The impact of exchange rate on trade balance in vietnam through import and export performance

International School, Vietnam National University, Hanoi Nante University Program: Master in Finance Banking Insurance Southeast Asia Thesis proposal THE IMPACT OF EXCHANGE RATE ON TRA

International School, Vietnam National University, Hanoi

Nante University

Program: Master in Finance Banking Insurance (Southeast Asia)

Thesis proposal THE IMPACT OF EXCHANGE RATE ON TRADE BALANCE IN VIETNAM (THROUGH IMPORT AND EXPORT PERFORMANCE)

Supervisor: Nguyen Van Dinh (Ph.D.,Assoc Prof)

Student: Cu Thuy Nga

Hanoi, 2018

Acknowledgements

I would like to express my deep gratitude to Ph.D.,Assoc Prof Nguyen Van Dinh, who

is not only my respectable supervisor but also my academic inspiration I am so thankful for all his guidance, support and encouragement during the period of writing this thesis He gave me a stronger confidence to deal with this dissertation He is a great teacher ever and from the bottom of my heart, I hope that all the best will come to him

I would like to thank the Nante University and International school, IS – VNU, to give

me a chance that enables me to fulfill the course with all classmates FBA8 and all the lecturers for their useful lessons which make not only my Master course but my life

To my family, no word can express all my love to them They have always been my biggest encouragement I could not have finished this course without them

Table of Contents

CHAPTER 1: INTRODUCTION 2

Background of the problem 2

1.2 Reasons for researching 3

1.3 Research objectives 4

1.4 Research questions 5

1.5 Research subjects and scope 5

1.6 Research general structure 5

1.7 Data and research method 6

CHAPTER 2: LITERATURE REVIEW 7

2.1 Theory of trade balance 7

2.1.1 Definition 7

2.1.2 Factors affecting trade balance 7

2.2 Theory of exchange rate 10

2.2.1 Definition 10

2.2.2 Factors that influence the exchange rate 13

2.2.3 Impact of exchange rate on import and export performance 14

2.3 Exchange rate system and trade balance 15

2.3.1 Exchange rate system 15

2.3.2 Trade performance 19

2.3.3 Trade balance 23

2.4 Related research 25

CHAPTER 3: DATA 28

3.1 Research data 28

3.1.1 Data availability 28

3.1.2 Descriptive analysis of data 28

3.2 Data analysis procedure 28

CHAPTER 4: MODEL ESTIMATION AND REGRESSION RESULT 30

4.1 Descriptive statistic 31

4.2 Research model regression result 33

4.2.1 Regression model between export – import and the exchange rate 33

4.2.2 Regression between real bilateral exchange rate USD/VND and import-export ratio 36

CHAPTER 5: CONCLUSION 40

5.1 Summary 40

5.2 Limitation of the study 40

Bibliography 42

Appendix 45

Table of Notations and Abbreviations

Abbreviation Meaning

ASEAN Association of South-East Asian Nations

EURO European Monetary Unit

EXM Export – Import ratio

NBER The bilateral nominal exchange rate NEER The bilateral nominal exchange rate 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 export ratio

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

import-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 not, especially in the period from 2008 to 2015 Besides, this study used the available date from 2000 to 2015 to calculate the real effective exchange rate From that, the research attempts to identify the relationship between the exchange rate of Vietnam dong against United Stated dollar and individual trade, import and export Also, the method

of ordinary least squares is used to estimate equation of explanatory variables ( GDPUS, GDPVN, RERVND/USD ) for explained variable ( EXM -export over import ratio) It exhibits a significant relationship, which is highly sensitive A change one basic point

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

Key words: Import, export, 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,

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 import-export turnover and the trade balance

Using the exchange rate tool to run a flexible economy in the current context is necessary However, how to adjust and conduct the exchange rate policy is also a problem To achieve this goal, policymakers must be cautious and firmly set the regulations of the law on goods and currency mobilization in the current situation of our country dominated by a number of countries with developed economies

