Topic monetary policy stabilizes the macroeconomy in the context of international trade tensions

…..18 Chapter 2 Monetary policy stabilizes the macroeconomy in the context of : international trade tensions ……….21 2.1.. For many years, Vietnam has used monetary policy as a tool to

DIPLOMATIC ACADEMY OF VIETNAM

FACULTY OF INTERNATIONAL ECONOMICS

MACROECONOMY IN THE CONTEXT OF INTERNATIONAL TRADE TENSIONS

Hà N ội – 202 2

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MEMBERS OF GROUP 8:

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TABLE OF CONTENTS

1 The paper’s necessity….……… ………… …… ……… ……… .4

2 The research’s purposes… ……… ……….……… 4

3 The paper’s extent and object……… ……… ….…… ………… 4

4 The research’s methods………… ……… ……… …………5

5 The paper’s structure….……… ………… ……….… 5

CONTENT SECTIONS Chapter 1: Overview of international trade tensions ………… ……… 5

1.1 The importance of monetary policy in managing the macroeconomy … … .5

1.2 Major fluctuations in international trade in the period 2020-2022…… ……6

1.3 How does international trade volatility affect Vietnam? …… … 18

Chapter 2 Monetary policy stabilizes the macroeconomy in the context of : international trade tensions ……….21

2.1 Purpose……… … ………….………21

2.2 Content……… …… ……….……….……22

2.3 How to implement and organize implemantation……… …… … 30

Chapter 3: Feasibility in policy implementation……… 34

EPILOGUE References……….……… ………… ………36

Telecommunications

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PROLOGUE

1 The paper’s necessity

Globalization and international economic integration are objective requirements and are currently taking place strongly all over the world, facilitating the effective combination of domestic and foreign resources, expanding the space for economic development for countries However, it is the rapid development of globalization and international economic integration that has made the economies of countries deeply interdependent As a result, every event that occurs in any region of the world affects the global economy and trade

In the context of a series of environmental events, epidemics, wars, conflicts, etc., which have a strong impact on the global economy today, countries need to have specific policies to respond minimize the consequences for the economy One of the most effective policies a country can use to govern its economy is monetary policy

For many years, Vietnam has used monetary policy as a tool to regulate the macroeconomy and achieved certain successes, maintaining economic growth momentum, and minimizing disadvantages However, in order to contribute to the construction of a more effective monetary policy, more suitable to the current situation,

our group chose the topic "Monetary policy stabilizes the macro-economy in the context

of international trade tensions" for study in this final essay

2 The research purposes

The purpose of the study is to give an overview of the international trade situation with many fluctuations, indicating the impact of those fluctuations on the Vietnamese economy From there, propose appropriate monetary policies and assign tasks to ministries and sectors in order to stabilize the macro-economy and contribute to economic development

3 The paper's extent and object

Research object: international trade tensions, monetary policy in Vietnam

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Research extent: current situation from 2020 to present, policy proposals from now to 2030

4 The research methods

The topic uses research methods: statistics, comparison, analysis and synthesis of available data, thereby proposing policies

5 The paper’s structure

The paper consists of 3 chapters:

Chapter 1: Overview of international trade tensions

Chapter 2: Monetary policy stabilizes the macro-economy in the context of international trade tensions

Chapter 3: Advantages and challenges in implementing monetary policy

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CONTENT SECTIONS

Chapter 1: Overview of international trade tensions

1.1 The importance of monetary policy in managing the macroeconomy

Monetary policy plays an important role in regulating the amount of money circulating in the economy Through this policy, the Government and the State Bank control the monetary system Thereby achieving the objectives such as controlling inflation, reducing unemployment, stabilizing prices, stabilizing the purchasing power

of the currency, and promoting economic growth In addition, monetary policy is also a tool for the State Bank to control the operation of all commercial banks and credit institutions nationwide

Economic growth: This is the top goal The increase or decrease in the volume of money affects the aggregate demand and the interest rate Thereby increasing production investment and total national output

