Topic: The management of exchange rate policy in Vietnam
in recent years
A. Introduction:
Prior to the 1980s, Vietnam closely followed the model of
a centrally planned economy (CPE). The failure of this
system led to partial microeconomic reforms, yet within the
framework of a CPE. In the spring of 1989, Vietnam
adopted a comprehensive reform package and the
reforms implemented since then have fundamentally
changed the economic management system in Vietnam
toward a market-oriented economy. Some important steps
have been undertaken on the road to a more marketoriented financial system. The SBVN has considered
controlling the ER as an important macroeconomic
instrument for ensuring low inflation and stability of the
financial system, promoting exports, controlling imports,
and enhancing economic growth.
B. Context
I. Exchange rate regime in Vietnam and role of State
Bank:
1. Definition and Feature
·
A regulated floating exchange rate regime is one in which
the exchange rate fluctuates according to the supply and
demand relationship in the market and the central bank
intervenes in the foreign exchange market to influence the
exchange rate. The central bank is not committed to
maintaining a fixed exchange rate or a range of fluctuations
around the central rate.
·
A managed floating exchange rate regime is a
compromise between a fixed exchange rate regime and a freely
floating exchange rate regime.
·
To maintain this regime, the central bank must also have a
strong enough amount of foreign currency to intervene in the
market when necessary and must determine the appropriate
level of intervention, otherwise it will become a fixed exchange
rate regime.
2. Roles of State bank (SBV)
Unlike other countries that have modernized monetary policy,
the Vietnamese economy still features characteristics of a
centrally planned economy, where the central bank is an
integral component of the State and therefore follows
government guidelines when formulating monetary policy
The State Bank of Vietnam features low central bank
independence and accountability as public policy decisions are
centralized, and the State Bank of Vietnam’s mandate is
influenced by the government’s political goals. The State Bank
of Vietnam lacks both political independence and operational
independence.
The tasks and powers of the State Bank of Vietnam, as
elaborated upon in the Law on the State Bank of Vietnam
(2010) include the following:
·
“To conduct operations for the purpose of currency
stability; to assure the safety for banking operations and the
systems of credit institutions; to assure the safety and
effectiveness of the national payment system; and to contribute
to accelerating socio-economic development along the socialist
orientation.”
·
“To participate in the elaboration of national socioeconomic strategies and plans.”
·
“To perform the state management of foreign exchange,
foreign exchange and gold trading activities.”
·
“To manage state foreign exchange reserves.”
To implement the national monetary policy, the Governor of the
State Bank of Vietnam is empowered to “decide on the use of
tools for the implementation of the national monetary policy,
including re-financing, interest rates, exchange rates,
compulsory reserves, open-market operations and other tools
and measures as prescribed by the Government.” To that end,
the State Bank of Vietnam administers the exchange rate
regime in Vietnam and announces exchange rates. According
to Vietnamese law, “exchange rates of Vietnam dong shall be
determined on the basis of the foreign currency supply and
demand in the state-regulated market.”
State Bank of Vietnam Decision No. 2730 (2015) provides that
the State Bank of Vietnam will announce a central exchange
rate between the VND and U.S. dollar (USD), as well as the
cross-exchange rate between the VND and certain other
currencies. The State Bank of Vietnam specifically announces a
daily VND/USD central exchange rate on its website.
II. Objectives of exchange rate policy in Vietnam:
Vietnam is deviating from the phase of policy and growth
compared to developed countries. Vietnam is also different
from China because there is little room for adaptive growth.
Trying to maintain stability in factors such as price ratio, interest
rate and inflation will be the priority of operators to deal with
external risks.
a. OBJECTIVES:
(Overall goals and tasks in 2022)
- Operating monetary policy proactively, flexibly, closely
coordinating with fiscal policy and other macroeconomic
policies.
- Controlling inflation according to the 2022 target of about
4% on average, contributing to stabilizing the macroeconomy, supporting the recovery of economic growth,
and promptly adapting to market developments at home
and abroad.
- Implement synchronously appropriate solutions to
contribute to stabilizing the foreign currency market, gold
market, and supporting the management of monetary
policy.
- To increase the State's foreign exchange reserves when
market conditions are favorable and to convert capital
sources into production and business activities.
b. DIRECTION OF STATE BANK:
1. Basically keeping the exchange rate stable, but
considering developments in the world foreign exchange
market (the volatility of strong foreign currencies,
especially USD) to adjust when necessary.
2. Allowing the exchange rate to fluctuate within a certain
range (up to ±5% sometimes, then down to ±3%, and from
2011 to now, ±1%).
