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

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

USA The United Stated of America

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

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

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

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:

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:

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:

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,

5

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

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:

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

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

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,

5

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

4

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

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

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

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,

5

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,

5

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,

5

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

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:

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

4

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,

5

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

4

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

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:

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

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

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

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

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: