Tiểu luận môn tài chính quốc tế current situation of foreign exchange marke in vietnam and management measures

NATIONAL ECONOMICS UNIVERSITY
ADVANCED EDUCATIONAL PROGRAMS

International Finance
Topic : Current

situation of foreign exchange
marke in Vietnam and management measures
GROUP 5:
1.
2.
3.
4.
5.

Ha Tu Linh
Dang Thi Khanh An
Nguyen Thi Thu Ha
Tran Thi Thu Hang
Bui Viet Anh


TABLE OF CONTENT
CHAPTER 1: Current situation of foreign exchange market in
Vietnam
1.

Vietnam’s foreign exchange market in 2014

2.

Vietnam’s foreign exchange market in 2015

3.

Vietnam’s foreign exchange market in 2016

CHAPTER 2 : Vietnam’s management measures in cotrolling
foregin exchange market

CHAPTER 1: Current situation of foreign exchange market in Vietnam


1.

Vietnam’s foreign exchange market in 2014

Interbank rates was increased 1% by SBV.
In the first 6 months of 2014, the average interbank rate between VND and USD
was kept stable at 20,036 VND / USD until 19/06/2014, Government Bank
increased it 1% to 21.246 VND/USD. Accordingly, the new ceiling rate is 21,458
VND / USD and the new rate floor is 21,034 VND / USD. This adjustment reflects
the pressure to increase the VND / USD exchange rate, the demand for foreign
currencies to increase but still in the market's responsiveness as well as the control
of government bank.
The adjustment of the interbank rate this time is to support exports in the second
half of the year. By that, support economic growth when the absorption capacity of
the market is poor while the export situation is showing signs of optimism. For
many businesses in the export sector, especially exporters to the US and Europe,
this exchange adjustment will open up new opportunities.
Adjusting the exchange rate to support exports is also a positive impact, which

creates opportunities for enterprises to expand their export partners, reduces their
dependence on foreign partners.
In addition, the exchange rate adjustment will not pose significant risks to
inflation. Because in that time, domestic demands are still weak, Increase the
exchange rate led to higher input prices, but companies could not easily raise
output prices. In addition, with the current supply and demand situation of the
foreign exchange market, the SBV ( State Bank of Vietnam) will be able to
maintain the stability of the VND in the long run.
For the stock market, this adjustment of the exchange rate has the same reaction as
the adjustment of the interbank exchange rate in 2013. The stock market is
negatively impacted in the short term but then rebounded rapidly. On 27/6/2013,
the SBV increased the average interbank exchange rate 1%, one day later the VN
Index fell 3.7 points, but quickly recovered and increased.
In conclusion:


The foreign exchange market is stable in 2014 when the average exchange rate of
23 commercial banks was 21.251 VND / USD, increased 1.04% over the same
period in 2013. Free exchange rates on June 30, 2014 is 21.305 VND / USD,
increased 0.1% over the same period in 2013.
Although the nominal exchange rate has been adjusted by 1%, however, due to the
inflation gap between the US and Vietnam, the VND is still 6.48% higher than the
US dollar
The foreign exchange market is basically stable, due to the support of the
following factors:
-

-

-

Stable exchange rate police.
The SBV has maintained the interbank exchange rate at VND21,036 /
USD for nearly a year (from June 28, 2013 to June 18, 2014)
Trade balance continues to increase:
According to statistics of the General Department of Customs, the trade
balance of commodities of the country (calculated until June 15, 2014) is
surplus more than 1.45 billion USD. Specifically, the total import-export of
the country reached more than 127.63 billion US dollars, increased 12.9%
(which means increased more than 14.57 billion US dollars) over the same
period in 2013. Export turnover of the country reached more than US $
64.54 billion, increased 15.4% ( which means increased more than 8.61
billion USD) over the same period in 2013. Import turnover of goods
reached over $ 63.09 billion, increased 10.4% ( which means increased more
than 5.96 billion USD) over the same period in 2013.
Other capital flows such as FDI, ODA, remittances are relatively stable
According to statistics of the Foreign Investment Agency, in 2014, Foreign
direct investment projects are estimated to have disbursed $ 5.75 billion
USD, increased 0.9% over the same period in 2013. ODA in Vietnam is also
stable. In the year 2014 (starting from 1/4/2014 to the end of March 2015),
Japan promised to maintain stable ODA for Vietnam at least equal 2013
(about $ 3.5 billion). The European Union (EU) pledged to continue
financing € 542 million for Vietnam in 2014. Remittances are also a stable
source of foreign exchange and tend to increase each year. In 2013, the
amount of remittances transferred to Vietnam reached 11 billion USD, is
expected to increase by 20% in 2014.