1.1 Research statement

Exchange 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 balance, import and export, national debt, direct investment, but also the public's confidence Exchange rate adjustments can directly influent in social and economic problems trade balance in Vietnam For example, when the authority adjusts the exchange rate, they will have to face other unexpected impacts, given that there has existed high and long-term trade balance deficit and budget deficit that make the balance of payment unstable Therefore, exchange rate policy is always the primary concern of Vietnamese government in order to stimulate export, reduce imports, and guaranteeing macroeconomic stability and preventing inflation For enterprises engaged in import and export activities, 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 as a country Also, improving the trade balance is one of the top macroeconomic objectives

in Vietnam, contributing to increase foreign exchange reserves, 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 that banks in Vietnam hold a large amount of US dollar in exchange reserves The US dollar has a strong impact on the foreign exchange market Most of the foreign currency transactions in Vietnam often use the US dollar, even when listing rate 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 fluctuation 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 that significant 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 strategy of each 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 rate

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 current Vietnamese exchange rate policy and clarify the impact of

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

At the same time, the thesis also investigates the problems of the exchange rate policy

to give some solutions to avoid deficits trade balance in Vietnam

1.5 Research subjects and scope

The target subjects of the research are as following:

- The 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 in the coming time

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

in Vietnam in the period 2000 to 2015

1.6 Research general structure

The first part of the dissertation shows the background, the research 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 rate 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 part summaries the study, its contribution as well as its limitation 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 product, consumer price index, exports and imports, trade balance which cover the 2008-2015 period, were used in this study Following that, using method of aggregate analysis, evaluation based on the number of import and export volume, CPI, GDP, nominal exchange rate and real exchange rate, especially the use of econometric 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

exchange rate

GDP

GDP at purchaser's prices is the sum of gross value added by all resident producers in

the economy plus any product taxes and minus any subsidies not included in the value

of the products It is calculated without making deductions for depreciation of

fabricated assets or for depletion and degradation of natural resources Data are in

current U.S dollars Dollar figures for GDP are converted from domestic currencies

using single year official exchange rates For a few countries where the official

exchange rate does not reflect the rate effectively applied to actual foreign exchange

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

Inflation

Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly (World Bank)

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

in exports as foreign consumers substitute in favor of lower-priced alternatives 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, import prices remain constant and shoppers turn their fancy toward imports, which have fallen in price relative to inflating domestically produced goods The net result for

a country with a rise in inflation is decreased exports and increased consumption of imports The result is a fall in net 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, including import tariffs, import quotas, voluntary export restraints, export taxes, export subsidies, and so on

For example, there is increasing concern in the United States about the environmental and labor policies of many U.S trade partners With regard to environmental policies, some have argued that more lenient environmental regulations in many less-developed countries give firms in those countries a competitive edge relative to firms operating in the United 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

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

levels, and welfare This means that countries like the United States may not need to worry 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 internationally (Suranovic, 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 Vietnamese goods has fallen while the price of the US goods has increased for the Vietnamese Lowering the value of domestic currency tends to raise exports by making goods cheaper for foreigners Imports from abroad expensive in Vietnam dong, as a result, Vietnam exports will rise and imports will fall

If the exchange rate, instead, became $1 = 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 opposite directions

2.2 Theory of exchange rate

2.2.1 Definition

Although economic integration and globalization have been increasing, a lot of countries still hold their own currency According to Investopedia, an exchange rate is the price of a nation’s currency in terms of another currency Thus, an exchange rate has two components, the domestic currency and a foreign currency (Investopedia) In Vietnam, according to the Ordinance on foreign exchange No.28/2005/PL-UBTVQH11, Article 4, Clause 9, exchange rate of Vietnamese Dong means the price

