Hạn chế tình trạng đô la hóa tại việt nam tt tiếng anh

After the reunification of Vietnam in 1975, Vietnam’s economy experienced a long period of difficulties and failures in the price-wage-money policy of the domestic currency, from which t

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

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PHD STUDENT: NGUYEN THI THU HIEU

LIMITING THE DOLLARIZATION STATUS

IN VIETNAM

SUMMARY OF DOCTORAL DISSERTATION IN ECONOMICS

HO CHI MINH CITY – 2019

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

-oo0oo -

LIMITING THE DOLLARIZATION STATUS

IN VIETNAM

SUMMARY OF DOCTORAL DISSERTATION IN ECONOMICS

MAJOR: FINANCE - BANKING

CODE: 9.34.02.01

SUPERVISOR: PROF PHD NGUYEN THANH TUYEN

HO CHI MINH CITY – 2019

CHAPTER 1 LITERATURE REVIEW

1.1 THE NECESSITY OF THE STUDY

With the process of strong economic integration, the transitional economies have attracted a large amount of foreign currency through different channels These foreign currencies are important resources in helping countries in transition process to promote economic development However, these countries have been facing the phenomenon of dollarization in the economy Dollarization is often seen as an indispensable product, an objective entity linked with the operating mechanism of an open economic system, so the content of this phenomenon itself has shown its positivity However, when an economy is dollarized, the process of regulating money supply of the central bank is difficult, as well as seriously affects the balance of the foreign exchange market Besides, when the contents of dollarization are abused by subjective and spontaneous elements of members of society, or when the economic management agencies do not have effective measures to control its negative sides, dollarization will lead to unpredictable consequences for the economy - society

In the same situation like most other developing countries, Vietnam has had a long history of using the US dollar in parallel with the Vietnamese currency since the 1960s After the reunification of Vietnam in 1975, Vietnam’s economy experienced a long period of difficulties and failures in the price-wage-money policy of the domestic currency, from which the public lost faith in the value of VND, the trend of gold and foreign currencies increases, which made the phenomenon of dollarization become more complicated Although there have existed a great number of studies on dollarization in the world as well as in Vietnam However, the reality shows that the dollarization status is still quite complicated, affecting the economic stability and growth in the process of integration Especially, there are still no effective ways to deal with this phenomenon in the Vietnamese economy Therefore, the author chooses the

topic: “Limiting the dollarization status in Vietnam” as a research topic for her

doctoral thesis

1.2 REVIEW OF RELATED STUDIES

In the ability of approaching materials of the author, the researches on dollarization in Vietnam mention the process of dollarization in Vietnam in terms of causes, impacts and solutions in specific periods However, there are still scientific

gaps as follows: (1) Regarding the research objectives, there have existed no studies

on the correlation between the dollarization status and macroeconomic indicators such as: inflation, exchange rates, interest rates, foreign exchange reserves, .; (2)

Regarding the scope of the study, there have been no studies on the comprehensive

evaluation of impact of dollarization phenomenon on the economy before, during and after Vietnam’s accession to WTO according to the following criteria: deposit dollarization, loan dollarization, cash dollarization, dollarization of valuation and

prices; (3) Regarding the research method, there have been no studies examining the

correlation between the phenomenon of dollarization and the macroeconomic indicators in short-term as well as long-term

1.3 OBJECTIVES AND RESEARCH QUESTIONS

Objectives: the thesis is conducted to obtain one main aim and three specific

objectives The main aim is: to examine the dollarization status of the Vietnamese

economy, to determine the correlation between the dollarization status and the macroeconomic indicators, thereby suggest some policies to limit the dollarization

status in Vietnam Specific objectives are: (1) to analyze the dollarization status, to

identify the causes and impacts of dollarization on the economy from 1992-2017; (2)

to Identify the correlation between the dollarization status and the macroeconomic indicators such as: economic growth, foreign exchange reserves, exchange rates, inflation, interest rates, ; (3) to propose solutions to limit the dollarization status in the Vietnamese economy

Research questions to achieve the objectives: (1) How does the dollarization phenomenon in Vietnamese happen through stages? What causes this phenomenon?

How does it affect Vietnam's economy? What measures have been used by the Government to deal with the dollarization status? (2) Is there a correlation between the dollarization status and the macroeconomic indicators such as inflation, exchange rates, interest rates, foreign exchange reserves, .? If yes, what is the direction and degree of impact? (3) What are measures to limit dollarization status of the Vietnamese economy in the background of integration?

1.4 THE SUBJECTS AND SCOPE OF THE STUDY

- Research subjects: the dollarization status, its causes, the relationship between the dollarization status and the macroeconomic indicators The dollarization status is evaluated based on criteria: deposit dollarization, loan dollarization, cash dollarization, dollarization of valuation and pricing Among them, the study focuses on the deposit dollarization and the loan dollarization The macroeconomic indicators include: inflation, exchange rate, interest rate, GDP growth, foreign exchange reserves and import and export value

- Scope of research: Regarding space, Foreign currency deposits and foreign

currency loans on the total deposits and loans of individuals and businesses in the

commercial banking system in Vietnam; In terms of time: the study examines the

period from 1992 to 2017

1.5 RESEARCH METHODOLOGY

The study uses a systematic approach and dialectical materialism method, with the use of descriptive statistical methods, synthetic analysis method combined with comparative and interpretative methods to explain for the research problems used throughout the thesis

In addition, the thesis uses the method of quantitative regression with the Vector Error Correlation Model (VECM), processed through Eviews 8.0 software to solve the research question 2

1.6 RESEARCH DIAGRAM

1.7 CONTRIBUTIONS OF THE STUDY

Firstly, on the basis of systematizing general theories on dollarization, the

thesis evaluates comprehensively on the dollarization status in the Vietnamese economy since its opening until now (from 1992 to 2017) The thesis also identifies the causes of dollarization, analyzes and evaluates successes and limitations of measures to overcome the dollarization status implemented by the Government during the study period

Secondly, in the research period, the dissertation has provided empirical

evidence on the relationship between the phenomenon of deposit dollarization and some macro variables under the impact of the deposit rate ceiling policy Research results show: (1) Foreign exchange reserves and deposit interest rates of domestic currency have a negative impact on the situation of deposit dollarization; (2) Parallel market profits, foreign currency deposit rates, exchange rates and inflation have a

Resesarch problems Resesarch objectives Reseach methodology

• Current situation of dollarization

• Causes of dollarization

• Solutions to resolve dollarization

implemented by the Government

• The relationship between the status

of deposit dollarization and monetary indicators

• The relationship between the status

of loan dollarization, economic growth and export

Solutions and Requests

General conclusions

positive impact on the deposit dollarization status; (3) The policy of mobilizing ceiling interest rates with USD deposit rate of 0% brings a good result, helps reduce the deposit dollarization in stable macroeconomic conditions

two-Thirdly, in the research period, the thesis examines the relationship between the

status of loan dollarization and economic growth and exports Results show that the status of loan dollarization has a negative impact on the economic growth; a positive impact on exports in the short term; and a positive impact on the dollarization status and the differential in costs paid when borrowing VND compared with USD

1.8 ORGANIZATION THE STUDY

The study consists of 5 chapters:

Chapter 1: The literature review

Chapter 2: Theoretical background of dollarization

Chapter 3: The dollarization status in Vietnam in the period from 1992 to 2017 Chapter 4: Empirical evidence of the relationship between dollarization and

macroeconomic indicators Chapter 5: Conclusions and solutions to limit dollarization in Vietnam

CHAPTER 2 THEORETICAL BACKGROUND OF DOLLARIZATION

2.1 DOLLARIZATION IN ECONOMY

2.1.1 General theories on dollarization and the dollarization status

2.1.1.1 Dollarization

❖ Definition: dollarization is a phenomenon of a currency of any countries in the

world appearing in the economy of another country in any forms, regardless the acceptance or disapproval of the Government of that country In other words, dollarization is the phenomenon of people using money not issued by the Government

of that country

❖ Classification: Based on the legality of foreign currency including official

dollarization, unofficial dollarization and semi-official dollarization; Based on the

monetary functions including dollarization replacing assets, dollarization replacing payment also known as the currency dollarization, dollarization of listed valuation, financial dollarization; Based on the mechanism of foreign currency occurrence including deposit dollarization, loan dollarization, cash dollarization and dollarization listed evaluation

