1 NATIONAL ECONOMICS UNIVERSITY INTERNATIONAL ECONOMICS 2 MIDTERM EXERCISE TOPIC OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE.1 NATIONAL ECONOMICS UNIVERSITY INTERNATIONAL ECONOMICS 2 MIDTERM EXERCISE TOPIC OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE.
Trang 1NATIONAL ECONOMICS UNIVERSITY
MIDTERM EXERCISE
TOPIC: OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE
BANK OF VIETNAM
Class: International Economics EEP 62B
Group 6: Nguyễn Tuấn Sơn
Lê Thành Đạt Phạm Đức Minh
Tạ Xuân Sơn Nguyễn Cảnh Quân Nguyễn Hoàng Tuấn Nguyễn Hoàng Uyên
Lê Quang Huy
Lecturer: Ngô Thị Tuyết Mai
HA NOI, 2022
Trang 2The foreign exchange market is one of the most important factors
in a market economy When the foreign exchange market is well
controlled, it will help us control and coordinate all economic
development activities of a country, as well as improve competitiveness
in the field of imports and exports, control the trade balance Build an appropriate foreign currency reserve ratio structure, regulate capital structure in production, create confidence in the currency in the future Controlling the foreign exchange market well plays an important role in the country's economic development.
Vietnam, like developing countries, is currently facing a dilemma
in choosing the basic objectives in operating macroeconomic policy, namely the foreign exchange market The issue we need to pay attention
to is choosing an appropriate policy for the foreign exchange market to manage the macro-economy in accordance with the current economic growth stage.
This is the goal of the report, our group of 6 choses as the topic
"OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM" with the aim of having a clearer view of the foreign exchange market in the world and in Vietnam, along with the role of the state bank in regulating Vietnam's foreign exchange market We would like to thank our lecturer and look forward to her pointing out the shortcomings that still exist in the report.
Trang 3TABLE OF CONTENTS
I OVERVIEW OF THE FOREIGN EXCHANGE MARKET 4
1 DEFINITION 4
2 CHARACTERISTICS 4
3 FUNCTION 4
4 HISTORY 5
a International 5
b Vietnam 5
II PARTICIPANTS IN THE FOREX MARKET 6
1 COMMERCIAL BANKS: 6
2 TRADITIONAL USERS: 6
3 FOREIGN EXCHANGE BROKERS: 7
4 CENTRAL BANK: 8
5 NONBANK FINANCIAL INSTITUTIONS: 8
III FOREX MARKET STRUCTURE 8
1 FOREX EXCHANGE 8
2 OVER-THE-COUNTER MARKET 8
3 INTERBANK MARKET: 8
IV INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM 9
1 LIMITATIONS IN VIETNAM FOREX MARKET 9
2 THE REGULATION OF THE FOREIGN CURRENCY MARKET BY THE STATE BANK OF VIETNAM IN RECENT YEARS 10
a Control foreign currency credit growth at a reasonable rate: 10
b Apply synchronous measures to maintain the exchange rate within the committed range: 10
c 0% interest rate applies to deposits in USD: 10
d Announcement of the central exchange rate: 11
e Adjust the exchange rate incrementally to avoid shocks 11
V SPECIAL CASE 11
Trang 4I OVERVIEW OF THE FOREIGN
EXCHANGE MARKET
1 DEFINITION
Firstly, we will learn about the forex market concept The foreign exchange market is defined through three perspectives:
- The foreign exchange market is the market where international currencies are bought and sold
- Foreign exchange market refers to the organization setting within which individual businesses, governments and banks buy and sell foreign currencies and other debt instruments
- The foreign exchange market is a market for converting the currency of one country into that of another country
2 CHARACTERISTICS
- High liquidity
This market is the most liquid market in the world This involves trading between different currency pairs around the world Traders in the market are free to buy and sell currencies at any time of their own choice
- Transparency
This is evident to traders of the forex market: they have access to all data and information related to the market Transparency will make it easier for traders
to track price movements through their portfolios in real time
- Dynamic feature
The market structure shows its unending dynamism In the foreign exchange market, currency values change every second and hourly according to
economic fluctuations depending on the country that owns that currency
- 24-hour operation
The market rotates non-stop with activity 24 hours a day This clearly
demonstrates the market's supply to traders with the ability to trade at any time
3 FUNCTION
- Transfer
+ Transfer of Funds or Purchasing Power Currency from one Nation to another
+ Meet the needs of buying, selling, and exchanging foreign currencies for circulation and payment in the fields of international investment, international trade, tourism
- Credit Function
+ Foreign currency credit solves the problem of the time when goods are transported from exporter to importer
- To Provide the Facilities for Hedging and Speculation
+ Help traders hedge foreign exchange risk in foreign currency exchange
Trang 5+ It also helps speculators to profit if they can predict future exchange rate movements
