Luận văn the impact of exchange rate on trade balance in vietnam through import and export performance

LIST OF FIGURES Figure-1; Vietnam’s GDP and import, export from 2001 to 2016 World Bank Figure-2: Value of import; export and trade balance 2007-2015 General Statistics Office of Vietna

1.5 Research subjects and scope sẵn reer re ery eermrentn ren erernvermermn

1.6 _ Research general structute, si t2 S

17 Dataandresearchmethod secant

2.1.1 Definition

2.1.2 Factors affecting trade balance

EO Thee GP exchange Tat csesccciscncsamanasrcateeasiaretteccatcnisioeaniattinncses TO

4.2.1 Regression model between export import and the exchange rate

4.2.3 Regression belwcen real bilateral exchange rate USD/VND and imporl-export

Table of Notations and Abbreviations

ASEAN Association of South-East Asian Nations

REER The real effective exchange rate

LIST OF FIGURES

Figure-1; Vietnam’s GDP and import, export from 2001 to 2016 (World Bank)

Figure-2: Value of import; export and trade balance 2007-2015 (General Statistics

Office of Vietnam)

Figure-3: REER index and Ratio Export/Import

Figure-4: Regression result between dependent variables “export” and independent variables nominal exchange rate VND/USD “rate”

Figure-5: Regression result between dependent variables “import” and independent variables nominal exchange rate VND/USD “rate”

Figure-6: Regression between real bilateral exchange rate VND/USD and import-

export ratio

Figure-7: Regression between real bilateral exchange rate VND/USD and import-

export ratio

LIST OF TABLES

Table-1; Vietnam’s exchange rate regime from 1999 — 2015

Table-2: Vietnam's leading partners in international merchandise trade

Table-3: International merchandise trade of FDI enterprises (Customs Handbook on

International merchandise trade statistics of Vietnam 2015)

Table-4: Summary of data

Table-5: REER index and Ratio Export/Import

ABTRACT

This paper aims to determine whether exchange rate stability of Vietnam or noi,

especially in the poriod fromm 2008 to 2015 Besides, this study used the available date

from 2000 to 2015 to calculate the real effective exchange rate rom that, the research

attempts to identify the relationship between the exchange rate of Vietwam dong

agains! United Stated dollar and individual wade, import and export Also, the method

of ordinary least squares is used to estumate equation of explanatory variables ( GDPys, GDPyy RERyyposp } for explained variable ( EXM -cxpert over import ratio} TL

exhibits a significant relationship, which is highly sensitive A change one basic point

in Viemam dong can increase in thousands of USD Other important result is that the real exchange ralc is an important variable to trade balance, and depreciation of exchange rate has a positive impact on exports

Key words: Import, exporl, trade balance, real exchange rate, ordinary least, squares

CHAPTER 1: INTRODUCTION

Background of the problem

Exchange rate is one of the important macroeconomic policies of every nation The

exchange rate between USD and EURO, USD and JPY, as well as exchange rate

fluctuations between USD / VND in recent times shows that the exchange rate is

always an acute issue In Vietnam, the exchange rate affects not only trade balance,

import and export, national debt, direct investment, but also the public's confidence

On February 11, 2011, State Bank of Vietnam decided on the adjustment interbank

exchange rate to 20.693 VND, increased 9.3% compare with 18.932VND (State Bank

of Vietnam, 2009) This is the move in order to stabilize macro-economy and curb

inflation As of 2015, the State Bank of Vietnam announced to keep the exchange rate stable, the margin was anchored at no more than 2% However, within just over a

month, the State Bank raised the exchange rate by 1% to 21.458VND per dollar due to the signs of recovery for the US economy The trading band has been adjusted many times to intensify the flexibility of market exchange rate, There were two periods that

the band fluctuate the most The first one was in 2009 due to global financial crisis (the band was widened to +/- 5%), the second was in 2015, under a lot of pressure from

international market and decision of Fed raising Fed funds rates Along with that, the

exchange rate that varies over a short period of time also have no small effect on all

economic sectors need to use foreign currency, especially in import and export

Obviously, import and export activities play a vital role in development of Vietnam’s

economy These is also considered by a lot of countries, especially developing

countries, because this is the most direct way to increase the accumulation of wealth, to

solve the debt burden for most countries in the world Understanding this important

role, from small to large countries with high or low level development start entering a new race to promote import-export activities, and the exchange rate is the most

effective tool to optimize the purpose However, the exchange rate is one of the most sensitive macroeconomic variables Exchange rate movement is unpredictable due to

the impact of many factors such as trade deficit in both short-term and medium-term,

