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

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

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NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAMS International Finance Topic : Current situation of foreign exchange marke in Vietnam and management measures GROUP 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 Vietnam’s foreign exchange market in 2014 Vietnam’s foreign exchange market in 2015 Vietnam’s foreign exchange market in 2016 CHAPTER : Vietnam’s management measures in cotrolling foregin exchange market CHAPTER 1: Current situation of foreign exchange market in Vietnam Vietnam’s foreign exchange market in 2014 Interbank rates was increased 1% by SBV In the first 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 - 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 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 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 $ 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 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 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 - - 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 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 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 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 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 ...TABLE OF CONTENT CHAPTER 1: Current situation of foreign exchange market in Vietnam Vietnam’s foreign exchange market in 2014 Vietnam s foreign exchange market in 2015 Vietnam s foreign exchange market... market in 2016 CHAPTER : Vietnam s management measures in cotrolling foregin exchange market CHAPTER 1: Current situation of foreign exchange market in Vietnam Vietnam’s foreign exchange market in. .. 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

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