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

To 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: (Le, 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 activity A set price is determined against 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 currency on the foreign exchange market

in return for the currency to which it is pegged

- Floating or flexible exchange rate is the rate formed through specific transactions, and is determined by the private market through supply and demand Floating exchange rate means that currencies change relative value all the time This exchange rate fluctuates frequently depending on the supply and demand of foreign currency in the foreign exchange market

Based on the time of capital transfer

- Spot exchange rate is the current rate of exchange between two currencies The spot refers the prices buyers pay in one currency to purchase a second currency The exchange rate applied in the transaction where 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

- Telegraphic transfer rate is the foreign exchange rate for which bank has responsibility for transferring foreign exchange by electronic method It is utilized primarily for overseas transactions The telegraphic transfer rate is the rate used as the basis for determining other exchange rates

- Email or letter transfer rate is the foreign exchange rate that the bank has responsibility for transferring the foreign exchange by letter or mail It is cheaper but also slower than the telegraphic transfer

- A bill of exchange is a written 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 foreign exchange rate minus the interest arising from the time the bank buys the draft until the bill is paid A bill of exchange can be drawn by individuals or banks and are generally transferable by endorsements

Based on the relation between exchange rate and the inflation 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 measured in terms of another Thus, an exchange rate has two components, the domestic currency and a foreign currency

- The nominal 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 to prices in countries – partners in trading, it called a nominal effective exchange rate (NEER)

- 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 power ratio between domestic and foreign currencies

When a currency 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 becomes less valuable relative to another currency, it is 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 determinants of exchange rate based on a research of a group of authors According to Prof Pareshkumar J Patel and co-authors, there are six main important factors which can affect the valuation of FOREX (Prof Pareshkumar J Patel, Dr.Narendra J Patel, Dr.Ashok R Patel, March 2014)

First is inflation Inflation plays an important role in valuation of currency of any country If the rate of inflation in the India is lower than other countries comparatively, then Indian exports will increase There will be an increase in demand for Rupee to buy Indian goods Also foreign goods become cheaper and so Indian citizens will pay less ultimately import decreases Therefore lower inflation rates tend to 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 become attractive to invest money in India Investor will get a higher return from saving in the Indian banks Therefore demand for Indian Rupee will rise Higher interest rate is an appreciation for money inflow which will have 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 is 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 society has more debt on the country Such spending stimulates

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 debt to control inflation 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 Domestic Product GDP gives best measure of health of country’s economy It is the number calculated by consolidation of total expenses of government, money spent by business, private consumption and exports of the country 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 Economic performance Countries with stable government can give better growth in economy through completion of the projects in hand Investors invest their money in the countries 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’t 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 export performance

Devaluation means decreasing the value of the country’s currency in terms of other currencies (Asmamaw, 2008) The representation of currency devaluation is the increase of exchange rate When exporting goods in overseas market, if the exchange rate is high in the home country (Vietnam) compare with the same amount of foreign currency, the exporter will receive more domestic currency in the case exchanging foreign currency into local currency For example, a Vietnamese 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 =

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 market, 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, but impact on the price of import and export goods If the foreign exchange rate raises, 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 its currency value to change freely The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency

in a narrow band The currency value is determined by trading in the foreign exchange market The system is allowed to move due to market forces without intervention by country governments (NASDAQ)

Second is Managed Floating Exchange rate system, also known as “dirty” float This is

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

Third is fixed exchange rate system (Pegged).A country's decision to tie the value of its currency to another country's currency, 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, Đinh Tuan Minh,To Trung Thanh, Le Hong Giang, Pham Van Ha, 2010)

Time Exchange

Rate Regime

Definition by IMF (IMF, 2004)

Vietnam's Exchange Rate Regime in reality

1999 - 2000 Conventional

fixed peg arrangement

The country pegs its currency at a fixed rate

to another currency or a basket of currencies The exchange rate may fluctuate within narrow

The official exchange rate (OER) set based on the daily average exchange rate in the interbank market during the previous business day

margins of less than +/-

1 percent around a central rate-or the maximum and minimum value of the exchange rate may remain within a narrow margin of 2 percent-for at least three months Central bank can adjust the central rate, but not regular.1