Stabilizing market prices: Stabilizing prices will help the state plan well the direction of economic development This also helps to stabilize the investment environment and attract many investment capital sources

Stable interest rate: Based on the lending trajectory created from the deposits of the society and the interest rate system in line with the market mechanism

Stabilization of foreign exchange and financial markets: Stabilization of financial markets is driven by stability of interest rates Exchange rate fluctuations greatly affect purchasing power and economic activities

However, besides the important roles, monetary policy has certain limitations such as:The effect of monetary policy will be lower when private investment is not sensitive

to interest rates When interest rates increase, the cost (or capital) of inputs to businesses increases, which causes output prices to continue to rise, and inflation is not controlled Therefore, monetary policy will become less effective if the government is not committed to controlling the printing of more money Thereby, at a time when the government wants to control inflation with the use of tight monetary policy, facing pressure to cover the budget deficit, the government can print more money That will have the opposite effect with tight monetary policy Using expansionary monetary

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policy will cause interest rates to fall too low, which makes individuals unwilling to deposit money in banks and decide to hold cash This makes the commercial banking system lack of loan capital, which will affect the private investment cannot expand, reduce the effectiveness of the policy

1.2 Major fluctuations in international trade in the period 2020-2022

1.2.1 Changes in international trade after the COVID-19 pandemic

COVID-19 and the Effects on Supply Chains in Vietnam

The COVID-19 pandemic has slowed global trade and disrupted supply chains The virus, which first started in China, shut manufacturing facilities for an extended period

of time As China, known as the factory of the world, shut factories, it resulted in a ripple effect battering global supply chains with businesses struggling to source raw inputs

This has particularly affected Vietnam, which relies on China for importing raw materials for its industries while also exporting to the country A survey in February by the American Chamber of Commerce (AmCham) revealed that a majority of its members were reporting difficulties in sourcing supplies and materials from Chinese suppliers In addition, 70 percent of its members stated they were operating at just 70 percent capacity

Businesses suspending production

Several automobile manufactures including Honda, Toyota, Nissan and Ford that have production plants in Vietnam have suspended production due to the pandemic Businesses across all sectors in Vietnam are facing disruptions particularly as Vietnam

is currently in a two-week social isolation program, where only essential businesses operate

Vietnam economy resilient: World Bank

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And yet, while Vietnam remains exposed to COVID-19, its economy remains resilient as per the World Bank In its report East Asian and the Pacific in the Time of COVID-19, Vietnam due to its integration with the global economy has suffered due to the pandemic particularly hurting manufacturing and tourism Nevertheless, exports expanded by 8 percent in the first 2 months of the year, while FDI inflows amounted to US$2.5 billion

While this remains a difficult time, Vietnam is poised to overcome the ongoing crisis The report further states that while the pandemic can affect Vietnam’s economy

in the short term if the virus is contained in the long-term Vietnam can manage – –external risks by diversifying trade flows and improving competitiveness

Regarding monetary policy:Inflationary pressures due to supply bottlenecks may continue for some time, thus adding to pressure from higher energy prices The Government and relevant ministries and sectors such as the Ministry of Finance, the State Bank of Vietnam, the Ministry of Planning and Investment, the Ministry of Industry and Trade, etc need to continue their efforts to share information on how to respond to inflation, public publish relevant data and be ready to react quickly to any significant changes in the medium-term inflation outlook

Firstly, ensure liquidity in the money market, create conditions for credit institutions to continue to reduce lending interest rates, and ready capital to support credit institutions to boost credit The COVID-19 pandemic has halted many activities, restricted people's movement, disrupted production and circulation, and disrupted cash flow Liquidity support solutions are deployed by most central banks to help markets operate smoothly, maintain cash flow, and support banks and businesses to ensure solvency Similarly, liquidity is maintained abundantly at the system of credit institutions on the basis that the State Bank buys a large amount of foreign currency, puts the dong on the market, and at the same time daily offers to buy valuable papers on the open market to signal ready to support liquidity, stabilize the money market This is reflected in the fact that the interbank interest rate - which is the interest rate for short-term mutual borrowing among credit institutions, has fallen to a very low level in history, ranging from 0.5%/year to 0.9%/year in the last year of September, reducing