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the level of the budget deficit appeared to be quite high, around 6 percent of GDP, the increase in gold price, high demand in foreign currency especially USD The

appreciation or depreciation of the currency affects the imporl-exporl lumover and Lhe

trade balance

‘Using the exchange rate tool to run a flexible economy in the current context is

necessary However, how t adjust and conduel the exchange rate policy is also a problem ‘Io achieve this goal, policymakers must be cautious and firmly set the

regulations of the law on goods and currency mobilization in (he current situation of

our country dominated by a number of countries with developed economies

1.1 Research statement

Lixchange rate has played a very important role in international trade, especially in such

a great open world economy It fluctuates day by day and affects not only trade palance, import and export, national debi, dircel mvestment, but also (he public's confidence Exchange rate adjustments can directly influent in social and economic

problems Wade balance im Vietam For example, when the aulhority adjusts the

cxchange rate, they will have to face other uncxpeoted impacts, given that there has

existed high and long-term trade balance deficit and budget deficit that make the

balance of payment unstable Therelore, exchange rale policy is always the primary

concem of Vietnamese government in order to stimulate export, reduce imports, and

guaranteeing macroeconomic stability and preventing inflation For enterprises cngaged in import and export activitics, understanding and making good use of exchange rate will help to respond promptly to exchange rate movement and to reduce

the risks of doing business

1.2 Reasons for researching

‘The balance of trade compares the value of a country's exports of goods and services

against its imports When exports are greater than imports, this is a trade surplus Most

nations view that as a favorable trade balance Therefore, a lot of countries try to create

trade policies that encourage trade surplus because it is like making a profit a3 a country Also, improving the trade balance is one of the top macroeconomic objectives

in Viclnam, contributing lo increase foreign exchange roscrves, stabilizing the

domestic currency, ensuring economic growth Finding suitable solutions to get better

balance of trade in macroeconomic management is very important

It is known thal banks im Victnam hold a large amount of US dollar im exchange

reserves, ‘The US dollar has a strong impact on the foreign exchange market, Most of

the foreign curreney transactions in Vietnam often use the US dollar, even when listing

sate ‘the dollar is considered a major payment currency in import-export activities

Thus, the USD/VND exchange rate movements are easy to observe To some extent, it

is highly representative in the {luctuation of other currencies Thus, the author kept

track of the US dollar movements in the market to assess the manifestations of the

import - export and policy response to the trend of currency appreciation

To achieve the target of trade surplus, besides improving the quality and design of

exported products, many experts believe thal

ipnificant depreciation of the currency

can bring about international competitive advantage in terms of price At the same

time, it is necessary to maintain the exchange rate policy in line with the economic development stralogy of cach period Understanding the Vietnam situation related to

exchange rate problem, it is a motivation that prompted me making a quantitative

estimate of exchange rate movement on the merchandise trade balance

Also, it can be seen that in spite of many attention on the effects of exchange rate on trade balance, little attention is paid on the trade flow individually, import and export

flow Given that, this research focuses on revealing the dynamics of imports and exports in response to shocks of exchange Tate

1.3 Research objectives

Focusing on general study of the theoretical questions regarding to exchange rates and

the impact of exchange rate activity on economic activity, the study aims to look at real

situation of the curromt Vietnamese exchange rate policy and clarify the impact of

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exchange rate on trade balance through the response of imports and exports in the presence of exchange rate’s shock

At ihe same time, the thesis also investigales the problems of the exchange rale policy

to give some solutions to avoid deficits trade balance in Vietnam

Question 3: Does exchange rate volatility between Vietnam dong against United Stated

dollar influence on the ratio of export to import?

