Success in the exchange rate management and its multidimensional impacts on the macroeconomy

Nội dung text: Success in the exchange rate management and its multidimensional impacts on the macroeconomy

1. SUCCESS IN THE EXCHANGE RATE MANAGEMENT AND ITS MULTIDIMENSIONAL IMPACTS ON THE MACROECONOMY Dr. Tran The Sao sao.tt@ou.edu.vn Ho Chi Minh City Open University Abstract Exchange rate is a tool in operating monetary policy implemented by the State Bank of Vietnam. Foreign exchange management is a state management function, a content of macroeconomic management policies chaired by the State Bank of Vietnam. In nearly 10 years in general and in 2018 in particular, the exchange rate management and foreign exchange management of Vietnam have achieved important results, positively impacting many macroeconomic indicators. On the contrary, achieving many macroeconomic indicators also has a positive impact on managing exchange rates and managing external affairs effectively in the process of international economic integration. This study focuses on clarifying that content. Keywords: Success, exchange rate management, multidimensional impacts, macroeconomy 1. Introduction 1.1. Research on theory So far there have been many studies from a theoretical perspective both at home and abroad on exchange rates, foreign exchange management; which focuses on the following 9 main contents: i) Operating mechanism of floating or fixed exchange rates, or coordinating between these two mechanisms; ii) Measures to combat dollarization of the economy, exchange rate management and foreign exchange management in relation to the trade balance and current account balance; Free convert currency and foreign currency; iv) Develop the foreign exchange market in relation to the commodity market; v) Currency devaluation and macroeconomic impacts; vi) Operating exchange rates and foreign exchange management of emerging economies; vii) Factors affecting exchange rates and measuring the impact of those factors; viii) Exchange rate intervention measures of the Central Bank; ix) Coordinate the management of exchange rates and other monetary policy instruments. 16
2. 1.2. Research on practice Practical studies around the world focused on the exchange rate management and foreign exchange management of China, of some countries in the Americas, Southeast Asia, the impact of exchange rates and foreign exchange management financial and monetary crisis in Asia in 1998, the ruble crisis in Russia in the 90s; dollarization in Cambodia and some South American countries; foreign exchange reserves and foreign exchange reserves structure of some countries Practical studies in Vietnam also focus on the above specific contents of different stages of the process of innovation and international economic integration in Vietnam under the perspective of doctoral thesis at Thuongmai University, Foreign Trade University, National Economics University, Banking Academy, ; scientific research topics conducted by the Foreign Exchange Management Department of the State Bank of Ho Chi Minh City, ;; a number of articles published in economic journals, specialized journals and scientific conference proceedings. However, until now, no scientific research has evaluated the impact of foreign exchange management policy on macroeconomic indicators, focusing in recent years when Vietnam's economy is integrating. The current depth is updated until the end of 2018. The article focuses on this research gap. 1.3. Theoretical framework on the relationship between foreign exchange management policy and macroeconomic indicators Exchange rate control and foreign exchange management policy are two very difficult issues, very closely related. Operating exchange rates can also be considered as a content in the foreign exchange management policy. In terms of open economy, international integration, all fluctuations in the international financial market have an immediate impact on exchange rate control and foreign exchange management. The control of exchange rates and foreign exchange management in order to achieve macroeconomic objectives in operating the Central Bank's monetary policy: controlling inflation, stabilizing the purchasing power of the domestic currency, against the dollar chemical, promoting economic growth. According to the summary of IMF, there are currently three main exchange rate control mechanisms: floating exchange rate mechanism, fixed exchange rate mechanism and regulated floating exchange rate mechanism. Depending on the development conditions of the economy, capacity and qualifications of the Central Bank, the development of the domestic financial market and the level of international integration, which the Central Bank implements mechanism proper exchange rate. Similarly, the foreign exchange management mechanism is also based on the above factors and aims to implement monetary policy, Some current economies, such 17
