The following table shows vietnam’s balance of payments in 2009, when the economy was seriously affected by the global economic recession (maximum 2000 words, including figures or tables)

Calculate Vietnam’s current account balance, financial and capital account balance, the official settlement balance or the balance of payment in short, and the changes in the official re

COURSE: INTERNATIONAL FINANCE

(INE 3003 E)

FINAL ASSIGNMENT

Instructor: Dr Nguyễn Tiến Dũng Name of student: Đỗ Duy Hùng

Date of birth: 11/09/2000

Course: International Finance

(INE 3003 E)

Student

Đỗ Duy Hùng-18050467

Word count

4519 (Excluding Title Page, Table of Contents and References)

Course coordinator

Dr Nguyen Tien Dung

Date of submission:

4/6/2021

Plagiarism statement

“I confirm that this assignment is entirely my own work and has not been submitted in full or in part for any other course within or outside UEB I confirm that all references are duly acknowledged.”

Signature: Hùng

Problem 1: The following table shows Vietnam’s balance of payments in 2009, when

the economy was seriously affected by the global economic recession (maximum 2000

words, including figures or tables).

Table: Vietnam’s International Transactions, 2009 (Unit: billions U.S dollars)

A Current account balance B Capital and financial account balance

Foreign investment in Vietnam,

Imports, f.o.b -64.7 Vietnam's investment abroad, assets -0.7

Official (net) 0.4 D Balance of Payments

E Changes in international reserves Source: IMF Staff Report

a Calculate Vietnam’s current account balance, financial and capital account balance, the official settlement balance (or the balance of payment in short), and the changes in the official reserve assets Explain your calculations

b Based on the economic situation in 2009, discuss the disequilibrium (surplus or deficits) in the current account balance, financial account balance, and the balance of payment

c How did the State Bank of Vietnam (SBV) respond to this situation through exchange rate policy and foreign exchange market intervention? Show that the SBV actually moved to a more flexible exchange rate policy during this period

d Using the DD-AA model, show that the adoption of a more flexible exchange rate policy assisted the economy in mitigating the adverse effects of the global economic recession (Hint: you should compare the effects of the global economic recession and the resulting fall in the aggregate demand under fixed and flexible exchange rates)

3

a Calculate Vietnam’s current account balance, financial and capital account balance, the official settlement balance (or the balance of payment in short), and the changes in the official reserve assets Explain your calculations.

The current account balance:

The current account balance is the sum of:

The balance of trade in goods= 57.1-64.7 = -7.6

The balance of trade in services = 5.8 – 8.2 = -2.4

Net investment income = 0.8-3.8= -3

Net unilateral transfer = 6+0.4=6.4

Therfore We have

CA= -7.6-2.4-3+6.4= -6.6 billions USD

The Capital and Financial Account Balance

The Capital and Financial Account Balance is the sum of:

Net direct investment, Net Portfolio investment, Medium - and long-term loans and net short-term capital So we have:

KA & FA = 6.9 -0.1 + 4.5-4.5

The official settlement balance (the balance of payment) is the sum of the current

account balance, capital account balance and the financial account balance, Errors and omissions

= -6.6+6.8-9= -8.8 billions USD

The changes in the official reserve assets= - the balance of payment

= 8.8 billions USD

b Based on the economic situation in 2009, discuss the disequilibrium (surplus or deficits) in the current account balance, financial account balance, and the balance of payment.

Current account deficit

Viet Nam’s Current account deficit was -6.6 Billion USD Currently, Viet Nam’s current account deficit has declined significantly from its peak in 2008 In 2008 Viet Nam’s current account balance reached -10.823 Billion USD We can see that the global financial crisis harmed the economies of many countries worldwide, including Viet Nam This crisis was original from the US financial crisis in 2007, and it continued until 2009

The trade balance deficit is still one of the leading causes leading to the current account deficit

According to the data in the table, it can be seen that in transactions in goods and services, exports are always smaller than imports, which makes Vietnam's trade balance deficit According to the General Department of Customs, some essential Vietnam products such as oil, rubber, cashew nuts, and beans all went down Many export orders

to the US, EU, and Japan, such as textiles and pepper, decreased by 20%-30%, the signing of new export activities encountered many difficulties Many export activities had to be postponed to the following year Vietnam imports 70-80% of raw materials for production; however, during the global economic downturn, the supply of raw materials of countries is being tightened to reduce the impact of the recession Therefore, Vietnam lacks input materials, leading to a decrease in exports and a decrease in imports

In 2009, due to the global economic crisis, Vietnam's import and export turnover was still decreased Specifically, total import and export turnover of goods in 2009 reached 121.8 billion USD, down 11.4% compared to 2008, in which export turnover of goods reached 57.1 billion USD, down 8.9% compared to 2008; goods import turnover was 64.7 billion USD, down 13.3% compared to 2008

In 2009, Textile and garment exports surpassed crude oil and took the lead with a value

of $9.1 billion in export turnover In addition, the volume of rice exported in 2009 also reached 5.96 million tons, an increase of 25.4% compared to 2008 and the highest level Until 2009, shows a bright future for our country's rice export industry

The financial crisis and economic recession will directly affect several service industries with high foreign currency turnover, such as transportation, insurance, tourism According to the General Statistics Office, export turnover in services for the whole year reached 5.8 billion USD and import turnover in goods was 64.7 billion USD We can see the negative impact of the economic crisis on our country's trade balance in 2009 Vietnam's import-export industry was hit even harder than it was in 2008

Financial account balance surplus

Besides, we have a surplus of FA for the following reasons.