a developing economy, large capital needs but heavily dependent on the banking system,

it is not easy to reduce lending interest rates in Vietnam In order to promptly remove difficulties for businesses and people, even in 2020 when the new epidemic appeared, the State Bank of Vietnam reduced the operating interest rate 3 times with a reduction from 1.5%/year to 2%/year and is one of the Central Banks with the strongest interest rate reduction in the region; In 2021, the SBV keeps these low interest rates unchanged, combined with maintaining ample liquidity in the money market As a result, by the end

of September 2021, the average deposit and lending interest rates in VND of credit institutions decreased by about 0.46%/year and 0.72%/year respectively compared to the end of 2020 after decrease by about 1%/year in 2020 The average lending interest rate for priority sectors according to the policy of the Government (including agriculture and rural areas; supporting industries; small and medium enterprises; exports; high technology application) is 4.4%/year

Thirdly, ensure adequate and timely supply of credit capital for production and business needs in the economy, flexibly adjust credit growth targets to orient credit institutions towards credit growth, go hand in hand with quality With the characteristics

of the financial market heavily dependent on the banking system, credit management always needs to be harmonious and reasonable Credit growth that is too high causes inflation risks, but too low credit growth can affect capital sources for economic growth

On the basis of the economic growth target of 6.5% and inflation of about 4% set by the National Assembly and the Government, the State Bank has set a target of 12% oriented credit growth in 2021, adjusted accordingly consistent with the actual situation

In addition, the State Bank continues to direct credit institutions to grow credit safely and effectively, focusing credit on production and priority fields; strictly control credit in potentially risky fields such as real estate, securities, build-transfer-operate (BOT) projects, traffic build-operate (BT) projects; strengthen risk management for

in potentially risky sectors such as real estate, securities, and consumption remains under the control of the State Bank.

Fourthly, stabilize the foreign currency market Vietnam's economy has a high openness (total import and export turnover at the end of 2020 is about 200% of GDP), the exchange rate management of Vietnam always faces challenges from outside such as big countries are gradually narrowing monetary easing packages, the dollar appreciates Even for the domestic market, psychological factors are always present when the world financial market fluctuates Faced with that situation, exchange rate management continued to ensure flexibility, closely following market supply and demand, macro balances, currency and monetary policy objectives While the trend of capital withdrawal from emerging and developing countries caused the currencies of many countries in the region to depreciate significantly against the USD (USD up 4.65%, Thai Baht down 11.2%, Malaysian Ringgit down) 2.68%, Singapore Dollar decreased by 1.95%), the VND/USD exchange rate continued to be stable, by the end of October, the central exchange rate was equivalent to the end of last year Market liquidity is smooth, legal foreign currency needs are fully and promptly met

Fifthly, deploying many solutions to remove difficulties and support customers affected by the COVID-19 pandemic The State Bank directs credit institutions to

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accompany and stand side by side with businesses and people through implementing a series of solutions to support customers affected by the pandemic, continuously reviewing and editing measures to ensure that they are not affected by the pandemic Support measures are more and more practical, including:

The above figures have shown the great efforts of the banking industry in agreeing and sharing with the economy to overcome the pandemic, especially when the banking system itself also faces risks caused by the pandemic caused by translation The decline

in debt repayment capacity of businesses, individuals and households has the potential

to increase the risk of bad debts, increasing the cost of provisioning for risks As the lifeblood of the economy, ensuring the safety of banking operations during and after the pandemic is extremely important to ensure the supply and circulation of capital to serve the needs of economic recovery

The IMF warned that after the COVID-19 pandemic ends, many economies may have to raise taxes to cover the state budget deficit along with structural adjustments (reshaping supply chains, global production, demographic changes, development of the digital economy, etc.) are likely to create a period of higher inflation As a large open economy, Vietnam can be significantly affected by general trends Therefore, maintaining policy solutions to support the economic recovery process is necessary but cannot be subjective with inflationary pressure, which requires close and smooth coordination of policies on economic growth dosage, method of implementation, especially monetary and fiscal policy