- The State's macroeconomic management role
+ A tool for the central bank to implement monetary policy to control the economy according to government goals by adjusting the exchange rate through buying and selling foreign currencies
4 HISTORY
a International
Source: Dailyfx
b Vietnam
- Before 1990-1991:
+ No organized Foreign Exchange Market
+ Followed socialist subsidized economic model => fixed exchange rate + Only exchanged foreign currency with socialist countries
=> After the 86’ renovation, lots of USD was coming into our country while the exchange rate of VND-USD was significantly low
=> The trade deficit
- Between 1991 and 1994:
+ August 1991, establish 2 foreign trading centers in Hanoi and HCM City with 4 main targets:
1.To establish an official foreign exchange market for transactions between banks and individuals
2.To preview and measure supply and demand for foreign currency 3.To regulate the official exchange rate of VND-USD
4 To prepare for the foreign exchange market in the future + The Central bank set up a floating VND regime (to stimulate foreign
currency transactions and promote trade) But the economy has not yet
Trang 6recovered from the crisis, the market mechanism has not really worked, and the supply of foreign currency is much lower than the demand
=> Therefore, exchange rate fluctuations have a negative impact on the economy, so the central bank of Vietnam must set an exchange rate that only fluctuates a certain amount
- Between 1994 and 2007:
+ In 1994 2 foreign trading centers stopped working, instead interbank foreign exchange market started working in order to build an organized market which helps trade foreign currencies between commercial banks
- 2007 till now: After Vietnam became WTO member:
+ Vietnamese Foreign exchange has been constantly evolving
+ Foreign currencies have appeared more in Vietnamese Forex Market, so the government need to protect VND more carefully
II PARTICIPANTS IN THE FOREX MARKET
1 COMMERCIAL BANKS:
- Acting an important role in the foreign exchange market
- Because most large-scale foreign exchange transactions are done through commercial banks Commercial banks conduct foreign exchange transactions for two purposes:
+ Provide services to customers by buying on behalf of customers and selling
on behalf of retail customers
+ Do business for themselves by buying foreign exchange to make a profit when the exchange rate changes
Source: IFRS Vietnam
2 TRADITIONAL USERS:
- Corporations, tourists, importers, exporters, investors, etc
- Several types of companies make foreign exchange transactions for their own production and business activities
Trang 7- Individuals who have the need to buy and sell foreign currency for the purpose
of operating for themselves, not for the purpose of trading foreign exchange
3 FOREIGN EXCHANGE BROKERS:
- They are specialist companies playing the role of intermediaries between the different banks and they don’t buy or sell foreign currencies for themselves
Top 4 Foreign Exchange Brokers
4 CENTRAL BANK:
- Acting as seller or buyer of last resort when the nation’s total foreign exchange earnings and expenditures are unequal
Trang 8- Organize, control, and stabilize the operation of the foreign exchange market
to stabilize prices and exchange rates
- The central bank's transaction volume is not large, but the impact of these transactions on the foreign exchange market is very large because it is related
to future macroeconomic policy
5 NONBANK FINANCIAL INSTITUTIONS:
- Hedge funds
- Mutual funds
III FOREX MARKET STRUCTURE
The foreign exchange market is diverse in terms of participants However, the foreign exchange market is divided into three distinct structures:
1 FOREX EXCHANGE
2 OVER-THE-COUNTER MARKET
3 INTERBANK MARKET:
- The most developed form of the foreign exchange market, where transactions
of exchanging and buying and selling foreign currencies between state banks and commercial banks take place
- Participants in the interbank market:
+ Commercial banks: in the inter-bank foreign exchange market, commercial banks are considered as active participants and as makers of the foreign currency market They list the buying or selling prices of foreign currencies to other banks, based on a set price, banks will conduct exchanges and
transactions directly with each other
+ Central banks: the central banks of countries that participate in the interbank foreign currency market to increase the country's foreign currency reserves and operate in the interbank foreign currency market to stabilize the exchange rate in the national currency market
Trang 9+ Broker: some banks will have the need to choose a form of transaction through a broker, if necessary, brokers coordinate with these banks to compare, contrast and find out the purchase price or best seller
IV INTERVENTION IN THE FOREIGN
EXCHANGE MARKET BY THE STATE
BANK OF VIETNAM
Before looking at the interventions of the State Bank of Vietnam, we will look at the disadvantages of the Vietnamese foreign exchange market in recent years:
