters, compared to 9.9% in 2016 It is mainly contributed by foreign direct investment (FDI), which has driven the expansion of Vietnam’s export base and its rise in the value chain ▪ Moreover, during this period, the central bank in Vietnam executed a slight loose monetary policy due to low inflationary pressures, despite the acceleration in GDP growth and bank credit Consequently, government’s spending in 2017 increased - 14 - ... China US 2014 9, 3 59. 0 236,046.6 -3 65, 193 .0 2015 -2 ,041.0 304,164.4 -4 07,7 69. 0 -6 - 2016 625.0 202,203.4 -4 28,350.0 2017 -1 ,6 49. 0 195 ,116.7 -4 39, 642.0 2018 5, 899 .4 25, 499 .2 - 490 ,99 1.0 TÀI CHÍNH... Services 2015 2016 2017 2018 -7 51, 493 .0 -7 61,866.0 -7 49, 801.0 -8 05, 197 .0 -8 87,366.0 261,1 59. 0 263,334.0 246,820.0 255,075.0 2 59, 6 79. 0 - 490 ,334.0 - 498 ,532.0 -5 02 ,98 1.0 -5 50,122.0 -6 27,687.0 (Sources:... China US 2014 14 ,93 0.30 184,652.8 -7 1,571 2015 -1 ,074.00 -1 29, 981.6 -8 8,158.0 2016 11,352.00 -2 14,211.2 -4 4,373.0 -8 - 2017 18,3 79. 00 304,562.0 -6 4, 798 .0 2018 14,365.35 197 ,613.1 -3 7, 297 .0 TÀI CHÍNH