Considering the current conditions, the authors believe that there is no need for Vietnam to tighten monetary policy However, support packages should still focus on production and authorities need to develop inflation scenarios to have appropriate policies, still ensuring economic recovery and growth

1.2.2 Changes in international trade during the Russo-Ukrainian conflict:

Food and Energy Security Crisis

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Ukraine is a key player in the world markets for corn, sunflower oil and seeds, barley, wheat, and colza seeds The country was also one of the WFP’s top wheat suppliers before the war Russia’s blockade of Ukraine’s Black Sea ports drove up food prices and created a bottleneck in food commodity supply chains that prevented Ukraine from fully exercising its export capacities While one alternative was to use railway routes and other European seaports, this is not a perfect solution

After food prices, energy prices are the most directly affected Russia is one of the world’s biggest energy suppliers, providing 14 percent of its crude oil and 9 percent

of its natural gas globally Our simulation generates a 7 percent increase in the price of crude oil, which in turn raises the costs of transportation and production in manufacturing, leading to a drop in exports (Figure 1) Higher prices for natural gas, a key ingredient for ammonia fertilizer, will push up costs for farmers and reduce crop yields, further exacerbating food shortages

Figure 1: Change in exports relative to reference year as a share of real GDP

Nguồn: World Bank

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Following the effects of sanctions and the prospect of supply interruptions, all major commodity markets displayed signals of inflationary shock, worsening the mounting price pressure seen in 2021 and early 2022 The price of crude oil has risen to over US$100 per barrel10, and gasoline prices reached new highs during the first weeks

of conflict The progression of the war will largely determine whether this growing pressure on prices will continue or undergo a mid-term correction; however, there are currently few signs of de escalation The price of nitrogen fertilizer in New Orleans -soared 29 percent during the first week of the conflict, a record for the 45-year Green Market index, due to limitations on Belarus’s fertilizer exports to the EU, rising energy prices, and concerns about future supply interruptions Our assumed supply shock to Russian energy, along with US sanctions, results in a 7 percent increase in oil prices This should be seen as a direct effect of the shocks adding to the inflationary pressures streaming from a variety of factors beyond the scope of our modelling exercise The effects of various shocks to trade flows will be determined by the characteristics of trade, production, and consumption in the countries affected Net exporters benefit as gains in the terms of trade in agricultural and energy commodities drive up exports up (if production can be scaled up or redirected from the domestic market) At the same time, higher commodity prices reduce the competitiveness of goods and services that use them as inputs and therefore make them less profitable to produce and export In addition, the higher cost of fertilizer reduces agricultural yields, potentially reversing the terms-of-trade gains for agricultural exporters On the other hand, net importers of agriculture and energy are worse off due to rising prices of final and intermediate products

Disruptions to international transport

Freight rates reached record highs during the COVID-19 pandemic The current increasing fuel costs are causing inflation and may result in higher freight rates The war and resulting sanctions have severed key transport links between Russia and Ukraine and the rest of the world, disrupting trade more broadly Russia’s connections to European ports have been cut, and commodity exports to other destinations have been constrained Air freight between Europe and Asia must now be rerouted to avoid

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Russian airspace Rail transit through Russia is slowing due to checks for sanctions compliance, and further rounds of sanctions could risk halting rail transit entirely

Commodity and energy price shocks reduce global trade.