2.1.1.2 The dollarization status in economy

The phenomenon of dollarization in economy reflects the rates of use of foreign currency to do monetary functions regardless the Government’s acceptance or disapproval Based on the classification criteria, dollarization is often quantified according to different criteria Two commonly used criteria (according to IMF):

From the calculation results, dollarization will be assessed according to 3 levels: high (> 30%), average (from 10% to below 30%) and low (<10%)

2.1.2 The impact of dollarization on the economy

Dollarization has both positive and negative influences Positive impacts: reduce

transaction costs and eliminate exchange rate risks; promote international trade and world economic integration; reduce hyperinflation, help the economy overcome the

crisis Negative impacts: reduce the effectiveness of the management of monetary

policy; limit the function of the central bank as the final lender; narrow the export market share; easily lead to the risk of financial crisis; loose the control of the currency, affect the nation’s political prestige; easily cause the instability in macroeconomic and a series of other social issues

2.1.3 The relationship between dollarization and macroeconomic indicators

2.1.3.1 Theory of currency choice

❖ Gresham Law: “bad money drives out good” If the foreign currency is a

reliable and internationally accepted currency, it will be stored more than the domestic currency

❖ Theory of asset demand

According to Friedman (1956) and Mishkin (2003), to determine the need for

an asset, it is necessary to compare the benefits of holding that asset with those of holding other assets In an economy, if holding domestic currency has less benefit and more risks than holding foreign currency, the demand for foreign currency will be higher

❖ Equal relations in the international financial market

• Equivalence of interest: including 2 types: Covered Interest Parity (CIP) and

Uncovered Interest Parity (UIP)

• International Fisher effect: the combination of Fisher, the law of uncovered

interest parity (UIP) and the law of purchasing power parity (PPP):

exchange rate, spot exchange rates; ∆E is the expected fluctuation of the exchange

In perfect market conditions, the interest rates of currencies tend to balance with the fluctuation of exchange rates In fact, investors tend to choose currencies with higher convertibility and lower risks

2.1.3.2 Correlation between dollarization and macroeconomic indicators

❖ Correlation between deposit dollarization and macroeconomic indicators

• Deposit dollarization and inflation

• Deposit dollarization and exchange rate

Deposit dollarization increases when the expected exchange rate rises (∆E>0) because holding foreign currency will be more beneficial than the domestic currency (

• Deposit dollarizations and interest rates

If foreign currency interest rate is higher than that of domestic currency, deposit

Unofficial dollarization

Source: The author

Cost of imported goods ↑

Gresham, Friedman, Miskhin, Fisher

Foreign currency demand ↑

Local currency demand ↓

Foreign currency price ↑

Local currency price ↓

Foreign currencies perform currency functions for local currency Inflation ↓ Official dollarization

→ currency exchange

Deposit dollarization is positively related to the foreign currency and negatively related to the domestic currency interest

• Deposit dollarization and exchange rate differential between free market and

formal market (parallel market returns)

Countries that do not meet the demand for foreign currencies will tend to trade

on free markets, leading to higher price of foreign currencies in free market than that

in official market, stimulating the motive to hold foreign currencies to speculate Therefore, the higher the parallel market profit is, the more deposit dollarization increases

❖ Correlation between loan dollarization and macroeconomic indicators

• Loan dollarization and inflation

In theory, when high inflation occurs, borrowers will choose the domestic currency because the real interest rate which must be paid is lower This means loan dollarization will decrease In reality, when inflation is high, tight monetary policy is applied, nominal interest rate of domestic currency is increased, so borrowers will have more benefit when choosing foreign currency