High foreign exchange reserves.
In 2014, the SBV has bought over 10 billion USD, increased the exchange

reserves to over 35 billion USD- the highest level so far.

-

2.

Vietnam’s foreign exchange market in 2015

Overall, the foreign exchange market of Vietnam was quite exciting and
complicated in 2015. It can be seen thatthe foreign exchange market for the
first half of the year had been supported in a stable manner by long-term
factors including:
•
•
•

Consistent direction of the SBV
The overall balance of payments surplus - estimated to reach $ 2-3 billion in
the first 6 months of the year
Inflation remained low, CPI in June rose by only 0.6% against the end of 2014.
However, from the beginning of the year, the pressure from the international
currency market and the serious trade deficit forced the SBV to increase the
average interbank exchange rate by 1%.After that market sentiment stabilized
and exchange rates fell shortly, but this situation did not last long.Continued to
be influenced by the strength of the dollar, the exchange rate went to the
ceiling in several days before the SBV raised the second rate to 1% in May and
implement the commitment to adjust no more than 2% to the exchange rate as
well as ready to intervene to stabilize the market. The market liquidity was
stable until August, then the market was shaken again by the Chinese central
bank's CNY devaluation in response to the growing interest rate of Fed. In

order to facilitate export activities and stabilize market sentiment, the SBV has
adjusted flexibly to increase the exchange rate by 1% and adjusted the trading
exchange rate by 2%. Besides, combined with the method of selling foreign
currency to the market to serve the needs of payment of customers,the SBV
had easedthe market sentiment to push speculation. The exchange rate
stabilized around the SBV’s selling amout of 22,475VND / USD until midNovember. Then the exchange rate showed an upward trend due to the demand
for dollars at the end of the year for import activities and the uncertain market
sentiment was influenced by the decision to increase the basic interest rate of
the Fed.In that situation, the State Bank of Vietnam pledged to sell USD term


in order to support and stabilize the market sentiment, the exchange rate thus
dropped sharply from the ceiling level of the SBV's selling price of 22,475
USD / VND. The trading exchange rates was around this level until the end of
the year.
At 31/12/2015, the listed exchange rate for buying and selling VND / USD of
commercial banks were popular around 22,460 - 22,530 VND / USD (buy /
sell).
•
•
•

In the interbank market, the exchange rate at the end of December 31 was
22,485 - 22,495 VND / USD.
The exchange rate in the unofficial market traded at 22,630 - 22,660 VND /
USD (buy-sell).
The SBV's policy remained unchanged during the week: the average interbank
exchange rate was 21,890 VND / USD from 19/08/2015; The ceiling price was
21,233 - 22,547 VND / USD, respectively. The listed exchange rate at SBV
was 21,800 - 22,475 VND / USD on 19/08/2015.

3.

Vietnam’s foreign exchange market in 2015
Foreign markets in the first six months of 2016
After experiencing fluctuations in 2015, causing the state to sell a
considerable amount of foreign currency to intervene in the market, in early
2016, the foreign exchange market of Vietnam is quite stable.
On February 2, 1616, the State Bank reverted to the dollar with the purchase
price of 22,300 VND and the ceiling price of 22,511 VND. This move shows
that banks have started buying foreign currencies to reserve. After the
announcement of the above information, market liquidity became plentiful,
market activity became more active.
The central bank's daily central rate announcement has contributed to
speculative sentiment among investors. At the same time, this also helps to
prevent the ongoing dollarization in the Vietnamese economy.
At the end of May this year, the exchange rates in many commercial banks
have shown signs of warming due to the rumors of a possible Fed rate
increase in June 2016 and impact From the deceleration of the Chinese
economy, the yuan has declined significantly. In addition, in the Vietnamese
A.