Firstly, because Vietnam is a developing country, borrowing from abroad is understandable to promote growth, build infrastructure, Attached to that we also not invest abroad

Second, due to Vietnam's accession to the WTO, this is an opportunity to attract good foreign investment Although it is only 24.6% compared to 2008, this is quite a high number in the current economic crisis when investors limit their investment

The investment income deficit of 3 billion USD was partly due to the sharp drop in profits from the oil industry and the downward trend of crude oil prices in the world market

The balance of payment deficit

To sum up, with the deficit in the current account balance being too large, the surplus

in the financial account cannot cover this part, so our Vietnam has a deficiency in the balance of payments, at 8.8 billions USD In the context of economic recession, this happens even more seriously, and the state needs to have the necessary solutions to solve this problem

c How did the State Bank of Vietnam (SBV) respond to this situation through exchange rate policy and foreign exchange market intervention? Show that the SBV actually moved to a more flexible exchange rate policy during this period.

Monetary policy:

In 2009, the SBV implemented a flexible and effective exchange rate system along with a signal-field-based loan discounting system; In addition, SBV also manages the exchange rate in line with market signals that encourage exports while controlling imports, stabilizing Vietnam's economy and ensuring payment

Faced with this situation, the State Bank has implemented many measures synchronously: decided to widen the exchange rate band from +/-3% to +/-5%, applied from March 24, 2009, to reduce the price difference between the free market and the official market; strictly control foreign exchange trading activities of credit institutions

to ensure that credit institutions strictly implement regulations on foreign exchange management on listing and trading; strengthen propaganda to stabilize people's psychology and implement measures to create consensus among commercial banks to agree to increase USD deposit rates and lower interest rates for foreign currencies to overcome the situation foreign currency supply-demand imbalance

In the face of a sharp increase in the free USD price under the influence of the gold price fever, the bank immediately announced the import of gold to reduce the pressure

on the gold supply, reducing the dollar's heat on the free market In addition, the State Bank decided to intervene strongly directly in the exchange rate when adjusting the average interbank exchange rate by 5.44% from 17,034 VND on November 25, 2009, to 17,961 VND/USD applied for the next day Narrowing the USD/VND trading price range from ±5% to ±3% and raising the introductory interest rate in VND, the SBV also committed to supporting the sale of foreign currencies to credit institutions with status from minus 5 % go down In addition to the above decisions of the State Bank, the Prime Minister issued version No 2578/TTG-KTTH requesting seven state-owned corporations and corporations to sell foreign currencies in the form of deposits immediately and current revenue sources for credit institutions that are allowed to operate foreign exchange to reduce the pressure on the foreign currency supply

d Using the DD-AA model, show that the adoption of a more flexible exchange rate policy assisted the economy in mitigating the adverse effects of global economic recession.

As we all know, the central bank has applied a cautious expansionary monetary policy, supporting liquidity and creating conditions for credit institutions to expand credit effectively

At the same time, the Central Bank also applied a flexible exchange rate policy to

create liquidity in the market and restore the economy

In this case, if the central bank using Monetary policy in fixed exchange rates

regime

Exchange rate

DD 2

E2

E1

AA2 AA1

Output, Y

Hoping to increase output to Y2, the central bank decides to raise the money supply by

buying domestic assets Because of that, AA1 shifts to the right to AA2 And we have a

new equilibrium at point 2, where Vietnam's output and asset market at the exchange

rate of E2 and output lever at point Y2 Both exchange rate and the output lever

increase

However, in the fixed exchange rate regime, The central bank must maintain the

exchange rate at E1 So, they sell foreign assets for domestic currency to decrease the

money supply They are shifting AA2 back to AA1

After all, the economy's equilibrium remains at point 1, with the exchange rate and the

output lever unchanged at E1 and Y1

In case the central bank maintains a flexible exchange rate regime

The central bank maintains a somewhat flexible exchange rate regime, specifically until

November 2009 the central bank tries to increase the exchange rate, for example:

Exchange rate

DD

E2 E1

AA2 AA1

Output, Y

When Vietnam faces an economic crisis, the Government wants to increase output to recover the economy Hoping to increase output to Y2, the central bank decides to increase the money supply by buying domestic assets Because of that, AA1 shifts to the right to AA2

For that, AA1 shifts to the right to AA2 And we have new equilibrium at point

2, where the output and asset market of Vietnam at the exchange rate of E2 and output lever at point Y2 Both exchange rate and the output lever increase

Summary: When Vietnam using Monetary policy in

As the data above shows, when the economy is in recession, only applying monetary policy in a flexible exchange rates regime can increase the total output; in return, this causes our exchange rate to grow and our currency to devalue But the devaluation of our money will cause us to increase exports when our goods are cheaper than foreign goods

The central bank must maintain the exchange rate in the fixed exchange rate regime, so the total output doesn’t change when using monetary policy Therefore, the use of this policy is ineffective

Problem 2: The following table shows the inflation rates in the U.S and European

countries at the end of 1960s and the early 1970s (maximum 2000 words).

Source: OECD

a Discuss the trend in the inflation rates between the U.S and European

countries during this period

b Explain why, with the exception of the U.S., monetary policies were ineffective under the Bretton-Woods fixed exchange rate system (Hint: you should use the

DD-AA diagram for this question)

c Explain the observed close relation between the inflation rates in the U.S and European countries Use the diagram of internal balance and external balance to support your arguments

a Discuss the trend in the inflation rates between the U.S and European

countries during this period.

- In the period from 1944-1971 after the Bretton wood conference, the world leaders

decided to establish the Bretton wood system, more specifically, the leaders decided to attach

the world currencies to the dollar, the cash that continued, then they agreed to exchange it for

gold at $35 an ounce

The Bretton Woods system stipulates that the US dollar is the only fully convertible

currency into gold Other currencies cannot be directly converted to gold Countries use

gold or US dollars as a means of international payment It can be said that the Bretton

Woods system is a gold standard exchange system based on the US dollar

- Countries that follow the Bretton Woods system will have foreign exchange reserves

in the form of a single country's currency, and only that country will follow the gold standard

system (the United States)

- From there, we can see the central position of the United States in the world economy

at that time

This means that countries around the globe maintain their economies with fixed

exchange rates in the Bretton Wood system

The inflation rates in the U.S and European countries during 1966-1972 (unit: %)

12

10

8

6

4

2

0

1966 1967 1968 1969 1970 1971 1972

Britain France Germany Italy United States

European Countries:

Inflation rates of European countries in the period from 1966 to 1972 fluctuated wildly during this period Specifically, from 1966 to 1967, the inflation rate of Germany and the UK fell Specifically, Germany decreased from 3.4 to 1.4%, the UK declined from 3.6% to 2.6%, while the rest of the countries were maintained Inflation was relatively stable as France kept an inflation rate of 2.8% Italy was 2.1% Then, from 1968 to

1969, Germany's inflation rate had many fluctuations when in 1968 the German inflation rate increased to 2.9% but decreased to 1.9% in 1969 At the same time, the inflation rate in Germany increased to 2.9% France's inflation rate during this period increased steadily from 4.4% to 6.5% England also had a similar situation when the inflation rate increased from 4.6 to 5.2% in 1969 Finally, Italy had an inflation rate Inflation fell to 1.2% in 1968 and then rose again to 2.8% in 1969 In 1970 Britain, Germany, and Italy both had increased inflation rates when inflation rates reached 6.5%, 3.4%, and 3.4%, respectively The last rate was 5.1%, while the inflation rate of France in this period went 5.3%, down from 1969 In the previous two years,

1970-1971, Britain peaked the inflation rate at nearly 9.7%, reaching 9.7% In addition, Germany and Italy also achieved inflation of 5.3% and 5.2% in 1971 At the same time, France has had moderate inflation rates since 1971, specifically 5.5 % Finally, in 1972 the UK's inflation rate went down after rising sharply in 1971 and stopped at 6.9%, while the rest of the country rose slowly at 6.2% in France, 5.5% in Germany,

5.3% in Italy

United States:

The US inflation rate showed signs of increasing steadily and continuously in the period from 1966 to 1971 (When the Bretton system was still in effect); in particular, in 1966, the US inflation rate only reached 2.9%; however, this figure in subsequent years came 3.1% in 1967, 4.2% in 1968, 5.5% in 1969, 5.7% in 1970 By 1970, the US inflation rate had almost reached double the 1966 inflation rate of 5.7% to 2.9%

The US balance of payments is constantly overspending America also has to spend a lot on wars in other countries Hundreds of billions of dollars of inflation abroad flooded the world market, causing the US dollar to depreciate continuously US gold reserves fell to the lowest level The US must suspend the exchange of dollars for gold for foreign central banks and suspend the stabilization of the world gold price The US dollar has nothing to do with gold anymore The US dollar standard collapsed, and the Bretton Woods fixed exchange rate system was also terminated in August 1971 However, the US inflation rate has decreased since 1970, when in 1971 1972 US