3. Every year, the State Bank makes a statement about the
adjustment limit of the exchange rate for the year so that
the market knows in advance
4. The State Bank is ready to intervene whenever the free
market has strong fluctuations. First of all, by official
statements about market stability. After that, if the market
still has strong fluctuations, then apply the operations of
buying and selling USD to keep the exchange rate stable.
5. If the exchange rate in the market continues to fluctuate
strongly for a long time, the State Bank will make a move
to adjust the exchange rate, usually with a small level of a
few percent.
=>In the coming time, along with the process of modernizing
the monetary policy framework, the State Bank is committed to
continue to operate the exchange rate proactively, flexibly, in
line with the development level of the foreign currency market
and economic factors, ensuring stable and smooth operation of
the foreign currency market, contributing to stabilizing the
macro-economy, thereby alleviating concerns of the US
Department of Finance.
III. Management of exchange rate policy in Vietnam recent
years:
To adjust the exchange rate, the State Bank can adjust the
supply and demand by buying or selling foreign currencies on
the interbank foreign currency market. This management
mechanism is more flexible, and in line with international
practices, contributing to enhanced integration into the world
economic community.
* 2016 - 2020 period:
Since 2016, the State Bank has started implementing a new
exchange rate management method according to the central
exchange rate mechanism, which fluctuates daily in close
contact with market movements and the monetary policy goal is
to ensure macroeconomic stability, strengthen confidence
believe in VND, implement the Government's policy on antidollarization of the economy. Flexible management of the
central exchange rate in combination with buying and selling
foreign currency interventions in accordance with market
conditions; proactively communicating in various forms to orient
and stabilize market sentiment when there are adverse
pressures; closely coordinating with other monetary policy
instruments
- Vietnam – through the State Bank of Vietnam – tightly
manages the value of the VND, particularly against the
USD, and the State Bank of Vietnam intervenes in FX
markets through reserves accumulation and decumulation
to maintain the exchange rate that it sets
- IMF data indicate that Vietnam’s foreign currency reserves
rose from just under $49 billion at the end of 2017 to
slightly more than $88 billion by September 2020. This
considerable growth in Vietnam’s FX reserves is
attributable primarily to the State Bank of Vietnam’s
interventions in FX markets.
- The graph illustrates Vietnam’s estimated interventions
since 2016 based on valuation- and earnings-adjusted
monthly changes in reserves positions reported to the IMF.
Estimated purchases of FX in a particular month are
shown as a positive number on the y axis; estimated sales
of FX are shown as a negative number on the y axis. As
demonstrated in the graph below, Vietnam’s estimated
interventions in FX markets since the beginning of 2019
have been heavily weighted towards purchases of FX.
Since the beginning of 2019, the majority of Vietnam’s FX
purchases came during the second half of 2019, before
the beginning of the COVID-19 pandemic.
- As illustrated in the graph above, Vietnam intervened
largely in one direction at the outset of 2020 as well,
purchasing FX reserves. Net purchases of FX then
declined in early-to mid 2020 as global financial conditions
tightened amid the COVID-19 pandemic
- IMF data further shows that Vietnam’s FX reserves rose to
approximately $87.8 billion by August 2020
=> The increase in national foreign exchange reserves can be
considered as a preventive buffer for national financial security
and macroeconomic stability. The accumulation of international
reserves can prevent net capital outflows and external debt
repayment. Moreover, holding international reserves helps
monetary authorities control inflation in times of financial crisis.
However, on the other hand, mercantilist motives may also
motivate the central bank to keep the exchange rate
depreciation by increasing international reserves, thereby
increasing international trade competitiveness and ultimately
promoting exports.
Recently, Vietnam’s trade surplus has been increasing,
particularly with the United States. This led the US Treasury to
find that Vietnam is a “currency manipulator” and giving an
unfair advantage to the country’s exports. That is, the Treasury
argues that the Vietnamese dong has been held at “too low” a
level to artificially boost Vietnam’s exports. However, the real
value of the dong has been stable against the dollar since
2015, and in 2015, Vietnam had an overall trade deficit.
Thanks to the stable macro-economy along with proactive and
flexible management measures, the foreign currency market in
recent years has been generally stable, the foreign currency
liquidity is smooth, the legal demand for foreign currency of
enterprises and public is fully and timely responded. The
VND/USD exchange rate is basically stable despite strong
fluctuations in the world currency market, which is a premise for
people to sharply reduce their foreign currency holdings,
thereby converting foreign currency resources into VND for
economic development, consistent with the anti-dollarization
policy
The State Bank of Vietnam has managed the exchange rate
very flexibly and effectively during the period from the
beginning of 2016 up to now. The success and efficiency in
exchange rate management of the State Bank of Vietnam can
be recognized in the proactive and flexible position, ensuring
the stability of the market positively; while minimizing the cost
of direct intervention through foreign currency supply and
demand and continuously increasing the size of Vietnam's
foreign exchange reserves.