3. as China, Vietnam, etc. are implementing mechanisms. control the regulated floating rate. Every day the State Bank of Vietnam announces the central exchange rate, commercial banks set their buying and selling rates with customers on the basis of central exchange rates. In addition, the State Bank combined with foreign currency trading in the market and regulates the amount of money to buy and sell foreign currencies through saving through open market operations tools (OMO). Researching on the mechanism of controlling exchange rates and managing foreign exchange to implement macroeconomic objectives in the current period of international economic integration of Vietnam is very necessary. 1.4. Discussion results Previously published articles and research projects that have their own assessments of the impact of exchange rate management and foreign exchange management all agree that there is a big impact. Most of the opinions agreed with the stable exchange rate operating mechanism and effective dollarization, positively impacting commercial activities. However, no research has mentioned the impact of exchange rate management and foreign exchange management on a comprehensive basis of macroeconomic indicators and updated until the end of 2018 is the year Vietnam reached Many high achievements in foreign economic relations. 1.5. Objectives of the study It can be affirmed that since Vietnam officially became a WTO member, since the beginning of 2007, Vietnam's economy has been deeply integrated with the regional and international economic community. Because Vietnam prepares and prepares to implement CPTPP, EVFTA, and a series of other international economic commitments. But managing exchange rates and foreign exchange management, Vietnam is also under the greatest pressure by fluctuations in the international financial market, the record level of RMB depreciation against the USD and a variety of currencies Other strong. The Chinese stock market has experienced the largest decline in the past 10 years, after the global financial crisis in October 2008 and other key stock markets also fluctuated. In this context, the State Bank of Vietnam (SBV) has actively managed flexible and effective exchange rates, closely controlled foreign exchange. USD / VND exchange rate fluctuates in accordance with the target set at the beginning of the year of each year in recent years, the position of Vietnam Dong continues to be strengthened, contributing to achieving other important goals of the economy. sacrifice. 18
4. It can be affirmed that, right after the global financial crisis, with the openness, the level of integration of the economy, the banking system, the issue of import and export, along with the trade balance, billion The price is most affected. In that context, the State Bank of Vietnam (SBV) has actively and flexibly managed the exchange rate, adapted to the actual situation, and combined with strict management of foreign currencies, gold management, minimizing the negative impacts, contributing to encouraging exports, realizing the goal of anti-dollarization and goldenization of the economy, contributing to macroeconomic stability. 2. Methods Through qualitative research methods, based on the sources and data published by the State Bank of Vietnam, MOF, the General Statistics Office, of commercial banks, the article focuses on analyzing and clarifying the above contents in the current period. , focus is on 2018, giving some recommendations. 3. Results 3.1. Overview of Exchange rate movements In almost all developed economies, central banks implement a floating exchange rate regime and only intervene when needed to implement the objectives of macroeconomic and monetary policy management. However, for developing economies, exchange rate management is considered as a whole art. In Vietnam, in spite of various viewpoints in recent years, particularly since 2012 in which many scientists recommended a slight devaluation of VND to stimulate exports, the SBV of Vietnam (hereinafter referred to as the SBV) have been consistent in the management of relatively stable exchange rate to contribute to the successful achievement of many macroeconomic objectives. While the USD/VND exchange rate observed significant fluctuations during 2008-2010, these fluctuations declined from 2011 onwards and in seven recent years from 2012-2018 as well as in the first months of 2019, the ate became quite stable in all three markets: parallel market, interbank market and exchange rates between commercial banks and customers. The stability of the exchange rate together with the gold market stabilization has strengthened the public confidence in VND. According to the statistics publicized by the GSO, while in 2008, 2009 and 2010 the USD/VND exchange rate increased by 6,31%; 10,07% and 9,68% respectively, it increased by 2,2% in 2011 and decreased by 0,96% in 2012. It saw a slight increase by 1,09% and 0,59% in 2013; 0.56% in 2014; 0,9% in 2015; 1,1% in 2016; 1,2% in 2017; 1,29% in 2018 and 0.2% in the first 3 months of 2019 respectively. GSO (2012-2018) 19
5. 3.2. Multidimensional impacts on macroeconomic objectives of current foreign currency management policy The Forex market is basically stable; the commercial bank system’s foreign currency liquidity has improved significantly compared to that in several recent years. That result should be considered in the context that there are a number of opinions that the stable exchange rate maintained by the SBV means an overvaluation of VND, making the value of VND increase significantly compared to the USD when domestic inflation maintains at high levels for many years and others Asian currencies depreciate sharply against the USD. Many stated that a VND devaluation is needed to encourage exports given high inflation – 18.13% in 2011, 6.81% in 2012; 6.04% in 2013; 4,09% in 2014; 0,65% in 2015; 4,74% in 2016; 3,53% in 2017; 3,54% in 2018 and 0.15% in the first 3 months of 2019 respectively. GSO (2012-2018). However, the exchange rate is almost unchanged resulting in a high VND appreciation, causing difficulties to imports. However, from the perspective of managing monetary policy, it is confirmed that the authorities have had clear viewpoints, clear messages about exchange rate management in the official market, showing a firm management stance against pressure of public opinion. That lesson should also be considered frankly in the context that at the beginning of 2011, under public pressure and based on some theoretical calculations, the SBV proactively devaluated the VND by 9,3% against the USD. Specifically, from 11 February 2011 the SBV actively increased the interbank exchange rate by 9,3% and also narrowed the exchange rate trading band from +- 3% to +-1%. SBV (2012-2018). That adjustment had a significantly upward impact on the input costs of imported goods, raw materials, ancillary materials which affect costs and expenses, then selling prices and CPI accordingly. The stimulating impacts on exports, however, was vague when the export performance reflected a minor impacts from exchange rate, as it also depends on the competitiveness of Vietnam’s exports compared with others partners, especially in terms of models, design, technology, forms, packaging, marketing and types of items, etc However, from the end of 2011 until now, the SBV has actively managed the exchange rate towards stability, which has positively impacted on both exports and imports leading to unwinding trade deficits which lasted for many years, on both the government and enterprises’ foreign currency debts, as well as dollarization and other macroeconomic factors. 20
6. Impact on Vietnam's public debt Vietnam’s external debts including direct debts of the state budget and foreign currency debt of state owned general corporations and groups, such as: Vietnam Electricity, Vietnam National Oil and Gas Group, Vietnam Airlines, Vietnam Cement Industry Corporation, will rise at the same rate as the rise of the exchange rate. In other words, a 3-5% exchange rate depreciation will lead to a corresponding increase in external debt . Chart 1: Public debt of Vietnam 2003-2013 (Source: MOF (2012-2018)) Chart 2: Public debt of Vietnam 2014-2017 (million billion VND) (Source: MOF (2012-2018)) 21
7. Impact on export and trade balance of Vietnam The stable exchange rate leads to a reduction in trade deficit, which has positive impacts on the foreign currency demand and supply as well as the exchange rate. While Vietnam’s monetary policy requires a multi-objective implementation, decreasing trade deficit is not a direct target of the monetary policy but it is necessary to acknowledge that the sharp decrease in trade deficit over last 3 years is mainly attributed to exchange rate management, the foreign currency interest and the effective implementation of exchange rate and gold market management measures. Before 2012, Vietnam’s trade deficit was at high levels and increased continuously, especially in 2007, there was a nearly threefold increase compared to that in 2006 and reached $14bn, rose to $18bn in 2008 while remained at the level of $10bn in others years and equivalent to between 12.7% and 29.2% compared to exports. GSO (2012-2018) In 2011, in spite of implementing a lot of synchronized solutions under the direction of the government, Vietnam’s trade deficit remained high and exercised high pressure on the exchange rate. In turn, the VND on a depreciation trend led to higher prices of imported goods and services when converted into VND, causing difficulties in achieving the planned target of controlling CPI fluctuations. However, Vietnam experienced a trade surplus of $780.3 million in 2012, of more than $900 million in 2013; $2000 million in 