1.5 Research subjects and scope

The largel subjccls of the research arc as [ollowing:

- ‘he theoretical basis on the impact of exchange rates on trade balance

- The relationship between exchange rates and trade balance

- Exchange rate policy of Vietnam

- Import and export activities in Vietnam

- Recommendations to improve the effectiveness of the exchange rate policy im the

coming time,

Soope of research: focusing the data of import and export activities and exchange rates

im Vielnamn in the period 2000 to 2015

1.6Research general structure

The first part of the dissertation shows the background, the researeh questions as well

as the significance of the study The remaining parts include:

- Part 2: provides the over view of the overview about trade balance and the exchange sate theory as well as the exchange rate system in Vietnam

- Part 3: summarizes the related literature review:

- Part 4: points out the data and methodology used in the regression model of the study

- Part 5: gives the estimated result and discussion for Vietnam

- Final parl summaries the study, ils contribution as well as its limitalion and suggest

areas for further researches

1.7 Data and research method

In order to implement the study, annual time series data on exchange rate, gross domestic producl, consumer price index, exporls and imports, trade balance which cover the 2008-2015 period, were used in this study I'ollowing that, using method of ageregate analysis, evaluation based on the number of import and export volume, CPI, GDP, nominal exchange rate and real exchange rate, especially the use of economelric model appreciate the impact of exchange rates on the trade balance in Vietnam

CHAPTER 2: LITERATURE REVIEW

2.1 Theory of trade balance

2.1.1 Definition

There are many national and regional currencies in the world, Each country has its own currency, such as the United States dollar of the United States, Yuan currency of

China, Euro currency of Euro zone, or Yen currency of Japan The balance of trade is

the difference between the value of exports and imports of a country in a certain

period

Export means sending goods or services produced in a country to another country

Import means bringing in goods or services into a country from another country

It is trade surplus if a country’s value of exports is greater than its value of imports Conversely, trade deficit happens when the value of imports greater exports

The balance of trade is also known as Net Export It is calculated by a simplified

formula: imports minus exports

2.1.2 Factors affecting trade balance

The balance of trade of a country can be affected by what influence its import and

export They are Gross Domestic Product (GDP), inflation, Government policy and

transactions, an alternative conversion factor is used (The Economic Times)

How GDP affects trade balance can be seen under two angle of view

- Domestic GDP

If GDP of a country increases, the income raises a home Consumers are more likely to

buy products and services It may result an increase in import At the same time,

because of increasing in demand, firms may pay more attention into domestic market,

decreasing export may occur as a result The result is fall in net export (NX)

Figure 1: Vietnam's GDP; Export and Import 2001 - 2016 (World Bank)

According to data of World Bank, from 2001 to 2016, there was an upward trend in GDP in Vietnam Since open period, GDP of Vietnam has raised impressively six times from around $ 30 Billion to around $200 billion at the end of 2016 During that time, we can also recognize the increase of both export and import value but there was always a gap between the demand of imported and exported goods and services This

gap was largest on the period of 2008 — 2010 because of financial crisis

- Foreign GDP

If GDP of foreign countries increases, so does their demand of import It leads to the

increase of export to foreign countries.

Increases in domestic inflation lead to higher prices for exported goods and a decrease

in exporis as forcign consumers substitule in favor of lower-priced allernalives produced within their own country or imported from elsewhere Substitution occurs in the home market as well As the prices of domestically produced goods increase,

imporl prices remain conslanl and shoppers turn their fancy toward imporls, which

have fallen in price relative to inflating domestically produced goods ‘I'he net result for

a country with a rise in inflation is decreased exports and increased consumption of imports The resull is a fall im nel export (The University of Colorado Boulder)

Government Policies

A country’s policies can have major effects on trade balance Trade policy includes any

policy that directly affects the flow of goods and services between countries, inchiding

import tariffs, import quotas, voluntary export restraints, export taxes, export subsidies,

and so on

For example, there is increasing concem in the Uniled Stales about the environmental

and labor policics of many U.S ade partners With regard lo environmental policies,

some have argued that more leniem environmental regulations in many less-developed countries give [rms in those countries a compelilive edge relafive to firms operating in

the Uniled States The same argument is used in regard to labor practices Many U.S

industry representatives argue that low foreign wages, lenient occupational safety regulations, and in some cases the use of child labor or prison labor give some

countries a competitive edge in international markets

dn general, for small countries, domestic policies will affect domestic prices, production levels, trade flows, and welfare but will not affect forcign prices, production

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levels, and welfare ‘this means that countries like the United States may not need to wary much about domestic practices in very small countries However, when a country is large in international markets, domestic policies will affect prices, production levels, profits, and welfare, both domestically and intemationally

(Snranovic, 2007)

Exchange rate

Exchange rate has a significant influence directly to export and import For instance, suppose the exchange rate becomes $1 = VND 22.500 the value of the dollar has appreciated or gone up The price in dollars of Vichramese goods hes fallen while Ue: price of the US goods has increased for the Vietnamese Lowering the value of domestic currency tends to raise exporls by making goods cheaper for foreigners Imports from abroad expensive in Vietnam dong, as a result, Vietam exports will rise and imports will fall

