Main macro factors of viet nam affecting the variation of usd:vnd exchange rate in recent years and how does covid 19 pandemic effects on it

When the supply of foreign exchange is greater than the demand for foreign exchange, the relative price level decreases, thereby causing the exchange rate to tend to decrease.. Conversel

MINISTRY OF EDUCATION AND TRAINING

HOA SEN

FACULTY OF ECONOMICS & ADMINISTRATION

a [IIHI - FINAL REPORT

LECTURER : LAM THANH PHI QUYNH

Subject: International Payment

Class’ ID: NT317DE01 - 0100

Semester: 2034

Students list:

1 TRAN PHUONG UYEN 2199126

2 THÁI HUỲNH NHƯ 2194133

3 PHẠM THIÊN KIM 2192836

4 NGUYEN NGOC KHANH 2192575

5 TRAM NGOC LOAN 2196870

6 TRAN CAM TIEN 2190949

7 PHAM CO MINH VAN 2191289

Ho Chi Minh city, August 2021

ACKNOWLEDGEMENT

First of all, our group would like to express our sincere thanks to lecturer Lam

Thanh Phi Quynh - who has been with us for the past 15 days studying He has conveyed extremely useful information in the subject as well as practical knowledge so that we can apply it to our future work Although in the process of learning was affected by the Covid-19 pandemic, but whether the it is offline or online, he has always been dedicated to instructing

Besides, we also thank Hoa Sen University for constantly upgrading online

learning tools so that the process of study is more easily

Finally, thank you to all members of group 6 for their serious cooperation and high sense of responsibility in the process of completing this report

Your sincerely

TABLE OF CONTENTS

1.1.1 Relationship between inflation and interest rates cee eens 1

1.1.2 The effects of inflation on the exchanpe rate - ccc c2 c2 2 1.1.3 Inflation im the 2000s 1n Vietnam 2 2: 12212221222 tra 2

1.3 Interest rate IDifferentHaÌL - 222 1211211121 1121 115111111 11821111111 121111188 x key 5 1.4 Relative income ÏeveÌ c1 1 2121211211121 1121 121111 1118110111011 12 82111211 k6 6 1.4.1 Direct Impact - c 12 22211211121 1121 1111111121111 111011111101 1 18g ng 6

1.5 Government ÏnterveIntIOH c2 21122112211 1221 121111211 11111111 111181 ray 7 1.5.1 Direct IntervefntIon - - c1 2c 22111211121 1211 111112212 1110111812011 1111 121 xk2 9 1.5.2 Indirect ÍntervenntIOH - ác: 1122111211211 121 1111111115111 1 18211 1 key 10 1.5.3 Exchange rate adJjustment policy of VIietnam :5 2c c2 c2 s+22 10

1.6.1 Psycholop1cal ÍaCfOfs - c1 12211211121 11221 121 110112212111 211112 ke ru 12 1.6.2 lnvestors” exDeCfatIOI§ - c1 120 1211121111111 21211011 11121111111 ray 14

2, HOW COVID-19 PANDEMIC EFFECTS ON EXCHANGE RATE 14 2.1 The exchange rate of USD/VND before CovId-19 - ccccccccccccssey 14 2.2 Covid-19 effects on the exchange rate of USD/VND - c 222 15 2.3 Forecast and recommmerndafIOIS - c1 0 221222112 221211521 1115811118211 xe 18

LIST OF FIGURES

Figure 1 - Work assignment tabÌe á- óc 2121121321111 121 1111151111111 2 11111 1H ng IV

Figure 2 - Factors affecting exchange rafes L0 22011211121 11121 111181121 xe2 1 Figure 3 - Table ofinflation and economic erowth chart (1996-2007) 3

Figure ion 3

Fleure 5Š - State Bank of Viet Nam (SBV) L2 Q12 1212012121112 12tr re 8

Figure 6 - Central rate (USD/VND) of Viet Nam 2019 se 15 Figure 7 - Table of exchange rate (USD/VND)m Viet Nam 2014-2020 16 Figure 8 - The exchange rate of USD/VND in 2020 - Ác 22s ee 17

INTRODUCTION

“* Objectives

@ A brief system of information on exchange rates, get more information of

the macro-factors that effect on the exchange rate and how does the

Covid-19 pandemic impact on it

® Find out the exchange rate regime being applied in Vietnam and find out how

the bank updates the exchange rate on a daily basic

® Provide recommendations to limit risks from exchange rate fluctuations

“* Work assignment table

2196870 Tram Ngoc Loan 1.1 Inflation 100%

An exchange rate is the value of one country's currency in terms of another

country's currency and is a value that fluctuates frequently and 1s difficult to

predict It affects the economy and people's daily life because when the value of

the local currency increases, the price of goods will increase Domestic goods are

expensive relative to foreign goods Therefore, the exchange rate is a good tool

for creating favorable conditions, while maintaining the competitiveness of the

economy

For the above reasons, exchange rate policy can be considered as one of the most

important monetary policies of an open economy On the other hand, currently,

USD is still considered the strongest currency in the world with nearly 80% of

transactions on the foreign exchange market using USD In Vietnam, the USD

plays a similar role as it accounts for 60% of the foreign exchange reserves of the