2014. But Trade deficit of $ 3540 million in 2015; however, continued trade surplus in recent years: $2,56 in 2016; $2,67bn in 2017; $7,21bn in 2018 and $1,0bn in the first 3 months of 2019. GSO (2012-2018) Accumulating the State International Reserves associated with sterilization of local currency amounts used to purchase US dollar: The stable exchange rate and sharply lower trade deficit need to be analyzed in the context of a strong accumulation in international reserves, from $7bn to approximately $35bn at present, while the potential international reserves of Vietnam is about $45bn. Take into consideration the first 4 months of 2014 only, the SBV bought $10bn, which means that the SBV injected VND 210 trillion into circulation via USD purchases. SBV (2012-2018). The purchase of foreign currency goes along with the supply of the VND into circulation, however, it can lead to monetary inflation. This fact can be rationalized by synchronous coordination of monetary policy instruments centered at open market operations and sterilization of money supply through purchasing foreign currency. 22
8. Dedollarization in the economy: The stable exchange rate has had a positive impact on the sentiment of the public and financial markets. The public and investors’ strengthened confidence in the stability of the VND means that VND is valued. This reduces purchases of foreign currency as a way to hold and store wealth, and contributes to the decline of dollarization in the society. While in 2006, the total foreign currency deposits over the total deposits of credit institutions was still at above 26%, this number was down to 19.5%, 14.6%, and 12% in 2011, 2012 and 2013 respectively, and was only 11% by the end of April 2014; about 10% since 2015 until now. SBV (2012-2018) By the end of 2013, the ratio of total foreign currency deposits over the total liquidity continued to go down to about 12% compared to that of 15.8% in 2011 and 12.36% in 2012; state international reserves was doubled compared to that number by the end of 2013 and was 2.2 times from April 2014; 11% by the end 0f 2014. By the beginning of 2019, Vietnam's foreign currency reserve was about USD 63 billion. SBV (2012-2018) Outstanding loans in foreign currency in 2006 was 30% of the credit institutions’ credit to the economy while this ratio declined to 20% in 2011 and continued to fall to 17.5% in 2012, 14.2% in 2013 and 13% by the end of 2014; about 11%-12% since 2015 until now. SBV (2012-2018) The above-mentioned exchange rate developments also minimized the foreign currency speculation on accounts of commercial banks in waiting for the increase of exchange rate, narrowed the spread between the parallel and the official exchange rate. A stable exchange rate and the SBV’s clear direction facilitate commercial banks to implement their foreign currency trading strategies. But more importantly, it indicates that the clear objective of reducing the dollarization in the economy is being implemented effectively that empowers the position of the VND. The exchange rate remained stable but exports still increased rather well. The volume of goods exports was $114.6bn in 2012 and reached to $132.2bn in 2013, increasing by 18.3% compared to that of 2012. Furthermore, the volume of imports was also circumscribed to $131.3bn, increasing by 15.4% compared to that of 2012. The total volume of exports and imports of 2014 was nearly $148 bn, increasing by 12.1%,. GSO (2012-2018) In 2015, the total import-export turnover of the whole country reached US $ 327.76 billion, up 10% compared to 2014, in which export goods reached 162.5 billion USD. Export turnover in 2016 is estimated at 175.9 billion USD, up 8.6% over 23
9. the previous year. In 2017 export turnover of the whole year reached 214.01 billion USD, up 21.2% (corresponding to an increase of over 37.44 billion USD) compared to 2016. In 2018 Export turnover reached 244.7 billion USD, an increase of 13.8% compared to 2017. Total export value in the first 2 months of 2019 reached USD 5.5 billion, down 1.6% compared to the same period in 2018. GSO (2012-2018) The demand for foreign currency of enterprises was still met by the SBV through commercial banks, actively satisfied the necessary demand such as petroleum, medicine, veterinary medicine, plant protection chemicals, defense - security, foreign debt repayment, etc. The stable exchange rate helps gain the confidence of foreign investors on monetary stability and exchange rate policy of Vietnam. Regarding impacts on attracting the FDI into Vietnam, the registered FDI was $13bn in 2012 and reached to $21.6bn in 2013, increasing by 54.5% compared to 2012. The newly registered FDI of 2014 reached to $20.230bn, $22,76bn in 2015; $24,3bn in 2016; $36bn in 2017; $35,46 in 2018; $8,47 in the first 2 months of 2019. The disbursement of FDI is over $10bn per year that significantly impacts on