Te the exchange rate, instead, becarme Sĩ VND 21,000, the value of the dollar has fallen or depreciated Now, the US goods are cheaper in terms of VND while Vietnamese products are more expensive for the US consumers Exports will fall and imports will rise So generally, the exchange rate and the trade balance move in

the price of a nation’s cumrency in terms of another currency Thus, an exchange rate

has two components, the domestic currency and a foreign currency (Investopedia) In

Viemam, according to the Ordinance on foreign exchange No.28/2005/PL-

UBTVQHI11, Artick: 4, Clause 9, exchange rate of Victramese Dong micans Lhe price

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of one unit of foreign currency calculated in Vietnamese Dong (Standing Committee National Assembly, 2006)

‘Yo identify the impact of exchange rates on the Vietnamese economy in general, export

and import activities in particular, the change rates are classified as following: (Te, 2014)

Based on exchange rate management

- Fixed exchange rate is the rate the central bank sets and maintains as the official

exchange rate It usually remains unchanged for a period of time as a basis of reference

for transaction aclivily A set price is delemmined agains! a major world currency such

as the U.S dollar, euro or Japanese yen In order to maintain the domestic exchange

rate, the central bank buys and sells its own cuency on the foreign exchange market

in return for the currency to which il is pegged

- Floating or flexible exchange rate is the rate formed through specific transactions,

and is determined by the private markel through supply and demand Floaling

exchange rate means that curencies change relative value all the time This cxchange rate fluctuates frequently depending on the supply and demand of foreign currency in

the foreign exchange markel

Based on the lime of cupital transfer

- Spot exchange rate is the current rate of exchange between two currencies ‘Lhe spat refers the prices buyers pay in one currency to purchase a second currency The cxchange rate applied in the transaction whore the transfer of capital occurs at the same time with the contract is signed

- Forward rate is the exchange rate applied in a transaction where the capital transfer is conducted after a certain period of time, at a predetermined rate and at the time of signing the contract

Based on the form of payment used

il

- 'Telegraphic transfer rate is the foreign exchange rate for which bank has responsibility for transferring, foreign exchange by electronic method It is utilized

prinanily for overseas (ransaclions The telegraphic transfer rats is the rate used as the

basis for determining other exchange rates

- Email or letter tansfer rate is the foreign exchange rate that the bank has

responsibility for transfering the forcign exchange by letler or mail Il is cheaper but also slower than the telegraphic transfer

- A bill of exchange is a wrillen order used primarily in international trade that binds

one party to pay a fixed sum of money to another party on demand or at a predetermined date, Bills of exchange are similar to checks and promissory notes Bill

of exchange rate is the exchange rate determined by the [orvigu exchange vate minus

the interest arising from the time the bank buys the draft until the bull is paid A bill of

exchange can be drawn by individuals or banks and are penerally transferable by

endorsements

Rased on the relation between exchange rate and the inflatiim index

Exchange rate is price determined in the FOREX market It is a rate at which a nation’s

currency will be exchanged for another currency or simply, exchange rate is the price

of one currency moasured in terms of anolher Thus, an exchange tale has two

components, the domestic cwrency and a foreign currency

- The naminal exchange rate is the price of a currency denominated in other currencies

‘The exchange rate, which is a weighted average of nominal exchange rates of a national currency excluding tendencies for change in prices of country under

consideration with respect lo prices in countries — partners im trading, il called a

nominal effective exchange rate (NUR)

- 'The real exchange rate is the exchange rate determined on the basis of the nominal

exchange rate adjusted by the inflation rate between domestic and foreign countries,

thus reflecting the purchasing powor ratio beiween domestic and foreign currencies

When a curtency becomes more valuable relative to another currency, it is appreciation For example: $1 buys 25,000 VND instead of 20,000 VND previously

When a currency beeorcs loss valuable relalive lo another currency, it 1s depreciation

For example: $1 buys 15,000 VND instead of 20,000 VND previously

2.2.2 Factors that influence the exchange rate

There are numerous factors affect exchange rates, the following are some of main deicrminants of exchange Tale based on a researuh of a group of authors According lo

Prof Pareshkumar J Patel and co-authors, there are six main important factors which can alfecl the valuation of FOREX (Prof Pareshkumar J Patel, Dr.Narendra F Patel,