market, the purchase of $ 7 billion in reserves by the State Bank also
contributes to the rise of the dollar.
The interbank interest rates in May 2016 were mixed with the previous
month, tending to fall further and stay low for several consecutive weeks due
to the following reasons: Faster than the VND credit, the SBV pumped more
than 72 trillion VND via foreign exchange channels.
However, in June, the exchange rate returned to a stable situation as the bank
temporarily stopped pumping money into the market, trade balance was

positive and the US Federal Reserve Delayed raising interest rates.
•Exchange rate of USDVND

The situation on the foreign exchange market in the first quarter was quite
stable. The market liquidity was good, the exchange rate gradually declined
in the quarter and revolved around the SBV buying, supported the State
Bank of Vietnam to buy a large amount of USD in foreign exchange
reserves. To get this result: (i) the new exchange rate mechanism was
effectively implemented by the SBV from the beginning of the year. The use
of central rates to bring the reference exchange rate to reflect the true supply


and demand situation in the market has at the same time repelled speculation
and dollarization in the market; (Ii) The surplus trade balance in the first
quarter, the abundant foreign currency volume from FDI projects flowing
into the market, the low demand for foreign currencies of enterprises in this
period also created favorable conditions. To reduce exchange rates and
stability; (Iii) The FED exercise caution to raise interest rates and the yuan in
Q1 / 2016 does not fluctuate significantly to reduce forex pressure. At the
end of the first quarter, the exchange rate was stable at 22,290 - 22,300 VND
/ USD.
+ At the end of the month, VND / USD exchange rates of commercial banks
were commonly quoted around 22,260 - 22,320 VND / USD (buy / sell).
+ The exchange rate in the unofficial market fluctuates with the exchange
rate fluctuations on the official market. The exchange rate in the unofficial
market decreased and stabilized around 22.28022.320 VND / USD (buysell).
+ SB's operating policies: The central bank adjusted flexibly to increase /
decrease the central rate by day, and as of 31/03/2016 the central rate was
adjusted down 33 points compared with the beginning of the month at
21,850 VND /USD.

• Other foreign currency
In the first quarter of 2016, the dollar fluctuated in a narrow range in
February and fluctuated sharply in March. The reason is because the dollar
devalued before the decision to delay the Fed interest rate increase while the
loosening policy. The ECB's currency does not cause the euro to fall. Euros
in the quarter increased 4.6% against the dollar and closed at 1.1377 EUR /
USD. - The dollar rose slightly at the beginning of the quarter versus the
Japanese Yen while it fell sharply at the end of the quarter. The weakness of
the US economy and the prospect of a damp world economy prompted
investors to invest in the Japanese Yen as a hedge. Japanese yen in the
quarter rose 6.7% against the dollar and closed at 112,549 JPY / USD.
Situation of market volatility in the last 6 months of 2016
Looking back at the foreign exchange market over the past time, after a long
period of relatively stable and less volatile, since mid-August, the central
rate has been continuously adjusted up to October 26, Listed at 22,030
B.


VND / USD, an increase of about 0.6% compared to the beginning of the
year.
However, the exchange rates of commercial banks and the informal market
continue to maintain and maintain stability. The rate at many commercial
banks is currently around 22,330 - 22,350 VND / USD.
In particular, the CDS index tends to fall slightly and NDF term rates have
not changed much compared to the previous month, suggesting that the
exchange rate expectations are quite stable. The change in CDs is due to:
• Some of the major currencies in the basket depreciate against the dollar,
particularly the CNY and GBP.
• Foreign currency demand pick-up may increase again by seasonal factor to
meet year-end payment demand and FED's ability to raise interest rates in

December. In particular, demand for foreign currency has shown signs
hotter:
(i) Imports of finished goods have stopped their downward trend and started
to increase again since September;
(ii) Foreign currency credit is increasing significantly. As of 30/9/2016,
foreign currency credit has increased 5.44% over the end of 2015, up 3.69
percentage points over the previous month.
CONCLUSION:
After 15 years of operating, the exchange market of VN still under
developed, even when compare with countries in same area.
The fact has shown that low quality of management, lack of unification,
regulation still poor and don’t have the connection. The same with invest
operation from foreign country to VN, VN don’t have the base of
enforcement for purpose of management. It cannot be denied that, indirect
investor try to dishonor the regulation by buying bonds, treasury bills which
issued from foreign countries or central bank us source of exchange reserve
to invest.
According to financial expert, the lack of unification and disadvantages has
created the great amount of pressure for VN on the way of integration.
Firstly, the foreign exchange is top priority in joining international
cooperation organization to serve the process of integration.


It’s time for VN to built another course of enforcement to guarantee safety
through authorized units, using transfer or asset blocked of a person or
organization related to terrorism, illegal money.
The market does not really open, allow non-bank institution to join foreign
exchange market, diversity in goods, services of foreign exchange ,…
According to Mr. Le Duc Thuy, state bank governor, with development of
the economy in the past few years, transactions in foreign exchange continue

to diverse itself, both scale and depth.
Mean while, the foreign exchange management in VN still considered to be
inadequate. For the current transaction, VN has removed regulation in
transforming foreign exchange and payment but still regulation in files and
documents which are really complicated. Modern transaction such as
internet banking, card payment, don’t have any regulation, also guide of how
to use these product.
Inconvenience also shown in funding transaction, documents for this
problem is decree no 63/NĐ – CP from the government have been
established for 7 years. The contents are not in details.
After being accepted to follow the term VIII by IMF. Regulation about
freedom in current transaction will be important condition for VN in joining
WTO.
On the other hand, need flexible regulation about foreign exchange market
with subject participate in the market and market’s tools.
Funding transaction should be emphasized in management through cash
flow in and out of foreign account open by bank.

CHAPTER 2: : Vietnam’s management measures in
cotrolling foregin exchange market
Domestic currency devaluation: includes government interventions so that the
domestic currency becomes less valued.
- Domestic currency appreciation: includes government interventions so that the
domestic currency becomes more appreciated.
- Exchange rate behavior to a certain degree is the maintenance behavior of the
government to maintain a stable exchange rate.


- Do not intervene, let exchange rates fluctuate freely according to market supply
and demand.

Depending on the nature of the impact on the direct or indirect exchange rate
policy, the tools are divided into two groups: direct tools and indirect tools.
1
-

-

Direct tools
This is the activity of Central Bank on the foreign exchange rate through the
buy or sell domestic currency to maintain the fixed exchange rate ( in the
fixed exchange rate regime), or the effect makes exchange rate changes to a
level according to the set target (floating exchange rate regime). To
intervene, Central Bank has to have a sufficient amount of foreign exchange
reserves.
Besides it, we have to talk about the government administrative
interventions:

+ The Government stipulates that natural persons and legal entities with foreign
currency revenues must sell a certain percentage within a certain period to
organizations licensed to deal in foreign exchange.
+ Promulgation of regulations: regulations restrict the buyers and the number of
foreign currency purchases, restrictions on the use of foreign currencies and on
the time of buying foreign currencies.
With the trend of opening economy, free trade and financial liberalization,
administrative interventions are becoming increasingly inappropriate. So the
world trends to use the market tools.
2

Indirect tools

It includes some tools like: rediscount rates, tariffs, qoutas, prices,… in which
rediscount rates are most commonly used.
-

-

Rediscount Rates: Central Bank increases rediscount rate will effect on
market interest rate; when the market interest rate raises, foreign currency
capitals run into to make domestic currency increases. And when rediscount
rate decrease, the domestic currency will fall down.
Tariffs: High tariff will makes limit import, the foreign currency demand
also decrease, leading to domestic currency increase. Low tariff has opposite
effect.


-

Qoutas: Have the same effect like tariff
Prices: Through the price, Government can support price for strategic
exports goods or in early stages of production. Export subsidies help
increase export volume and domestic currency raises. Besides, government
price subsidies for necessary goods import, it makes domestic currency
decrease.

In addition to, government also has other measures:
-

Adjusting the reserve requirement ratio in foreign currency for commercial
banks
The ceiling interest rate regulation is less attractive to deposits in foreign

currency.
Currency status regulation for commercial banks in addition to preventing
exchange rate risk, while limiting foreign currency speculation, reducing the
pressure on the exchange rate when supply and demand imbalance.

System of intervention tools in foreign exchange management
1

Discount Policy: This method usually use to adjust exchange rate on the
market. Although the tool is used frequently in countries around the world,
the discount rate policy has certain limitations because the relationship
between exchange rate and interest rate is only indirect.
In Vietnam, capital inflows, mainly from foreign investment, indirect
investment and short-term capital flows in recent years, are likely to be too
low. Therefore it makes discount policy can not be a powerful tool in
changing the currency flows in general and foreign currency in particular the
impact of interest rates.


2

The foreign exchange market operations: This is one of the important
measures of government to maintain the stability of the purchasing power of
the national currency. This is also a direct measure of the impact on the
exchange rate. Through this operation, Central Bank can intervene in a
flexible, quick and efficient way.

3

Exchange Stabilization Fund: In situations where market prices are always

volatile or fluctuations, countries often use the exchange stabilization fund
as one of the tools to adjust the exchange rate. The source of funds for the
formation of the exchange stabilization fund may be:
- Issue treasury bonds in national currency.
- Use gold to fund exchange stabilization.

4

Currency devaluation tool:
- Devaluing a currency is raising or lowering the purchasing power of that
currency relative to other currencies. The result of currency devaluation
will directly affect the increase or decrease of the exchange rate.
Devaluing the currency is a powerful and extreme measure that is used
only in rich economies but is confronted with the economic downturn
coupled with increasingly severe inflation or the lost balance of
payments.
- In Vietnam, we have only done a low level of currency depreciation. We
are still trying to use all other possible measures to manage the exchange
rate before using the devaluation tool. Recently the VND has been under
pressure to depreciate and many economists have suggested using this
tool in the current Vietnamese economy.
Vietnam's exchange rate mechanism from 1989 to 2013
Time
Before 1989

Mechanism of
application
Multiple rate
regime

Characteristics of the real exchange
rate regime
- Three official rates.
- The free market rate exists in parallel
with the exchange rates of the state.
- The official exchange rate (OER) are
unified.
- OER is adjusted by the central bank
based on the signals of inflation,
interest rates, payment balance and free


1989 - 1990

Crawling bands

1991 - 1993

Pegged
exchange rate
within horizontal
band

1994 - 1996

Conventional
fixed
peg arrangement

1997 - 1998

Crawling bands

market rates.
- Commercial banks are allowed to set
trading rates within +/- 5%.
- The use of foreign currency is strictly
controlled.
- Controlling the use of foreign
currencies more closely; Limit bringing
money out of borders.
- Set up official foreign exchange
reserves to stabilize exchange rates.
- Established two foreign exchange
trading floors in Ho Chi Minh City and
Hanoi.
- OER is formed based on bidding rates
on both exchanges; The central bank
intervened strongly on the two
exchanges.
- Exchange rates at commercial banks
fluctuate less than 0.5% announced
OER.
- The interbank foreign exchange
market was formed to replace the two
exchange trading floors; The SBV
continues to strongly intervene in this
market.
- OER is formed and announced based
on interbank rates.

- Exchange rates at commercial banks
fluctuate in the +/- 0.5% OER band. By
the end of 1996, the amplitude was
widened from less than +/- 0.5% to +/1% (November 1996).
- OER kept stable at 11.100VND /
USD
- Exchange rates at commercial banks
compared to OER widened from +/1% to +/- 5% (February 1997) and
from +/- 5% to +/- 10% ( October 13th
1997) and then adjusted down to no
more than 7% (August 7th 1998).


1999 - 2000

Conventional
fixed
peg arrangement

2001 - 2007

Crawling peg

2007 - 2013

Conventional
fixed
peg arrangement

- OER was adjusted to 11,800VND /

USD (February 16th 1998) and
12,998VND / USD (August 7th 1998)
- The OER announced the interbank
average on the previous day (February
28th, 1999)
- Exchange rates at commercial banks
dropped to no more than 0.1%.
- OER is fixed at 14,000VND / USD
- OER was gradually adjusted from
14,000 VND / USD in 2001 to 16,100
VND / USD in 2007.
- The exchange rate band at
commercial banks was adjusted to +/0.25% (from July 1st 2002 to December
31st 2006) and +/- 0.5% in 2007
- OER kept unchanged at 20,828
VND / USD from January 2012 to Jun
28th 2013, increased to 21,036 VND /
USD
- Trading band is fixed +/- 1%
Sources: Central Bank.