Brazils foreign exchange rate policy and lessons to vietnam a research of the 2016 2022 period

NATIONAL ECONOMICS UNIVERSITYADVANCED EDUCATION SCHOOL MAJOR RESEARCH PAPER Brazil's foreign exchange rate policy and lessons to Vietnam: A research of the 2016-2022 period Supervisor :

NATIONAL ECONOMICS UNIVERSITY

ADVANCED EDUCATION SCHOOL

MAJOR RESEARCH PAPER

Brazil's foreign exchange rate policy and lessons to Vietnam:

A research of the 2016-2022 period

Supervisor : Dr Do Thi Huong

Student name : Do Hong Quan

Student ID : 11206659

Major : International Economics

Class : EEP International Economics 62BType of Education : Full time

I hereby certify that this paper is entirely conducted by my own work Citations andmaterials used in the exercise are completely honest, sourced and guaranteed withthe highest accuracy If anything is not true as stated above, I will take the fullresponsibility for my mistake.

I would like to express my deepest gratitude to all those who have supported andcontributed to the completion of this thesis My heartfelt thanks go to my supervisor

Dr Do Thi Huong for her invaluable guidance, mentorship, and unwavering supportthroughout the research process

Moreover, I would like to acknowledge the countless researchers, scholars, andauthors whose works have served as a foundation for my research Their pioneeringcontributions have been instrumental in shaping the academic landscape and havegreatly enriched my understanding of the subject matter

No Acronyms Full meaning

1 ASEAN Association of Southeast Asian Nations

4 COPOM Brazil’s Monetary Policy Committee

5 FDI Foreign Direct Investment

9 GSO General Office of Statistics

10 IBGE Brazilian Institute of Geography and Statistics

11 IMF International Monetary Fund

13 MERCOSUR Southern Common Market

15 SELIC Brazil’s benchmark interest rate

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BRAZIL'S FOREIGN EXCHANGE RATE POLICY

AND LESSONS TO VIETNAM:

A RESEARCH OF THE 2016-2022 PERIOD

1 Introduction

1.1 The rationale of the topic

Vietnam is a growing nation with significant export and economic potential.Vietnam successfully maintained its trade surplus in 2022, with exports totaling

$336.31 billion, a 19% increase from the previous year The domestic economyreached 91.09 billion USD, increasing 14.2% from 2021 The foreign-investedsector, which includes crude oil, reached $245.22 billion, up 20.9% from 2020 Atotal of 35 products have an export turnover of over $1 billion in 2021 This ismainly due to the fact that Vietnam has always pursued a stable and competitiveexchange rate policy to support its export-oriented economy

Brazil is one of Vietnam's major commercial partners Statistics fromTradingEconomics show that over the previous five years, Brazil imported goodsworth a total of almost $11 billion from Vietnam The two economies greatlycomplement one another Vietnam exports consumer goods to Brazil to meet marketdemand Still, it also needs Brazilian agricultural products including maize,soybeans… to meet its rising material needs In terms of trade interaction withBrazil, Vietnam is leading the ASEAN membership Within the Southern CommonMarket, the two parties have kept up their study and negotiations for a free tradeagreement (MERCOSUR)

In recent years, Vietnam's exchange rate strategy has been linked to itsinnovation and integration policies Given the significance of exports and the effect

of the Covid-19 pandemic on the global supply chain and the export-import market,Vietnam must seriously evaluate and take actions in order to cope with and adjust tothe constantly shifting exchange rate policies of its trade partners, notably Brazil As

a result, the topic chosen for this paper will be "Brazil's foreign exchange rate policyand lessons to Vietnam: A research of the 2016-2022 period"

1.2 Object and scope of the paper

Object: This paper focuses on Brazil’s exchange rate policy, which can be based on

tto suggest lessons for Vietnam to improve its exchange rate policy

+ Time: The period of 2016 - 2022 and suggesting recommendations for the next 5-year period;

+ Space: 2 countries: Brazil and Vietnam

1.3 Structure of the paper

Besides the introduction and the reference list, this paper is divided into 5 main parts:

(i) Introduction

(ii) Theoretical framework of exchange rate policy;

(iii) Situations of Brazil’s exchange rate policy;

(iv) Situations of Vietnam’s exchange rate policy;

(v) Conclusion and recoommendations to Vietnam

2 Theoretical framework

2.1 Definition and content of the exchange rate policy

2.1.1 Definition of exchange rate

Exchange rate is the price of one currency in terms of another (Ngo Thi TuyetMai & Do Thi Huong, 2020) There are several ways to classify exchange rate,based on different criterias, including determination, form, timing, method of buyingand delivering, trading operations, and regime (Cao Thi Y Nhi & Dang Anh Tuan,2017)