Dr Ashok R Patel, March 2014)

Virst is inflation Inflation plays an important role in valuation of currency of any country Tl the rate of inflation in Ihe India is lower than other countrios comparatively, then Indian exports will increase ‘here will be an increase in demand for Rupee to buy Indian goods Also foreign goods become cheaper and so Indian citizens will pay less

ulumately imporl decreases Therefore lower inflation rates tend 1o see an appreciation

in the currency value of any country

Second is interest rate If rate of interest in India increase relatively to other countries,

it will became attractive to invest money in Tndia Tuvestor will get @ higher return from, saving m the Indian banks Therefore demand for Indian Rupee will rise [ipher

interes rale is an appreciation for money mflow whoch wall bave negative impact on

local businesses of the country Higher interest rate reduces purchase power of the consumer while the loan borrowers have to pay more interest

Third 1s capital account balance For any country current account deficit indicates higher values of imports of services and goods in comparison to the values of exports

Countries having surplus in their financial account are benefited than countries with

deficit They can attract more capital from other countries and can see appreciation in the currency value relative to the countries with capital account deficit

Fourth is public debt Countries’ spending more on public sector projects and fund for

social upliftment of the socicty has mare debt on the ceuntry Such spending stimulates

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the domestic economy Countries with higher public debt are not attractive to foreign investors Because higher debt of the country leads to higher inflation ultimately

increases debi to contral mflation Some standard organizations like Standard &

Poor’s, Moody's gives debt rating of the country, and it is very important determinant

of its exchange rate

Fifths is Gross Domeslic Product GDP gives best measure of health of country’s

economy It is the mumber calculated by consolidation of total expenses of government,

money spent by business, private consumplion and exports of the eourtry Increment in

GDP indicates economic growth Foreign investors get attracted towards the countries

with economically strong countries with good GDP It leads to better valuation of the currency of the country because more and more money comes to the country

Sixth is Political stability and Lconomic performance Countries with stable government oan give better growth in economy through completion of the projects in hand Tavestors invest their woncy in the countnes with strong economic performance

As India has coalitions government and no party has got full majority so there are lot of

problems for stability of the government and the government can’l take decisions

strongly So, it causes loss of confidence in foreign investors It affects economic

growth and money moves out of the country

2.2.3 Impact of exchange rate on import and expart performance

Devaluation means decreasing the valuc of the country’s curroney in terms of other

currencies (Asmamaw, 2008) ‘Ihe representation of cwrency devaluation is the increase of exchange rate When exporting goods in overseas market, if the exchange yale is high in the home country (Vietnam) compare with the same amount of foreign currency, the exporter will xeceive more domestic cwrency in the case exchanging foreign owrency into local currency For example, a Viemamese exporter sold an amount of goods overseas that had USD 200.000 in value with payment term of three months The exchange rate of one USD equals twenty thousand Vietnam dong at

present, but after three months the forward rates becomes 22.720 VND for 1 USD As

the result, exporter get more money with amount of (22.720 - 20.000)* 200.000 —

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544,000,000 in Vietnam dong Besides, with the devaluation of currency or increase in exchange rate, commodity of goods become cheaper and more competitive in the

global markel, by extension, volume of goods exported increase Conversely, the

volatility of exchange rate affects the import goods volume in the opposite way When

the exchange rate increases, the volume of import commodities could decrease as the

prices of foreign goods and service increases sharply The change in exchange rate would not impact on volume of goods exported immediately because of time lagging,

‘bul impacl on the price of import and exporl goods If the forsign exchange vale raiscs,

value of export goods decrease in foreign currency, value of import goods rises in

domestic currency,

2.3 Exchange rate system and trade balance

2.3.1 Exchange rate system

There are three mains way that a country manages its currency and the foreign

exchange market

First is Freely Floating Exchange rate system It means a country's decision to allow ils currency value lo chamge freely The cureney is nol constrained by central bank intervention and does not have to maintain its relationship with another currency

in a narrow band The ewrency value is determined by trading in the foreign cxchange market, The system is allowed to move duc tomarket forces without

intervention by country governments (NASDAQ)

Sevond 1s Managed Floatng Exclunge tale system, also known as “dirty” float This is

a system of floating exchange rates with central bank intervention ta reduce currency

fluctuations

Third is fixed exchange rate system (Pegged).A country's decision to tie the value of its cmrency to another country’s cwrency, gold or another commodity, or a basket of

currencies, (NASDAQ)