In the rest of the world, the economic consequences will be felt mainly through the rise in commodity prices, which will fuel already existing inflationary pressures As always when commodity prices soar, net importers of energy & food products will be particularly affected, with the spectre of major supply disruptions in the event of an even greater escalation of the conflict The drop in demand from Europe will also hamper global trade In Asia-Pacific, the impact will be felt almost immediately through higher import prices, particularly in energy prices, with many economies in the region being net energy importers, led by China, Japan, India, South Korea, Taiwan and Thailand As North American trade and financial links with Russia and Ukraine are fairly limited, the impact of the conflict will mainly be felt through the price channel and through the slowdown of the European growth Despite the prospect of slower economic growth and higher inflation, the recent geopolitical events are not expected to derail monetary policy in North America at this stage

Energy price shocks continue to drive up prices on the world food and commodity markets and, along with supply chain disruptions, are leading to downturns

in production and trade growth This trend has prompted experts to warn about famine and stagflation The crop and energy price shocks reduce global trade, with the total value of exports declining by 1 percent, exports of developing countries declining by 1.06 percent, and of developed countries by about 1 percent

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While some effects may not fully come into focus for many years, there are already clear signs that the war and resulting jump in costs for essential commodities will make it harder for policymakers in some countries to strike the delicate balance between containing inflation and supporting the economic recovery from the pandemic

Considerable challenges for exporters

Besides its effect on imports, the war has also affected exports to Ukraine and Russia Disrupted access to these markets is an urgent issue for perishable goods, such

as fresh fruit and vegetables Some products that exporters cannot ship to Ukraine and Russia could be redistributed to other (European) markets Still, exporters may not be able to avoid oversupply Redistribution also causes increased competition and price

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reductions At the same time, rising energy and fertiliser prices are causing higher production costs This creates a considerable challenge for exporters

— Trade policies and their limitations—

Trade-policy interventions risk further destabilizing food markets:

● Monitoring by the World Bank – Global Trade Alert released at the end of March Trade shows that countries actively used trade policy to respond to domestic needs in the presence of potential shortages in food supply at the beginning of the COVID-19 pandemic This policy activism resurfaced since the beginning of 2022 and particularly since the war in Ukraine began As of March 23, governments had imposed

a cumulative 161 trade liberalizing measures and 208 trade restrictive measures (Figure 2.1).

● A total of 53 new trade policies (67 including subsidies) were imposed or announced between the beginning of the conflict on February 23 and March 23, 2022 (109 since the beginning of the year) This surge has been dominated new export bans and export licensing requirements (31 measures), followed by import bans and import quotas (13 measures), and liberalizing import reforms such as tariff cuts (9 measures)

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● Sixteen nations are responsible for the increase in export controls since the beginning of the war, especially in the ECA region (Figure 2.2) Examples include export bans of vegetable oils, maize and wheat imposed by Serbia on March 10 and export licenses for grains by Hungary on March 4 Export controls were also imposed

by food importing nations such as Algeria, which on March 13 introduced a ban on consumer products such as sugar, pasta, oil, and semolina; and Egypt, which on March

18 imposed a ban exports of cooking oil, corn, and all kinds of cracked green wheat for

a period of three months

● Governments have taken measures to alleviate pressures in national food markets Since the beginning of the war, 12 governments from every continent except North America have increased subsidies for farmers and fertilizer producers or have subsidized food purchases by citizens Azerbaijan, for instance, announced the allocation of up to US$44.1 million in subsidies to cover the difference in domestic and international prices of wheat and flour products

● In addition, nine measures have been taken since the beginning of the war to reduce or remove import barriers on food and fertilizers For instance, on March 3, Colombia decreased to zero import duties on corn, seeds, and resinoid oils, among other

Policies to contain inflation, such as raising government subsidies, could pressure already weak fiscal accounts in the Middle East and North Africa In addition, worsening external financing conditions may spur capital outflows and add to growth headwinds for countries with elevated debt levels and large financing needs In the Western Hemisphere, Financial conditions remain relatively favorable, but intensifying conflict may cause global financial distress that, with tighter domestic monetary policy, will weigh on growth.

In Europe, Unprecedented sanctions on Russia will impair financial intermediation and trade, inevitably causing a deep recession there The ruble’s depreciation is fueling inflation, further diminishing living standards for the population European governments also may confront fiscal pressures from additional spending on energy security and defense budgets While foreign exposures to plunging Russian assets are modest by global standards, pressures on emerging markets may grow should investors seek safer havens Similarly, most European banks have modest and manageable direct exposures

to Russia