* 2021
Vietnam and the US have made positive progress in the issue
of "currency manipulation", the SBV has stopped buying foreign
currency forwards and returned to using spot buying tools to
have immediate impact on the money market
The factors affecting the exchange rate in 2021 will mainly
come from the international market, of which the two main
factors are the slowing down of US economic growth due to the
impact of the Covid-19 pandemic and the Federal Reserve's
The US (Fed) still kept the loose monetary policy to stimulate
the economy affected by the pandemic, so the dollar only
increased slightly by 0.1% compared to the beginning of the
year.
Since the beginning of 2021, the State Bank has adjusted the
buying price in USD many times. The downward adjustment of
the buying price is an inevitable consequence in the context
that the central exchange rate as well as the selling price of the
SBV and the USD price in the interbank market decreased
compared to the beginning of the year. Besides, the VND is still
being pegged to the USD and when China's currency
depreciates sharply, Vietnam's trade balance will be severely
affected due to the influx of cheap Chinese goods into the
market. With the exchange rate adjustment, it will be beneficial
to import raw materials from China (this is Vietnam's largest
source of imports) and then export to the US market.
During this period, the State Bank still actively bought foreign
currencies to increase foreign exchange reserves.
From a crisis control perspective, increasing foreign exchange
hoarding through the purchase of USD - the dominant currency
in Vietnam's international reserves and payments - is a typical
crisis prevention move in the context of a financial crisis
=> Proving that the SBV's exchange rate management
policy is completely correct and flexible, on December 3,
2021, the US Department of Finance announced the
"Report on foreign exchange and macroeconomic policies
of foreign partners". key trade of the United States”, in
which Vietnam continues to meet the criteria to determine
not to manipulate currency.
IV. Comparison between exchange rate policy of VietNam
and Singapore:
a.Targets on managing exchange rate *Singapore
The exchange rate represents an ideal intermediate target of
the general economy for several reasons.
1. It makes sense in the context of Singapore being a small and
open economy. Singapore has no natural resources, and is
almost completely dependent on imports for necessities such
as food and energy.. Singapore has to export to pay for their
imports. The economy is thus extremely open to trade, which
totalled more than 300% of GDP in 2011.
2. The economy’s openness means that the exchange rate
bears a stable and predictable relationship to price stability as
the final target of policy over the medium-term.
3. The exchange rate is relatively controllable through direct
intervention in the foreign exchange markets. An exchangerate-based monetary policy thus allows the government to
retain greater control over macroeconomic outcomes such as
GDP and CPI inflation, and thus over the ultimate target of
price stability.
a.Targets on managing exchange rate *Vietnam
Regarding the goals of the SBV, the SBV Law states that “the
operations of the State Bank shall aim at the stabilization of the
value of the currency, contribute to securing the safety of
banking activities and the system of credit institutions, facilitate
the socio-economic development with the socialist orientation”,
“Stabilization of the value of the currency” is interpreted here as
stabilization of the exchange rate, as the stabilization of the
currency is mentioned as a separate goal, together with control
of the inflation rate.
In 2004 and 2005, the Governor of the SBV announced
exchange rate targets suggesting that the SBV uses the
exchange rate as a nominal anchor.. For the time being, targets
are formulated as annual targets, and the SBV does not appear
to have made commitments to continue with the peg in the
future. In fact, the SBV stresses in its 2004 Annual Report the
flexibility of its exchange rate policy.
b. Impact on the economy *Singapore
Changes in the exchange rate are transmitted to the economy
in the following ways.
1.The exchange rate acts directly to reduce imported
inflationary pressures. Given that Singapore imports most of
what it consumes, domestic prices are very sensitive to world
prices. The exchange rate thus provides an important buffer
against external price pressures at the borders, especially in
periods of escalating global commodity prices, thereby
contributing significantly to the objective of medium-term price
stability.
• Second, the exchange rate acts indirectly to tackle domestic
sources of inflation. A stronger currency moderates the external
demand for our goods and services, and as the demand for
domestic factor inputs eases, factor incomes rise more
modestly. This in turn reduces the domestic demand for nontradable goods and services, and puts downward pressure on
prices.
b. Impact on the economy *Vietnam
Recent developments in Vietnam suggest that the expectations
of a stable exchange rate have contributed to a strong increase
in borrowing in foreign currency in Vietnam. In 2019, lending in
foreign currency increased by 60%, compared to 38% of loans
in domestic currency. While lower interest rates on foreign
currency loans explain part of the increase in foreign currency
lending, the SBV’s policy of pegging the exchange rate has
most likely also contributed to the increase.