About Vietnam Exchange Rate Regime, according to a research of Lan Hoang, since

1999, trading in the interbank market had to take place at exchange rates within ranges stipulated daily by the State bank of Vietnam (SBV) Only SBV, state-owned banks, joint-stock banks, joint-venture banks, and branches of foreign banks could participate

in the inter-bank market The official exchange rate (OER) has been set based on the

daily average exchange rate in the interbank market during the previous business day

Participating banks must quote rates no more than the allowed trading band compared

previous day’s official rate The trading band has been adjusted many times to intensify the flexibility of market exchange rate Vietnam has experienced many types of

exchange rate structures, from pegging within horizontal bands in 1999 to managed

floating without pre-announced in 2002, conventional peg in 2006, and stabilized

arrangement from 2008 onwards Although SBV announced the exchange rate anchor

based on basket of currencies since 1999, the International monetary fund (IMF) has

only recognized this since 2012 (Hoang, 2016)

The article “Select the exchange rate policy in the context of economic recovery” by Nguyen Thi Thu Hang and her corporate author indicates the exchange rate regime in the period from 1999 to 2015 as following

Table 1: Vietnam's Exchange Rate Regime in 1999 — 2015 (Nguyen Thi Thu Hang, Dinh Tuan Minh,To Trung Thanh, Le Hong Giang, Pham Van Ha, 2010)

basket of currencies The

exchange rate may

fluctuate within narrow

‘Fone Exchange | Definition by IMF Vietnam's Exchange Rate

Rate Regime | (IMF, 2004) Regime in reality

1999 - 2000 | Conventional | The country pegs its The official exchange rate

fixed peg currency ata fixed rate | (OER) set based on the

arrangement | to another currency ora | daily average exchange

rate in the interbank market during the

previous business day

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value of the exchange

rate may remain within a

arrow margin of 2 percent-for at least three

nortis Central bank

can adjust the central

rate, but not regular `

Exchange rate fluctuation

The currency is adjusied periodically in small

amounts at a fixed rate

or in response to

changes in selective

quantitative indicators, such as inflation?

The currency is maintained within

certain fluctuation

margins of at least |/- 1 percent around a eautral rate-or the margin

between the maximum

ORR was gradually adjusted from 14,000

VND / USD in 2001 to 16,106 VND / USD in

2007

Exchange rate band at conumercial banks was adjusted to +/- 0,25%, OER was pradually adjusted from 16,000 VND / USD to 16,500 VND / USD in carly

2008, and gradually increased to 20,828 VNDVUSD at the end of

' Classification of Exchange Raic Arrangements and Monetary Policy Frameworks

and minimum value of 2013

the exchange rate ‘The exchange rate band exceeds 2 percent-and was adjusted to |/-

the central rate or 0.759, +/- 19, +/- 294, margins are adjusted +/ 3%, ~/- 5% in 2009 periodically ata fixed then narrowed down to rale or inresponse lo -+/- 1% in 2014

changes in selective OER remained at 20,828

quantitative indicators? = VND / USD from January

2012 to June 28, 2013, raised by 21.036 VND USD OER was adjusted

at 21,036 VND / USD to 21,036 on June, 19 2014 from January 2012 to

June 28, 2013, increased

by 21,458 VND/ USD on Jan, 2015

Monthly data on exchange rate fluctuations of home currency are explained by changes

in anchor currencies and an exchange markel pressure index reflecting the degree ol” currency flexibility Vietnam's exchange rate policy revolves around the US dollar as

an exchange rate anchor, amouncing ths average inter-bank cxchange raic and

restricting the band of exchange rate On the basis of this exchange rate anchoring

policy, the official exchange rate and the fluctuation band change in different periods

lo response the shocks

* Classification of Exchange Rate Arrangomants and Monctary Policy Frameworks

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3.3.2 Trade perfarmanre

Theoretically, the cxehange rale, inllalion ønd trade policy are the factors influencing the import and export of a country, in which the exchange rate may be the main factor When a domestic currency (Vietnam dong) appreciates in value in the market for forcign currency exchange, domestic goods become more expensive relative to forcign goods It tends to raise the prices of exported products and discourage the prices of imported products, thus generally encouraging imports and discouraging exports In contrasl, the depreciation of the domestic curenvy will (acilitale exports and limil