1 LIMITATIONS IN VIETNAM FOREX MARKET
- The foreign exchange market in Vietnam today, although only recently
formed, is considered by financiers as a market with strong growth potential and is gradually stabilizing
- Despite being a potential and diversified market for trading products, the foreign exchange market in Vietnam is still not fully developed, especially derivatives This shows that the trading volume is still low
- The main reason is due to:
+ Lack of real demand from customers
This is considered as a core issue because Vietnamese enterprises have not had the habit of paying attention to and taking risks with foreign currency
activities Typically, in the period 2007-2008, the Vietnamese market suffered
a wobbly phase when the USD/VND exchange rate fell sharply to the floor level The reason is due to a large amount of foreign currency from foreign direct and indirect investment activities, and businesses often borrow a lot of foreign currency to invest in large projects, then convert from VND to USD to
Trang 10repay the debt This creates large fluctuations in exchange rates and lending rates
+ Lack of legal basis
Because exporters often convert foreign currency into VND to serve domestic production and business activities and investment, they do not convert from domestic currency to foreign currency
+ Lack of knowledge and understanding about derivatives
Due to the complex nature and requirements of enterprises, it is necessary to have a fast, accurate and constantly updated information system for
forecasting international exchange rates; There must be a tool to measure and warn of exchange rate risk, a team of professional experts, so derivative products for businesses are still limited
Because of these disadvantages, it is necessary to have a large enough entity
to stand up to solve it completely before the situation gets worse, which is the State Bank of Vietnam.
2 THE REGULATION OF THE FOREIGN CURRENCY
MARKET BY THE STATE BANK OF VIETNAM IN
RECENT YEARS
a Control foreign currency credit growth at a reasonable rate:
- Narrow the cases of borrowing capital in foreign currencies
- According to Circular No 03/2012/TT-NHNN Except for foreign currency loans, if there is enough potential to repay the loan, other cases must be approved by the State Bank
=> This helps to prevent speculation in foreign currencies, helping the State Bank
to control the foreign exchange market well
b Apply synchronous measures to maintain the exchange rate within the committed range:
- The SBV has set a target of maintaining the exchange rate within a range of no more than 2% - 3% to control expectations about the devaluation of VND (2013), creating conditions for businesses to be proactive in their production and business plans To achieve the set target, the State Bank of Vietnam manages the foreign currency market and strictly controls the exchange rate according to market signals, in line with the macro balances and international balance of payments, takes measures to increase the foreign exchange reserves
of the State
=> As a result, the foreign currency market in recent years has been quite positive with the stability of the exchange rate
c 0% interest rate applies to deposits in USD:
=> This measure of the State Bank is aimed at preventing speculation and
hoarding foreign currencies to sell at a profit
Trang 11d Announcement of the central exchange rate:
- Issued Decision No 2730/QD-NHNN on announcing the central exchange rate of VND to USD, the cross rate of VND with some other foreign
currencies
- Aims to help Vietnam's foreign currency market increase its resilience to
external shocks and minimize adverse impacts on the exchange rate
- Encourages individuals and organizations to sell foreign currencies to buy
VND to enjoy profits
- Limiting residents' foreign currency hoarding
e Adjust the exchange rate incrementally to avoid shocks
So, to learn more about the role of the State bank of Vietnam in the foreign
exchange market, we will analyze more deeply in a case below:
V SPECIAL CASE
- During the period 1989 - 1993, the exchange rate of VND/USD is shown in the following table:
Official price of the state Market price +/- %
Source: Vietnam banking scientific journal
- The above table shows that the VND/USD exchange rate fluctuates up and down over the years Because the state floated the exchange rate during this period, the VND/USD exchange rate tended to increase and was adjusted by the government to match the free market price closely However:
- The floating exchange rate has stimulated the psychology of foreign currency speculation, to enjoy the price difference
- Exchange rate fluctuations and lack of foreign currencies because of USD
shocks, destabilize the economy
=> Therefore, the escalation in USD price has stimulated the psychology of USD reserves Foreign currency, which is already scarce, is not used for
import and export activities but is traded around in circles between domestic organizations At this stage, the bank cannot control foreign currency
circulation