• Loan dollarization and exchange rates

When it is due, foreign currency borrowers have to pay the cost of r*+∆E while domestic currency borrowers only have to pay the cost of r Therefore, if the exchange rate fluctuates constantly, foreign currency borrowers will face risks and vice versa The relationship between loan dollarization and exchange rate is a negative relationship

• Loan dollarization and interest rates

In theory, countries with weak currencies will have r>r* and there will be a deviation in CIP Investors will borrow foreign currencies to invest in domestic markets to get benefits This makes loan dollarization increases In fact, the blinding regulations in foreign exchange transactions lead to the lost of opportunity to benefit from the differential from foreign currency trading activities If there exists the phenomenon of r > r*+∆E, loan dollarization will increase

• Loan dollarization and deposit dollarization

Logically, loan dollarization functions similarly to deposit dollarization because

of the profitability of commercial banks

• Loan dollarization and export

Borrowers will have risks when the loan currency and the repayment currency are different, while the weak currencies are less accepted in international payments Borrowers often choose foreign currencies to foster import and export activities Loan dollarization has a positive relationship with export activities of enterprises

2.2 LIMITING THE DOLLARIZATION STATUS IN ECONOMY

2.2.1 Concept

To limit dollarization, a Government has to combine macroeconomic policies and micro-measures (which can be encouraged or required) to enhance the use of domestic currency compared with foreign currencies

2.2.2 Policies and measures to limit dollarization

Studies have suggested such policies and measures to limit dollarization successfully as: (i) Stabilizing macroeconomics, (ii) Using market instruments, (iii) Using mandatory administrative tools

Policies to limit dollarized economy have two sides They can bring successfulness or failures

2.3 EXPERIENCE TO SOLVE DOLLARIZATION OF A NUMBER OF COUNTRIES IN THE WORLD AND LESSONS FOR VIETNAM

2.3.1 The reality of dollarization in some countries in the world

In this section, the thesis analyzes the cause of dollarization, the economic situation, the benefits and risks after deciding on the official dollarization For semi-formal and informal dollarization countries, the thesis further analyzes the policies to restrict dollarization forced by the Government

- Official dollarization countries: Ecuador and El Salvador

- Semi-official dollarization countries: Cambodia and Laos

- The countries succeeded in solving unofficial dollarization: China, Chile,

Israel, some countries in Latin America, some countries in Southeast Asia

2.3.2 Experience to limit dollarization in the Vietnamese economy

Dollarization does not completely cause bad effects on the economic development of a country Sometimes, dollarization is the driving force to attract investment in economic development Therefore, the measures to restrict dollarization

in economy need consider following issues: the restriction on dollarization does not mean eliminating it completely, official dollarization is not a good choice when a crisis occurs, to restrict dollarization, it is necessary to combine measures administrativewith market economy instruments, consistent with the unique circulation of the domestic currency in the economy and reinforce belief in the domestic currency with a stable macro economy

CONCLUSION CHAPTER 2

In chapter 2, the thesis presents the general theories on dollarization and the dollarization status, evaluates the impact of dollarization on the economy, analyzing the relationship between dollarization and macroeconomic indicators based on the theories of money In the next section, the thesis presents the theoretical framework for restricting dollarization, drawing lessons from the countries facing with dollarization

in the economy

CHAPTER 3 THE DOLLARIZATION STATUS IN VIET NAM

IN THE PERIOD FROM 1992 TO 2017 3.1 THE IMPACTS OF ECONOMIC CHARACTERISTICS ON DOLLARIZATION IN VIETNAM IN THE PERIOD FROM 1992 TO 2017 3.1.1 Economic growth

In general, the trend of the GDP and the dollarization status is inversely related When GDP is stable and rises, dollarization decreases Conversely, when GDP falls, the dollarization tends to increase

Figure 3.1: GDP growth and dollarization status in the period from 1992 to 2017

Source: IMF

3.1.2 Balance of trade

The trade balance was improved, Vietnam moved from a trade deficit for a very long time to a trade surplus since 2012

Figure 3.2: Balance of trade and dollarization status in the period from 1992 to 2017