imports,

With the increase in export and decrease in imports, il is expected that depreciation reduce 2 country’s trade deficit As a matter of fact, in recent years when a country experienced a severe disequilibrium in the trade balance, it devaluated its currency to raise exports and decline imports and thus to restore equilibrium in the balance of

payments

Tn the poriod of 2008-2009, Vietnam [hees the Ing change in the exchange rale policy

in the monetary market (early 2007, Vietnam joined the WTO) Vietnam dong (VND)

continued Lo depreciate against the US dollar, and lasted until the end of 2009 Along

with that, inflation began to ineroase rapidly in the last months of 2008 The global financial crisis also had a direct impact on the Vietnamese economy, especially in the field of import and export There was trade deficit - the value of import was higher hạn export in Vietnam from 2000 to 2015 Vietnam's exports and imports increase both in terms of size and growth The total import and export value in 2015 grew in number by

nearly USD 328 billion, more than two times the lolal amounl in 2010 Only in 2009,

the value of both export and import decreased as a result of global crisis It was shown

that the total import and export value in 2009 reached USD 127,05 million, in which

export aecourted for 57,1 bilion USD, decreased 8.9% and import was 69,95 billion

USD, declined 13.3% compared to 2008 After that, exports increasing more than

imports resulled in trade surplus; however it maintained shortly to 2014 only Tn 2015,

ig

trade deficit appeared again with the value of export around $162,000 mil and import

$165,000 mil

200.00

162.02 165.5 150.22 147.85

000

-50/00

Figure 2: Value of import; export and trade balance 2007-2015 (General Statisties

Office of Vietnam)

In today’s increasing globalized world, removing cross-border trade barrier creates

favorable conditions for international business among countries Since Vietnam

opened, in general, there has been an upward trend on exports and imports At present,

Vietnam has maintained trade relations with more than 200 countries and territories in

which the top five partners account for 50% mostly to USA, China, Japan, Korea and

Hong Kong and imported from 138 countries There were 15 markets whose import

values from Vietnam reached over USD 1 billion and 14 markets whose export value

to Vietnam reached over | billion in 2008 The statistics increases significantly in 2015

with 29 export markets and 20 import markets respectively

Table 2: Vietnam's leading partners in international merchandise trade

Exports (Bil USS)

Germany 207| 189| 237| 3437| 4/09| 474| 5.18 $7| 5.96

Thailand 135 127| 118| 179| 283| 310] 348| 32] 3.69 Singapore 266| 207| 212 229| 236| 266| 294| 33| 244

Malaysia 195 | 168| 209| 2.83 45| 492| 393| 35§| 334

Imports (Bil USS)

Trading partners 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016

China 15.65 | 16.44 | 20.02 | 24.59 | 28.79 | 28.0 | 29.6 | 49.5 | 49.93 United States of America 264 301| 377 453| 483| 400] 43] 78] 8.71

Republic of Korea 7.07 |_698| 9.76 | 1318| 1554| 157| 147| 27.6 | 32.03

Japan 854| 747| 9.02| 1o4|1160| sso] 87] 144 | 15.03

Taiwan 8.36 | 625 | 698] 856] 853] 7.10 75 |_11.0 | 11.22

Germany 148| 159| 174| 219| 238| 220| 18| 32| 283 Thailand 491| 451| S6| 638| 5.79| 480| 48] 83] 8.79

Singapore 9.39 |_ 4.25 41| 639| 669| 430 46 60| 471

Malaysia 26] 25] 341] 392] 341] 310] 28| 419] SII Trade balance

Trading partners 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 China -IH1 | 115 [ 127] -135[ 164] 3147} -147 2719

United States of America 9.23 |_ 8.35 | 1046| 12.4 | 14.84 | 19.84 | 24.34 29.75

Source: (General Statistics Office of Vietnam)

As shown in data of General Statistics Office of Vietnam, the United States of America took the first place in import value from Vietnam with USD 33.47 billion in 2015, increased more than three times in 2008 of USD 11.87 billion Hence, USA became the highest trade surplus of Vietnam in merchandise trade, accounting for 41.3% of share

im total import and export in 2015 The US was followed by the European Union with

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nearly USD 31 bilhon; China with USD 17.1 billion, Japan with USD 14.1 billion,