the demand for and supply of foreign currency in the domestic market and facilitates to stabilize the exchange rate. GSO (2012-2018) The stable exchange rate combined with interest rate operation with a significant spread between the interest rates on deposits in local currency and deposits in foreign currency at commercial banks that contributes significantly to reducing the dollarization and attracting remittances into the country. The remittances are getting higher and higher over the years and sharply increase in recent years. The increased amount of foreign currency is due to the increase of the Vietnamese living and working abroad along with the upward trend of the number of exported labors over the years. Remittances register a sixfold increase during the early stage of market opening from 1990-1995, elevenfold increase in the second period from 1996-2006 and since 2007, remittances have been going up over the years and reached to $11bn in 2013 and $12bn of 2014 respectively. Statistics from the World Bank (WB) show that the amount of remittances to Vietnam in 2017 reached 13.81 billion USD, up 1.9 billion USD, equivalent to 16% compared to 2016; 2018 reached 16 billion USD. SBV (2012-2018) The increase of FDI, exports and remittances results in the increase of foreign currency supply in the market that has a positive impact on the relationship between demand for and supply of foreign currency and the stabilization of exchange rate. A part from FDI, exports and remittances, the process of international economic 24
10. integration has also created opportunities to rise up the amount of foreign currency circulated in the economy as a result of the following causes: Firstly, the number of foreign visitors to Vietnam has been increasing. Since the opening of the economy, activities of tourism, trade and investment of Vietnam have developed. The number of foreign visitors to Vietnam, hence, has increased rapidly. Particularly, the number of foreign visitors was nearly double in 2004 from only 1.52 million arrivals in 1998 and reached to 7.572 million arrivals in 2013. In the 2014, the number of foreign visitors to Vietnam rose by 4% to 7.874.300 arrivals compared to that of the same period of 2013 Only in 2018 of Vietnam achieved impressive results, with the number of international visitors to our country reached a record 15.5 million people, up 19.9% compared to 2017. GSO (2012-2018) The source of foreign currency received from the activities of tourism has a positive impact on foreign currency demand and supply and the stabilization of exchange rate. Because, if the average expenditure of each international visitor is $800, then the total receipts of foreign currency from tourism should be nearly $6bn per year. GSO (2012-2018) Secondly, the capital inflows to Vietnam have increased, clearly shown by the sharply increased foreign indirect investment at $6.243 M in 2007 that contributes significantly to the supply of foreign currency. However this kind of capital inflows is unstable and can be withdrawn quickly if the international markets fluctuate. This can be shown by the negative figures of this kind of capital inflows in 2008 (-$578M) and 2009 (-$71M). Moreover, in 2011, with the signal of the world economy recovery, this capital inflows came back to increase slightly and reached to $1.06bn in 2011 and increased by 25% in 2012 compared to that of 2011, and was estimated to rise by 20% in 2013 compared to that of 2012 and $1.0bn in 2014 . Overall, in 2018, total foreign indirect investment in Vietnam remained at a surplus of over USD 2.0 billion. GSO (2012-2018) Thirdly, the number of foreigners to Vietnam for working, living and studying has been increasing that leads to high expenditure in foreign currency especially for renting houses and other services circumventing regulations that is difficult to control thoroughly. The number of foreign banks, insurance companies and economic organizations opening offices, branches, companies, and factories in Vietnam has increased more and more that results in the increased number of foreign experts and labors working in Vietnam. 25
11. 4. Discussion and Conclusion 4.1. Lessons learned Success in exchange rate operation in 2012-2018 and in first months of 2019 owns to various factors, among which the most outstanding factor is the consistency in monetary policy operation of the SBV the SBV of Vietnam. Particularly, the SBV has actively operated and delivered the message of stabilizing the exchange rate for the whole year from the beginning of the year to prevent the situation of speculation with expectation of increasing the exchange rate; and been ready to intervene when the market slightly fluctuates due to the sentiment and rumors, for instance the fluctuations at the end of April 2013 and some other times in 2013, 2014 in order to strengthen the confidence for the market; maintained rather large spread between interest rates of deposits in USD and deposits in VND to gain the confidence of investors and people on the VND; determined to closely manage borrowing activities and domestic payments in foreign currency; determined to manage the gold market following the objectives. 4.2. Forecasts for 2019 - 2025 Pressure on adjusting the exchange rate and slightly depreciating the VND is significantly high from many sides, but it is predicted that the SBV of Vietnam will still maintain its objective of stabilizing the VND/USD exchange rate within a limit. It is also forecasted that the fluctuations of exchange rate (if any) for the whole year of 2019 - 2025 will not exceed 1-2% and this situation will be similar in 2012 - 2018. According to that, tools for monetary policy operation, including interest rates, reserve requirement, open market operations, policies and measures on managing foreign currency market have been also implemented by the SBV following this objective in an active, close but flexible manner to meet requirements of the practice and contribute to the improvement of the position of the VND and the decline of dollarization. Vietnam is continuing to integrate widely and deeply into the region and the world, the global financial markets and the exchange rates of various currencies contain unexpected fluctuations that have impacts on the domestic foreign currency market. However, it is forecasted that remittances, FDI, volume of exports, and the attraction of international visitors to Vietnam will continue to rise up significantly that creates prerequisites for stabilizing the exchange rate. The National Foreign Reserves Fund continues to be strengthened to ensure the adequate level in accordance with the international practice provided by the IMF. 26
12. 4.3. Some recommendations Firstly, administering the exchange rate should continue to coordinate closely, but proactively and flexibly with other instruments in operating monetary policy, especially interest rates, compulsory reserves and open market operations. ; and other measures of monetary management and banking operations, especially the status of domestic listing and sales in foreign currencies, the status of transferring foreign currency, etc., has a roadmap to move to implement Indirect tools in operating when conditions are ripe. Secondly, persistently manage the exchange rate stability and manage the gold market according to the set objectives with the synchronous coordination of monetary policy operating tools and state management of monetary and operating activities. bank; There is an earlier roadmap to pull the gold price in the domestic market with a narrower gap than the world gold price gap. Thirdly, there needs to be close and coordinated coordination between monetary policy and other macroeconomic policies, directly trade policies and fiscal policies (issuing government bonds in foreign currencies, borrowing and repayment of foreign loans, foreign currency demand for strategic objectives, ) in achieving the goal of stabilizing exchange rates, limiting trade deficit. Fourthly, continue to have policies to encourage the export of foreign workers, encouraging international visitors to Vietnam; strengthening control of foreign exchange flows, preventing smuggling, tax evasion and transfer pricing of foreign investment projects in Vietnam, VAT refund status. Fifthly, to strengthen the inspection of private gold and silver goods illegally exchanging foreign currency, transferring money abroad illegally; Foreign currency exchange agents of commercial banks do not report or cheat in foreign currency exchange. Sixthly, strengthening propaganda and explaining the policy of administering the exchange rate associated with implementing the objectives of monetary policy management, monetary stability, macroeconomic stability. This propagation needs to be diversified in form and method, implemented in depth, strengthening the exchange of both theory and practice in a scientific way. Seventh, continue to have more coordinated, more proactive and more coherent coordination between the SBV and the Ministry of Finance in regulating monetary policy and financial policy, in relation to handling foreign currency issues of the state budget as well as other related issues. 27
13. 5. References 1. SBV (2012-2018),"Report on operating monetary policy and banking activities, yearly, years 2012-2018", Hanoi, Internal circulation documents. 2. MOF (2012-2018), "Annual budget and public debt balance report, years 2012- 2018", Hanoi, internal circulation documents 3. GSO (2012-2018), "Information on annual socio-economic development, years 2012-2018", Hanoi, Access relevant information at: www.gso.gov. VN 4. NFSC (2012-2018), "Annual financial market overview report, years 2012- 2018”. Hanoi, visit at www.nfsc.gov.vn, related information section 28