State Bank (SBV) (Le Thi Tuan Nghia, Pham Thi Hoang Anh 2013), and is the

main currency used in import and export activities in Vietnam Therefore, the

management and control of the USD exchange rate has been one of the focuses

of the State Bank towards the goal of long-term and stable growth

1 MACRO FACTORS IMPACTS ON EXCHANGE RATE

The exchange rate is the relative ratio of the currency of one country with another country's currency (Chen, 2020) It is the price of one unit of this country's currency expressed in units of another country's currency

FACTORS AFFECTING EXCHANGE RATES

Figure 2 - Factors affecting exchange rates 1.1 Inflation

1.1.1 Relationship between inflation and interest rates

The inflation rate is highly monitored by central banks They examine inflation to direct their monetary policy and set their policy interest rates Each central bank

generally sets itself an inflation threshold that it does not want to exceed and seeks

to avoid deflation (often synonymous with economic recession)

If inflation is moderate, the central bank sets its interest rates according to the level

of inflation and also according to the economic growth rate (GDP) Of course, many

other factors are also taken into account by central banks, but this is to simplify

things

Inflation therefore has an impact on the level of interest rates, but the opposite is also true

1.1.2 The effects of inflation on the exchange rate

The level of inflation has a direct impact on the exchange rate between two currencies on several levels:

Purchasing power parity: Changes in purchasing power parity (and therefore inflation) affect the exchange rate If inflation is the same in both countries, the exchange rate does not change If it is higher in one country than In the other, this is when inflation affects the exchange rate The currency with the

higher inflation rate then loses value and depreciates, while the currency with

the lower inflation rate appreciates on the Forex market

Interest rates: Too high inflation pushes interest rates up, which has the effect

of depreciating the currency (less remunerative) on Forex On the other hand, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the Forex market However, inflation has a much more frequent negative effect than a positive one A high rate of inflation is likely to have a negative impact on the exchange rate, while low inflation is far from a guarantee of an increase in the exchange

Ngưổn: Theo số liệu của Thời báo Kinh tế Việt Nam: Kinh tế2006-2007 Việt Nam va Thé gici; va Tổng cục thống kê

Figure 3 - Table of inflation and economic growth chart (1996-2007)

Năm | Lạm phát thị trường 9 a Nam phá t | thịtrường Ũ bày

Figure 4 - Inflation data sheet

In the years 2000-2006, inflation was stable at single digit, interest rates were stable

at 13-15% per year In the years 2007-2011, when inflation was at a high double- digit rate, the interest rate increased from 18% to over 21%/year Therefore, in the

period of 2000-2006 Applying the fixed anchor exchange rate mechanism, the

average inter-bank exchange rate announced by the SBV was kept around from

14,000 VND/USD to 16,000 VND/USD In 2005, the SBV published the Ordinance

on Foreign Exchange and the International Monetary Fund (IMF) officially recognized Vietnam to fully liberalize current transactions In 2006, Vietnam's foreign exchange market began to come under pressure from the process of international economic integration The amount of foreign currency poured into

Vietnam began to increase sharply The World Bank and the IMF have warned the SBV to increase the flexibility of the exchange rate in the context of increasing

capital inflows into Vietnam

The period 2007 to 2011 This is the period when the USD/VND exchange rate

fluctuates strongly After Vietnam joined the WTO, the liberalization of the capital account was expanded, leading to an increase in capital flows to Vietnam, which greatly affected exchange rate fluctuations Starting from April 2018, the amount of loans in USD, the balance of payments due to the high trade deficit and the sharp decrease of the total foreign exchange reserves created a strong demand for USD The State Bank continuously sold foreign currency to intervene when the official

exchange rate and the black market rate appeared with a large gap for a long time

At the end of 2011, the SBV used many solutions to control and stabilize the market

In the years 2012-2019, inflation dropped to a low level, averaging about 4%/year, then the interest rate dropped significantly, averaging about 10%/year Thus, in the

period 2000-2019, interest rates tend to move in a positive direction with inflation

In the period from 2012 to 2019 The USD/VND exchange rate has been somewhat

more stable, the exchange rate management policy of the State Bank is more in line with market movements Monetary solutions of the State Bank have created positive

changes for the foreign currency market, the free market has almost stopped working The difference between the interbank exchange rate and the listed

exchange rate of commercial banks is narrowed (difference from 100 to 300 VND/USD), thereby reducing the psychology of holding foreign currency of

organizations and individuals

1.2 Relative Value

The relative valuation level is related to a country's relative inflation From there, it affects the supply-demand relationship in the economy, and on the exchange rate When the supply of foreign exchange is greater than the demand for foreign exchange, the relative price level decreases, thereby causing the exchange rate to

tend to decrease Conversely, when the demand for foreign exchange is greater than

the supply of foreign exchange, the relative price level will increase accordingly, so the exchange rate tends to increase

For example:

Vietnam has a relatively higher inflation rate than the USA At that time, the relative

valuation of American goods will be cheaper than Vietnamese goods, so people

prefer to use American goods On the other hand, Americans will tend to use less

Vietnamese goods (because the relative valuation of Vietnamese goods are more expensive) As a result, they will import more American goods and export Vietnamese goods to decrease By that, the supply foreign currency of USD decreases and the demand for foreign currency of USD increases In conclusion, the

exchange rate between USD and VND increases, domestic currency depreciates 1.3 Interest rate Differential

Interest rates are a tool used by central banks to adjust exchange rates in the market, adjusting the counter value of local currencies

The policy of high interest rates tends to support the appreciation of the local currency, because it attracts foreign capital inflows into the country That is, if the

domestic interest rate is higher than the foreign interest rate or foreign currency

Interest rate, it will lead to the transfer of foreign currency in the economy to the domestic currency to drive higher interest rates This causes an increase in the supply of foreign currency in the market (which means an increase in demand for the domestic currency), from which the foreign currency will tend to depreciate (or the domestic currency will appreciate) and vice versa

Consider the case of VND and USD:

When choosing to hold a local currency and a foreign currency (specifically USD), one will consider the real interest rate of these two currencies

When the interest rate of VND is higher than the interest rate of USD (real interest rate), people will tend to switch from holding USD to holding VND This causes the demand for VND to increase, the demand for USD to decrease, from which the price of USD will decrease compared to VND, or the exchange rate will decrease to

a new exchange rate where supply and demand of USD - VND become equal At that time, the real interest rates of VND and USD are equivalent (conditions of

interest rate parity and inflation are not taken into account)

When there is an effect of inflation, although the nominal interest rate increases, but

the real interest rate decreases, then vice versa - VND will depreciate against USD, leading to an increase in the exchange rate

Conversely, when the USD appreciates, in order to create a balance in the foreign

exchange market, the Central Bank will actively raise the interest rate of the local

currency (VND) through boosting the supply of foreign currency to the economy and at the same time sucking out the domestic dong bad about This makes the supply and demand of foreign exchange come into balance

1.4 Relative income level

Until now, the USD is perhaps the most frequently used currency in the world, and the USD/VND exchange rate may be influenced by Vietnam's economic growth Considering income influences the quantity of imported goods sought, the exchange rate is likely to fluctuate

In the following, we would like to present in more detail the two main effects that

affect the income of the country, which are the direct and the indirect effect 1.4.1 Direct impact

When a country's relative wealth rises, domestic consumers are more likely to buy

imported items, raising demand for foreign money and thus the exchange rate (the

tended to buy more USD in order to import goods from other countries, causing the

exchange rate to fluctuate

1.4.2 Indirect impact

As for the indirect impact, when Vietnam's relative income growth increases, our

people will tend to increase spending on foreign goods, thereby increasing the inflation rate due to increased demand Inadvertently, this indirectly affects the

exchange rate through the inflation factor and causes the USD/VND exchange rate

to increase

Conclusion: There's no reason to expect a change in the exchange rate if real

income rises in both nations at the same rate There is an indirect effect on the exchange rate if real income rises in one country but not in another However, it is possible that the country with more wealth imports more and exports less, causing its currency to fall significantly Even if this were true, trade flows have a much less impact on exchange rates than financial and technical reasons

1.5 Government Intervention

Each country has a government agency (called the central bank) that may intervene

in the foreign exchange market to control the value of the country’s currency (State bank of Viet Nam in this case)

Figure 5 - State Bank of Viet Nam (SBV) Central banks manage exchange rates:

- To smooth exchange rate movements

- To establish implicit exchange rate boundaries, and/or

Intervention is overwhelmed by market forces However, currency movements may

be even more volatile in the absence of intervention

Central banks can also engage in indirect intervention by influencing the factors that determine the value of a currency

In the managed floating exchange rate regime, the State's intervention role plays an

important role The State intervenes by means of the market through the Central State Bank and not by administrative tools, 1.e the Central Bank participates in the

market as a market participant ( buyers or sellers) from time to time to influence the supply or demand of foreign exchange, thereby affecting the exchange rate in accordance with the monetary policy of the State

- In a floating exchange rate regime, the central bank enters the foreign exchange market as an ordinary member, able to buy or sell a certain currency for its own purposes and not for the purpose of exchange rate intervention or exchange rate fixation