2.1.1 Definition of exchange rate policy

Exchange rate policy is an integral part of a nation’s foreign economic policy,including principles, policies, instruments, and measures, aimed at regulating therelationship between the domestic currency and other foregin currencies, in order toachieve the intented socio-economic objectives of that nation, during a specificperiod (Ngo Thi Tuyet Mai & Do Thi Huong, 2020)

2.1.2 Exchange rate regimes

According to the book “Foreign Economic Policy” published by NationalEconomics University (Ngo Thi Tuyet Mai & Do Thi Huong, 2020), there are 3exchange rate regimes that a nation can implement:

(i) Pegged/fixed exchange rate system: In this system, the exchange rate isdetermined by the Central Bank, and is usually based on the gold standard (ii) Free-floating exchange rate system: A country following the free-floatingexchange rate system allows the Invisible Hand of the market to regulate theexchange rate itself, without the government’s intervention.

(iii) Managed-floating exchange rate system: This is a combination of theprevious two, in which, the exchange rate is allowed to fluctuate within a certainrange, but the Central Bank may step in to buy or sell foreign currency in order toinfluence the exchange rate and prevent excessive volatility or sudden fluctuations

2.1.3 Tools of exchange rate policy

Nguyen Van Tien (2011) states in the book “International Finance” that anexchange rate policy includes several tools, which can be divided into 2 categories:(i) Direct tools: Implementing different exchange rate systems or methods ofdetermining exchange rate, performing a devaluation or a revaluation of thedomestic currency, performing open-market operations, setting reconciliationrequirements, and implementing other forex-market-related regulations;

(ii) Indirect tools: using tools of the monetary policy (including reserverequirements, money supply or setting the central interest rate…) and other trade-related policies like applying tariff, quota, or export/import subsidies

2.2 Brazil’s economic potential

Nominally, the economy of Brazil is historically the largest in Latin Americaand the Southern Hemisphere It is the 10 largest by nominal gross domesticthproduct (GDP) with US$1.894 trillions (according to the IMF) in 2022 Adjustedpurchasing power parity, it ranks the 8 largest in the world as of 2022, with a valueth

of $US3.78 trillion This equals to an increase of 2.9% comparing to the previousyear

When it comes to growth rate, from 2000 to 2012, Brazil was one of thefastest-growing major economies in the world, with an average annual GDP growthrate of over 5% However, Brazil's economic growth decelerated in 2013 and thecountry entered a recession in 2014 The economy started to recover in 2017, with a1% growth compared to the previous year This rate kept accelerating slowly,

reaching 1.1% and 1.4% respectively in 2018 and 2019, before experiencing a greatplummet in 2020 of -4.1% The changes can be illustrated as follows:

(Source : Statista.com)

Figure 2.1: Brazil’s GDP (PPP, $US billion)

As shown in the figure, after 2021, when the consequences of Covid-19 hasbeen put under control, there were positive signs of recovery; however, it is not until

2027 that forcasters predicted Brazil’s economy to be fully recovered

This can also be reflected through Brazil’s inflation rate and unemploymentrate as they both witnessed substantial changes around the year 2020

(Source: macrotrends.net)

(Source: tradingeconomics.com; IGBE)

Figure 2.3 Brazil’s Unemployment Rate, 2014-2022

While the inflation rate decreased from nearly 9% in 2016 to just over 3% in

2017, Brazil’s umemployment rate saw a gradual rise from 2015 to 2021

(Source: CEICdata.com)

Figure 2.2: Brazil’s Foreign Exchange Reserves (% of nominal GDP)

Figure 2.2 provides statistics about Brazil’s Foreign Exchange Reserve (as %

of nominal GDP) from April 2020 to October 2022 It started at just over 18%, thenincreased up to over 23% in the beginning of 2021, before steadily declined as theconsequences of the pandemic breakout kick in As of October 2022, Brazil foreignexchange reserves was accounted for over 15% of its GDP

Vietnam's GDP has been steadily increasing over the past decade According

to data from WorldBank, in 2012, Vietnam's GDP was approximately $US 195billion, and by 2021, it had risen to around $US 366 billion

(Source: data.worldbank.org)

Figure 2.3 Vietnam’s GDP per capita, PPP (current international $)

As shown in the chart, while Vietnam’s figure was relative higher than theaggreate figure of lower-middle-income countries (represented by the line below), itwas still much lower when comparing to the aggreate number of East Asia & Pacificcountries (represented by the grey line above)

(Source: tradingeconomics.com; GSO of Vietnam)

Figure 2.4 Vietnam’s GDP growth rate 2020-2022

Vietnam's GDP growth rate has also been relatively high, averaging around6% to 7% per year during the last decade However, due to the negative impact ofthe COVID-19 pandemic, Vietnam's GDP growth rate drastically slowed down in