Exchange rate fluctuation

in commercial banks dropped to no more than 0.1%

OER kept stable at 14,000 VND / USD

2001 - 2007 Crawling Peg The currency is adjusted

periodically in small amounts at a fixed rate

or in response to changes in selective quantitative indicators, such as inflation.2

OER was gradually adjusted from 14,000 VND / USD in 2001 to 16,100 VND / USD in

2007

Exchange rate band at commercial banks was adjusted to +/- 0.25%

2008 - 2014 Crawling

bands

The currency is maintained within certain fluctuation margins of at least +/- 1 percent around a central rate-or the margin between the maximum

OER was gradually adjusted from 16,000 VND / USD to 16,500 VND / USD in early

2008, and gradually increased to 20,828 VND/USD at the end of

1

Classification of Exchange Rate Arrangements and Monetary Policy Frameworks

and minimum value of the exchange rate exceeds 2 percent-and the central rate or margins are adjusted periodically at a fixed rate or in response to changes in selective quantitative indicators.3

2012

The exchange rate band was adjusted to +/- 0.75%, +/- 1%, +/- 2%, +/- 3%, +/- 5% in 2009 then narrowed down to +/- 1% in 2014

OER remained at 20,828 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 market pressure index reflecting the degree of currency flexibility Vietnam's exchange rate policy revolves around the US dollar as

an exchange rate anchor, announcing the average inter-bank exchange rate 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

to response the shocks

2 3 Classification of Exchange Rate Arrangements and Monetary Policy Frameworks

2.3.2 Trade performance

Theoretically, the exchange rate, inflation and 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 foreign currency exchange, domestic goods become more expensive relative to foreign 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 contrast, the depreciation of the domestic currency will facilitate exports and limit imports

With the increase in export and decrease in imports, it is expected that depreciation reduce a 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

In the period of 2008-2009, Vietnam faces the big change in the exchange rate policy

in the monetary market (early 2007, Vietnam joined the WTO) Vietnam dong (VND) continued to depreciate against the US dollar, and lasted until the end of 2009 Along with that, inflation began to increase 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 than 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 total amount 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 accounted for 57,1 billion USD, decreased 8.9% and import was 69,95 billion USD, declined 13.3% compared to 2008 After that, exports increasing more than imports resulted in trade surplus; however it maintained shortly to 2014 only In 2015,

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

to Vietnam reached over 1 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 US$)

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

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

nearly USD 31 billion; 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 markets of Vietnam, there are 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

In the other hand, Vietnam imported from 138 countries and from China were thirds of total imports China was the biggest commodity provider for Vietnam during the period from 2008 to 2015 with high share in Vietnamese import value, followed by Korea and countries in ASEAN For instance, the import value of China in 2008 was USD 15.65 billion, accounted for 19.99 percent in total import This figure continued

one-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 Hương 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% to 52%; share of high-value manufacturing goods increased from 4% to 39% but most of these classified high - value products are for assembly This implies that it may take long time and great deal of efforts in order to increase the value added contained in exporting products (Hoang, 2016)

Five categories of crude oil; rice; coffee; fishery products; textiles and foot-wears were the main commodity groups of Vietnamese export that remained 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 role in the growth of export turnover, the export value of agriculture, forestry and fishery tends to decrease especially in 2012 Rate of export growth did not reduce, but export turnover of these products declined mainly due to the decrease in 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

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 exploiting products decreased 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 thereof; motor vehicles; are the main imported product into Vietnam, especially a huge volume was from the Chinese market and ASEAN market A large proportion of importing products was used for producing exports goods For example, textile 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

In the period from 2008 to 2015, the trade deficit declined, in 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 billion, and continued to maintain until 2014, but the trade deficit appealed again in 2015 but at a low level, equivalent to 2.2% of Vietnam's export value

balance Year Value Annual

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Share in all export Value

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Share in all export