Republic of Korea with USD 8.9 billion It is worth noting that in the five largest

export markeis of Vietnam, thers arc three Asian countries are China, Japan and

Republic of Korea In which, growth rate of Vietnamese export commodity to Korea

rose dramatically from USD 1.78 billion in 2008 to USD 8.9 billion in 2015

Tn the other hand, Vielnam imported from 138 countries and from China were one-

thirds of total imports China was the biggest commodity provider for Vietuam during the period from 2008 to 2015 with high share in Vietnamese import value, followed by

Korea arik countrics in ASEAN For instance, the nport value of China m 2008 was

USD 15.65 billion, accounted for 19.99 percent in total import This figure continued

to climb almost two times in 2014 with USD 29.6 billion Inbound products from

China rose sharply and reached nearly USD 50 billion in 2015, it led to the

merchandise trade deficit with China

‘According to a research of Lan Huong Hoang, in terms of structure by-products, over

the period of more than 10 years from 2004 to 2015, the share of raw or preliminary

processed and low-value manufacturing goods reduced from 76% 10 52%; share of

high-value manufacturing goods increased from 4% to 39% but most of these classified

high - value products sre for assembly This implies that iL may take long lime and

great deal of efforts in order to increase the value added contained in exporting products (Iloang, 2016)

Five categories of crude oil; rice; coffee; fishery products; textiles and foot-wears were

the main commodity groups of Vietnamese export thal remaimed the largest

contribution in total export value ‘This was followed by high-tech exports such as

computers, electronic products and components While industrial products continued to

play an important sole in the growth of exporl lummoves, (he export value of agriculture,

forestry and fishery tends to decrease especially in 2012 Rate of export growth did not

reduce, buf export tumover of these products dechned mamly due Lo the decrease im

world market prices It led to the low value in export, although the export volume was

still increasing Besides, Vietnam had a positive move in the direction of reducing the

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proportion of exploiting fuel as well as minerals commodity group and increasing the proportion of manufacturing industry in view of the export good structure As a result,

the share in mining and mineral exploiling products deercased from 11% in 2010 to 6%

in 2014 (Mai, 2015) Meanwhile, commodity group of raw materials, machines,

equipment, tools, spare parts and components: telephones, mobile phones and parts

thereol; molor vehicles; are the main imported product into Vietnam, especially a huge volume was from the Chinese market and ASEAN market A large proportion of

imporling producis was used for producing exports goods For example, Lextile and

leather footwear products depend heavily on the imported inputs; therefore, export value only rose slightly despite of the increase in volume This indicates that export production in Vietnam highly relies on imported goods Import structure also points out

the limitation of Vietnam production lack of subsidiaries industries for domestic

production

2.3.3 Trade balance

Tn the period from 2008 Io 2015, the trade deficit declined, im other words, the ratio of

import over export tended to decrease It was due to the reduction in importing raw

materials and equipment for manufacturing goods in domestic production Trade

surplus came back in the year 2012 with USD 0.75 bilhon, and continued to maintam

until 2014, but the trade deficit appealed again in 2015 but at a low level, equivalent ta

2.2% of Vicinam's export value

Bil USD Exports Imports Trade

Ammual Sharein | Anmal Share in

Year [Value change allexpart | VAE€ change allexpore POP

These data excluded the value of exported crude oil

Table 3: International merchandise trade of FDI enterprises (Customs Handbook

on International merchandise trade statistics of Vietnam 2015)

It can be seen that the trade balance for the period from 2008 to 2015 was improved but

not sustainable Vietnam's imports and exports were still dependent on the foreign

invested businesses Specifically, the growth rate of import and export commodities in

foreign invested businesses was much more than the growth rate of the state-owned

enterprises The figure had more than doubled — from less than 53 billion in 2008 to

more than 178 billion in 2014 Export tumover of the FDI enterprises accounted for USD 207,85 billion in 2015 It is roughly equivalent to 63.45 percent of share in all

exports and import, while the state-owned enterprises only achieved nearly 40 percent

approximately It indicated the dominance of FDI enterprises as well as the difficulties and weaknesses of domestic enterprises in the import and export structure It also led to

a relatively amount of trade deficit in the domestic economy

In general, trade deficit accounted for a large proportion in the structure trade balance

Export growth was not really sustainable and the export growth rate tended to slow

down and restructuring in Vietnam’s export changed slowly as well The structure still

paid attention in low added value and low technological products, which were goods

for processing, re-processing or assembly Trade balance had surplus in several years,

but not brings high value These findings might partly be explained by the average

price went down and the volume went up, in other words, the movement of price-

driven and volume-driven was in opposite ways Besides, some domestic products with

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