2020 and 2021 Especially, the last two quarters of 2021 witnessed a negativegrowth, as a result of the widespread of the epidemic, and lockdowns in major cities

Regarding Vietnam’s unemployment rates, they have been remaining at arelatively low level (under 3%) for the majority of the 2012-2022 period, with anexception of 2022’s beginning due to Covid-19 lockdowns

(Source: tradingeconomics.com; GSO of Vietnam)

Figure 2.5 Vietnam’s Unemployment Rate, 2014-2022

In terms of inflation rate, similar to the GDP growth rate, Vietnam’s inflationrate also remained relatively stable during the aforementioned period 2016-2022,despite the negative effects by the pandemic around this time

(Source: data.worldbank.org)

Figure 2.6 Vietnam’s Inflation Rate, 2016-2021

When it comes to foreign exchange reserves, Vietnam has also been seeingconsecutive positive signs In 2012, Vietnam's foreign exchange reserves werearound $24 billion USD, and by 2022, they had risen to approximately $108 billion

USD This increasing trend stopped in 2022 when there was a decrease in forexreserves due to the Central Bank selling its reserves to maintain the exchange ratestability.

(Source: CEICdata.com)

Figure 2.5 Vietnam’s foreign exchange reserves 2013-2022

3 Situations of Brazil’s exchange rate policy from 2016 to 20223.1 Pre-covid policy (before 2020)

Brazil's foreign exchange rate policy before the COVID-19 pandemic (before2020) was characterized by a managed float exchange rate regime In this regime,the Central Bank of Brazil (Banco Central do Brasil - BCB) would partiallyintervene in the foreign exchange market to influence the exchange rate

Brazil's economy continued its slow recovery in 2019 after the 2014recession Following its inauguration in January 2019, the new governmentimplemented a set of foreign exchange rate policy, aiming at at promoting exportcompetitiveness, maintaining price stability, and managing external imbalances.Considering low inflation and weak economic activity, the BCB also cut itsbenchmark interest rate (SELIC) to an all-time low of 5% to promote economicactivities As a result, the BRL depreciated and, in November 2019, the exchangerate stood at 4.24 BRL to the USD

In an effort to stabilize the exchange rate, the BCB conducted multipleinterventions, selling US dollars through spot market interventions and currencyswap contracts, and purchasing BRL to make the BRL appreciate again Theysuceeded in this effort, the BRL started appreciating again and reached the peak inOctober 2020

They also reduced the reserve requirements ratio in the local economy from45% in 2016 to just over 20% at the end of 2020 This is with a view to stimulateinvestment and economic growth, which lead to higher demand for goods andservices, thus increasing the demand for the domestic currency, which can also helpappreciating the BRL.

(Source: CEICdata.com; Central Bank of Brazil)

Figure 3.1 Brazil’s Reserve Requirements Rates: Cash, 2016-2020

However, when looking at the bigger picture, Brazil experienced highexchange rate volatility, or wilder fluctuations in the exchange rate From January

2016 to December 2020, the exchange rate between the USD and the BRL variedfrom around 3.10 BRL per USD to 5.74 BRL per USD

(Source: Statista.com)

Figure 3.2 USD/BRL foreign exchange rate, 2016-2020

In response to the COVID-19 pandemic, Brazil, like many other countries,faced economic challenges that impacted its exchange rate policy The Brazilianeconomy experienced a contraction in 2020 due to the pandemic's effects on globaltrade and domestic demand In response, the Brazilian government and central bankimplemented several measures to manage the exchange rate and support theeconomy.

According to an analysis by KPMG (2020), in 2019 and 2020, the BCBconducted several foreign exchange auctions, buying a total of approximately US

$93 billion to support the exchange rate and prevent excessive depreciation of theBRL during the pandemic

The BCB also reduced the benchmark interest rate (SELIC) from 4.25% inFebruary 2020 to a record low of 2.00% in August 2020, and kept it at that leveluntil March 2021 The interest rate was gradually increased by COPOM to 3.50% bySeptember 2021 in response to rising inflation pressures, before returning to thenormal level at 13.5% in September 2022 Moreover, the reserve requirement rates

were also kept stably at 21% throughout the two years 2021 and 2022

(Source: tradingeconomics.com; Banco central do Brasil)

Figure 3.3 Brazil’s Interest Rate (SELIC), 2020-2022

Despite these efforts, the BRL still experienced significant depreciationagainst the US dollar during the post-COVID-19 period In January 2020, theexchange rate was around 4.00 BRL per 1 USD, and by December 2022, it hadweakened to 5.29 BRL per 1 USD, reflecting the impact of the pandemic on Brazil'seconomy and global economic conditions