The economy has a greater ability to adjust to external shocks
and to avoid costly adjustment processes with a flexible rather
than a fixed exchange rate. This buffer function of flexible
exchange rates would be an important advantage for Vietnam,
which as a small open economy is exposed to external shocks
and increasing external competition.
c.Features *Singapore
There are three main features of the exchange rate system in
Singapore, which can be summarized as the basket, band and
crawl (BBC) system.
1. The Singapore dollar is managed against a basket of
currencies of the major trading partners (also known as the
Singapore dollar nominal effective exchange rate or S$NEER).
Hence, its movements are less volatile than if it were pegged to
an individual currency. This feature also reflects Singapore’s
diverse trading pattern, with both the G3 and regional markets
representing important partners in our merchandise and
services trade.
2. MAS (Monetary Auditory of Singapore) operates a regulated
floating regime for the Singapore dollar. The trade-weighted
exchange rate is allowed to fluctuate within a policy band,
which provides a mechanism to accommodate short-term
fluctuations in the foreign exchange markets and permits
flexibility in managing the exchange rate. From an operational
perspective, the band also minimizes the need for constant
foreign exchange interventions, in contrast to a system based
on a hard currency peg.
• Third, the slope of the exchange rate policy band is reviewed
regularly to ensure that it remains consistent with the
economy’s underlying fundamentals.
Together, these features have provided an anchor of stability for
Singapore’s highly open economy, and the effectiveness of the
framework has underpinned confidence in the Singapore dollar.
c.Features *Vietnam
The regime exchange rate of Vietnam dong is a regulated
floating exchange rate on the basis of the currency metal of the
country with trading, borrowing, debt repayment and investment
system in line with the macroeconomic targets in certain
periods.
The exchange rate of Vietnam dong is formed on the basis of
the supply of foreign currency in the market with the State
reserves. The SBV adjusts the exchange rate through the use
of monetary policy tools and implements a feasible approach in
the foreign currency market.
Additionally, the SBV will be able to enter the market with a
stable exchange rate, inflation is in control, and in line with the
general objectives of monetary policy.
In fact, the VND exchange rate in 2020 is relatively stable
against the USD. Intervention of SBV is consistent with the field
of principles, with international information and does not have
the scope of "currency manipulation".
V. Achievements and shortcomings of exchange rate
policy of Vietnam:
1. Achievements:
While countries worldwide devalued or appreciated their
currencies sharply, the SBV had kept the local currency
relatively stable, with the management policy based on the
overall balance of the economy such as import and export,
public debt, balance of payments and current accounts
Reports from the SBV showed that currently, the foreign
exchange rate in the domestic market is relatively stable,
increasing and decreasing slightly in comparison with the large
fluctuations of currencies around the world.
According to the nine-month economic report by the General
Statistics Office, despite big economic changes in many
countries, including the US Federal Reserve (Fed)’s decision to
cut interest rates, the USD/VNĐ exchange rate did not fluctuate
significantly thanks to the SBV’s flexible exchange rate
management policy.
The domestic market liquidity has been ensured while foreign
currency transactions have been conducted promptly and
smoothly. It has also helped the central bank net buy dollars to
build up the nation’s foreign reserves.
It would also combine other monetary policy instruments and
take flexible market interventions to stabilize the foreign
exchange market, which would contribute to stabilizing the
macro-economy and supporting reasonable economic growth
and build up the nation’s foreign reserves when there are
favorable conditions
2. Shortcomings:
Regarding the exchange rate mechanism for Vietnam during
this period, it has been suggested that Vietnam should
announce the exchange rate based on a basket of currencies
rather than a single currency. The mechanism that relies on so
many currencies will reduce the risk of the VND relying on only
one currency, the USD.The rationality of this argument requires
more in-depth study; however, in terms of foreign exchange, it
shows that over the years, Vietnam's trade as well as foreign
exchange reserves have been based on USD rather than other
currencies
Specifically, with the old exchange rate mechanism, if the SBV
has foreign exchange intervention (buying / selling foreign
currencies), without neutralization intervention (using SBV
bonds), it will definitely affect the money supply (up / down) and
as such, monetary policy is affected.And conversely, when
there is foreign exchange intervention, if the SBV wants to
control the money supply, control inflation, the SBV will cost
costs related to the issuance of bills (neutral intervention,
sucking the local currency back in case of buying foreign
currency to maintain the exchange rate at the target level).