Source: IMF, World Economic Outlook Database, April 2018

3.1.3 Foreign capital

Figure 3.3: Foreign capital inflows into Vietnam in the period from 1992 to 2017

Source: General Statistics Office, World Bank, IMF, SBV

0 10 20 30 40 50

-15000 -10000 -5000 0 5000 10000

FCD/TD (%

- left column)

Vietnam’s financial integration process has attracted more and more external capital such as FDI, FPI, ODA and remittances, thereby putting pressure on exchange rates, inflation, interest rates or dollarization status is more and more increasing

3.1.4 Foreign exchange reserves

By the end of 2017, foreign exchange reserves reached 48.69 billion USD Figure 3.4 shows that currency reserves and dollarization tend to be opposite

Figure 3.4: Foreign exchange reserves and dollarization in the period from 1992

to 2017

Source: International Financial Statistics, IMF

3.2 CURRENT SITUATION OF DOLLARIZATION IN VIETNAM’S ECONOMY

In the past, the scale of Vietnam’s economy was very small From 1985 to

1986, VND weakened because of the failure of price-salary-money policy, inflation was up to 3 numbers, gold price increases constantly, residents used gold and foreign currencies to store, speculated price and used it as a means of payment However, dollarization was not taken into account because the economy’s openness is still very small

Since Decree 161-HDBT was issued in 1988, gold and foreign currencies were used in a very chaotic context Since 1992, Vietnam has officially opened its economy, expanded into the world economy and faced with dollarized economy

3.2.1 Deposit dollarization

The phenomenon of deposit dollarization increases or decreases according to the stability of the macro economy In relatively stable macroeconomic periods,

0 10 20 30 40 50

deposit dollarization decreased (1992 - 1996; 2002 - 2007); When the economy was in recession or effected from the world crisis, deposit dollarization increases (1997-2001; 2008-2011; 2013) Overall, deposit dollarization tends to decrease sharply

Figure 3.5: Deposit dollarization in the period from 1992 to 2017

Source: Viet Nam Statistical Appendix, IMF

0 1500000 3000000 4500000 6000000 7500000

Total deposit (right)

Foreign currency deposit (right)

Deposit dollarization (left)

0 5 10 15 20 25 30 35 40 45

Total loan (left column) Loan in VND (left column)

Loan in foreign currency (left column) Loan dollarization (right column)

exchange rate has been relatively stable, the loan dollarization has dropped sharply to 7.9% (in 2017) because the SBV tightened the demand for foreign currency loans

3.2.3 Cash dollarization

The thesis estimates the amount of foreign currency in circulation by two methods: basing on the amount of remittances and the change of foreign currency deposits and basing on statistical errors of the national payment balance The result is estimated at about $ 76 billion in cash in circulation in the economy

3.2.4 Listing and pricing dollarization

Business activities of electronic goods, motorbikes, real estate brokerage centers, etc are all priced and paid in USD or gold This phenomenon, then, spreads to such services that food, tourism, to websites selling electronic products, and to economic contracts, etc Since the Ordinance on Foreign Exchange No 06/2013 was issued, the phenomenon of listing and pricing dollarization has been greatly reduced

3.3 CAUSES OF DOLLARIZATION IN VIETNAM

By the end of 2017, Vietnam was no longer among countries with high rate of dollarization However, this phenomenon in Vietnam has been complicated, and fluctuated constantly, causing complexity and strong impacts on exchange rates and on the foreign exchange market The basic causes of dollarization in Vietnam can be mentioned such as: inflation rate was high and occurred complicatedly, USD/VND exchange rate tended to increase constantly, benefits when sending and borrowing VND is not high, the policy of foreign exchange management and the existence of foreign exchange market was unofficial, the exchange rate between the official market and the free market was different, foreign currency was regarded as a normal means of payment and could be stored and more and more foreign currencies occur in Vietnam

3.4 MEASURES TO SOLVE DOLLARIZATION USED BY THE GOVERNMENT

The government began to take measures to deal with the dollarization status since Decision 98/2007/QD-TTg was issued, specifically: