MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY -oo0oo - PHD STUDENT: NGUYEN THI THU HIEU LIMITING THE DOLLARIZATION STATUS IN VIETNAM SUMMARY OF DOCTORAL DISSERTATION IN ECONOMICS HO CHI MINH CITY – 2019 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY -oo0oo - PHD STUDENT: NGUYEN THI THU HIEU LIMITING THE DOLLARIZATION STATUS IN VIETNAM SUMMARY OF DOCTORAL DISSERTATION IN ECONOMICS MAJOR: FINANCE - BANKING CODE: 9.34.02.01 SUPERVISOR: PROF PHD NGUYEN THANH TUYEN HO CHI MINH CITY – 2019 -1- CHAPTER LITERATURE REVIEW 1.1 THE NECESSITY OF THE STUDY With the process of strong economic integration, the transitional economies have attracted a large amount of foreign currency through different channels These foreign currencies are important resources in helping countries in transition process to promote economic development However, these countries have been facing the phenomenon of dollarization in the economy Dollarization is often seen as an indispensable product, an objective entity linked with the operating mechanism of an open economic system, so the content of this phenomenon itself has shown its positivity However, when an economy is dollarized, the process of regulating money supply of the central bank is difficult, as well as seriously affects the balance of the foreign exchange market Besides, when the contents of dollarization are abused by subjective and spontaneous elements of members of society, or when the economic management agencies not have effective measures to control its negative sides, dollarization will lead to unpredictable consequences for the economy - society In the same situation like most other developing countries, Vietnam has had a long history of using the US dollar in parallel with the Vietnamese currency since the 1960s After the reunification of Vietnam in 1975, Vietnam’s economy experienced a long period of difficulties and failures in the price-wage-money policy of the domestic currency, from which the public lost faith in the value of VND, the trend of gold and foreign currencies increases, which made the phenomenon of dollarization become more complicated Although there have existed a great number of studies on dollarization in the world as well as in Vietnam However, the reality shows that the dollarization status is still quite complicated, affecting the economic stability and growth in the process of integration Especially, there are still no effective ways to deal with this phenomenon in the Vietnamese economy Therefore, the author chooses the -2- topic: “Limiting the dollarization status in Vietnam” as a research topic for her doctoral thesis 1.2 REVIEW OF RELATED STUDIES In the ability of approaching materials of the author, the researches on dollarization in Vietnam mention the process of dollarization in Vietnam in terms of causes, impacts and solutions in specific periods However, there are still scientific gaps as follows: (1) Regarding the research objectives, there have existed no studies on the correlation between the dollarization status and macroeconomic indicators such as: inflation, exchange rates, interest rates, foreign exchange reserves, ; (2) Regarding the scope of the study, there have been no studies on the comprehensive evaluation of impact of dollarization phenomenon on the economy before, during and after Vietnam’s accession to WTO according to the following criteria: deposit dollarization, loan dollarization, cash dollarization, dollarization of valuation and prices; (3) Regarding the research method, there have been no studies examining the correlation between the phenomenon of dollarization and the macroeconomic indicators in short-term as well as long-term 1.3 OBJECTIVES AND RESEARCH QUESTIONS Objectives: the thesis is conducted to obtain one main aim and three specific objectives The main aim is: to examine the dollarization status of the Vietnamese economy, to determine the correlation between the dollarization status and the macroeconomic indicators, thereby suggest some policies to limit the dollarization status in Vietnam Specific objectives are: (1) to analyze the dollarization status, to identify the causes and impacts of dollarization on the economy from 1992-2017; (2) to Identify the correlation between the dollarization status and the macroeconomic indicators such as: economic growth, foreign exchange reserves, exchange rates, inflation, interest rates, ; (3) to propose solutions to limit the dollarization status in the Vietnamese economy Research questions to achieve the objectives: (1) How does the dollarization phenomenon in Vietnamese happen through stages? What causes this phenomenon? -3- How does it affect Vietnam's economy? What measures have been used by the Government to deal with the dollarization status? (2) Is there a correlation between the dollarization status and the macroeconomic indicators such as inflation, exchange rates, interest rates, foreign exchange reserves, ? If yes, what is the direction and degree of impact? (3) What are measures to limit dollarization status of the Vietnamese economy in the background of integration? 1.4 THE SUBJECTS AND SCOPE OF THE STUDY - Research subjects: the dollarization status, its causes, the relationship between the dollarization status and the macroeconomic indicators The dollarization status is evaluated based on criteria: deposit dollarization, loan dollarization, cash dollarization, dollarization of valuation and pricing Among them, the study focuses on the deposit dollarization and the loan dollarization The macroeconomic indicators include: inflation, exchange rate, interest rate, GDP growth, foreign exchange reserves and import and export value - Scope of research: Regarding space, Foreign currency deposits and foreign currency loans on the total deposits and loans of individuals and businesses in the commercial banking system in Vietnam; In terms of time: the study examines the period from 1992 to 2017 1.5 RESEARCH METHODOLOGY The study uses a systematic approach and dialectical materialism method, with the use of descriptive statistical methods, synthetic analysis method combined with comparative and interpretative methods to explain for the research problems used throughout the thesis In addition, the thesis uses the method of quantitative regression with the Vector Error Correlation Model (VECM), processed through Eviews 8.0 software to solve the research question -4- 1.6 RESEARCH DIAGRAM Resesarch problems Resesarch objectives Reseach methodology Qualitative method Quantitative method • Current situation of dollarization • Causes of dollarization • Solutions to resolve dollarization implemented by the Government • The relationship between the status of deposit dollarization and monetary indicators • The relationship between the status of loan dollarization, economic growth and export Summaries Findings General conclusions Solutions and Requests 1.7 CONTRIBUTIONS OF THE STUDY Firstly, on the basis of systematizing general theories on dollarization, the thesis evaluates comprehensively on the dollarization status in the Vietnamese economy since its opening until now (from 1992 to 2017) The thesis also identifies the causes of dollarization, analyzes and evaluates successes and limitations of measures to overcome the dollarization status implemented by the Government during the study period Secondly, in the research period, the dissertation has provided empirical evidence on the relationship between the phenomenon of deposit dollarization and some macro variables under the impact of the deposit rate ceiling policy Research results show: (1) Foreign exchange reserves and deposit interest rates of domestic currency have a negative impact on the situation of deposit dollarization; (2) Parallel market profits, foreign currency deposit rates, exchange rates and inflation have a -5- positive impact on the deposit dollarization status; (3) The policy of mobilizing twoceiling interest rates with USD deposit rate of 0% brings a good result, helps reduce the deposit dollarization in stable macroeconomic conditions Thirdly, in the research period, the thesis examines the relationship between the status of loan dollarization and economic growth and exports Results show that the status of loan dollarization has a negative impact on the economic growth; a positive impact on exports in the short term; and a positive impact on the dollarization status and the differential in costs paid when borrowing VND compared with USD 1.8 ORGANIZATION THE STUDY The study consists of chapters: Chapter 1: The literature review Chapter 2: Theoretical background of dollarization Chapter 3: The dollarization status in Vietnam in the period from 1992 to 2017 Chapter 4: Empirical evidence of the relationship between dollarization and macroeconomic indicators Chapter 5: Conclusions and solutions to limit dollarization in Vietnam CHAPTER THEORETICAL BACKGROUND OF DOLLARIZATION 2.1 DOLLARIZATION IN ECONOMY 2.1.1 General theories on dollarization and the dollarization status 2.1.1.1 Dollarization ❖ Definition: dollarization is a phenomenon of a currency of any countries in the world appearing in the economy of another country in any forms, regardless the acceptance or disapproval of the Government of that country In other words, dollarization is the phenomenon of people using money not issued by the Government of that country ❖ Classification: Based on the legality of foreign currency including official dollarization, unofficial dollarization and semi-official dollarization; Based on the -6- monetary functions including dollarization replacing assets, dollarization replacing payment also known as the currency dollarization, dollarization of listed valuation, financial dollarization; Based on the mechanism of foreign currency occurrence including deposit dollarization, loan dollarization, cash dollarization and dollarization listed evaluation 2.1.1.2 The dollarization status in economy The phenomenon of dollarization in economy reflects the rates of use of foreign currency to monetary functions regardless the Government’s acceptance or disapproval Based on the classification criteria, dollarization is often quantified according to different criteria Two commonly used criteria (according to IMF): Deposit dollarizations: DDI = FCD TD (FCD: Foreign currency deposits, TD: total deposit) Loan dollarization: LDI = FCL TL (FCL: Foreign currency loans, TL: Total loan) From the calculation results, dollarization will be assessed according to levels: high (> 30%), average (from 10% to below 30%) and low (0) because holding foreign currency will be more beneficial than the domestic currency ( r  r * +E ) and vice versa • Deposit dollarizations and interest rates If foreign currency interest rate is higher than that of domestic currency, deposit dollarization increases (r*e>re) Conversely, deposit dollarization decreases, re > r*e - 19 - 4.2.1.1 Building research model Model: Yt = [DDIt, RESt, DIF_CEt, PERFt, R_USDt, R_VNDt, ERt, CPIt] (4.4) Table 4.1: Variables and data sources Variables Deposit Dollarization Symbols Variables used/ Calculation Method Source DDIt Foreign currency deposit / Total deposit IFS RESt Total international reserves (except for gold) IFS Foreign exchange reserves Gap of deposit rate ceiling Parallel market profits Deposit rate ceiling VND ( R ce VND ) – Deposit DIF_CEt rate ceiling USD ( R ceUSD ) ER F − ER C  100% ER C PERFt ERF: Free market selling rate; ERC: Commercial bank selling rate (average number) Deposit interest rates USD Deposit interest rates VND Exchange rate USD/VND Inflation The SBV Tygiadola com VCB R_USDt Deposit interest rates for 3-month term VCB R_VNDt Deposit interest rates for 3-month term IFS, VCB ERt CPIt Official exchange rate issued by the SBV (average number) Consumer price index (2010 = 100) The SBV IFS Source: The author Variables of deposit dollarization (DDIt), foreign exchange reserves (RESt), exchange rates (ERt), inflation (CPIt) are all in natural base of logarithms The data are according to the frequency of the month, starting from January 2008 to December 2017 and dividing the model (4.4) into phases with the aim of evaluating the role of one-ceiling operating mechanism of deposit interest rates of VND (from January 2008 to March 2011 - referred to as the period before April 2011) compared to the mechanism of operating ceilings of deposit interest rates VND and - 20 - USD (from April 2011 to now - referred to as the period after April 2011) The reason for such division is because: For VND: at the beginning of 2008, the maximum of the deposit interest rate was 12%; on May 19, 2008, Decision No 16/QD-NHNN: Deposit interest rates and lending interest rates not 150% of the basic interest rate announced by the SBV; For foreign currencies, the deposit interest rate ceiling has been applied since April 13, 2011 according to Circular 09/2011 of the SBV The order of verifying the VECM model is as follows: (1) Verifying the condition of estimating VECM, including: (i) Testing the stop of the data series, (ii) Selecting the optimal delay based on the results estimated of VAR model, (iii) Testing cointegration relationship with optimal delay by Johanson method, (iv) Testing of variable elimination; (2) Estimating VECM model; (3) Verification of VECM’s residuals: (i) Standard distribution of residuals, (ii) Chain correlation of residuals, (iii) General stability of the model to ensure the reliability of the estimation results; (4) Analysis of VECM estimation results 4.2.1.2 Research findings a) Testing application conditions VECM ❖ Stationarity analysis By the methods of Augmented Dickey Fuller (ADF) and Phillips - Person (PP) is stationarity analysis Test results (details in Appendix A.1 and B.1) show that all the variables non-stationarity at the root level I (0), but all stationarity at the first difference I(1) with the level meaning of 1% and 5% ❖ Lag selection: Select according to SC crietion and based on the stability of the model (details in Appendix A.2 and B.2) ❖ Cointegration test: By Johanson method, there are at least cointegration equations adopted (Appendix A.3 and B.3) ❖ Testing parameter restrictions: • Long – run exclusion test: As a result, none of the variables were eliminated in the long-run cointegration relationship at the level of 5% (Appendix A.4 and B.4) - 21 - Figure 4.3: Long – run exclusion test results LDDI LRES DIF_CE PERF R_USD R_VND LER LCPI Period from January 2008 to March 2011 Chi-square(3) 13.09 13.14 41.71 37.13 25.63 37.06 29.04 18.66 Probability 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Period from April 2011 to December 2017 Chi-square(3) 68.33 22.37 18.09 8.71 15.62 14.71 13.67 7.84 Probability 0.00 0.00 0.00 0.03 0.00 0.00 0.00 0.04 Source: The analysis of the author • Weak exogeneity test: As a result, in both phases, the variables are statistically significant at 10%, except DIF_CE in the first phase It means that, in short term, before April 2011, DIF_CE had no effect on DDI, or DDI was affected by the policy of two-ceiling interest rates (VND and USD) more strongly than the policy of one-ceiling interest rates (Appendix A.5 and B.5) Figure 4.4: Weak exogeneity test results LDDI LRES DIF_CE PERF R_USD R_VND LER LCPI Period from January 2008 to March 2011 Chi-square(3) 6.28 9.63 5.19 27.53 10.84 21.62 19.94 7.69 Probability 0.09 0.021 0.15 0.00 0.01 0.00 0.00 0.05 Period from April 2011 to December 2017 Chi-square(3) 12.23 11.73 25.25 7.63 74.16 8.61 8.53 11.04 Probability 0.00 0.00 0.00 0.05 0.00 0.03 0.03 0.01 Source: The analysis of the author b) Estimating VECM model Qualify to estimate VECM, conduct estimation and obtain regression results, impulse response function and variance decomposition, specifically: ❖ Regression results Table 4.5 and Table 4.6 below only show statistical results, details of regression results are presented in Appendix A.6 and B.6 - 22 - Table 4.5: Results of estimation of VECM in the period from January 2008 to March 2011 Error Correction: D(LDDI) CointEq1 D(LRES) D(DIF_CE) -0.177649* (0.09394) [-1.89111] -0.013339** (0.00586) [-2.27596] D(LDDI(-1)) 0.395730* (0.22907) [ 1.72756] D(R_USD) D(R_VND) 24.73035*** (5.49243) [ 4.50263] CointEq2 CointEq3 D(PERF) -0.550901** (0.25298) [-2.17761] D(LER) D(LCPI) 0.114329*** (0.03565) [ 3.20687] 29.11585*** (4.57528) [ 6.36373] -2.319055** (0.98769) [-2.34797] -0.051762* (0.02970) [-1.74294] 1.036653** (0.44735) [ 2.31733] -0.226107** (0.09657) [-2.34136] -0.012645*** (0.00290) [-4.35479] -0.036239** (0.01524) [-2.37790] 0.255354** (0.11349) [ 2.25001] D(LRES(-1)) 0.169126* (0.08024) [ 2.10763] D(DIF_CE(-1)) -0.013706* (0.00754) [-1.81852] 0.838459* (0.44067) [ 1.90268] D(PERF(-1)) 0.281166* (0.15147) [ 1.85630] D(R_USD(-1)) 2.113304** (0.96247) [ 2.19571] D(R_VND(-1)) -0.011327* (0.00673) [-1.69401] D(LER(-1)) 0.716516** (0.39646) [ 1.80728] 0.249764** (0.09513) [ 2.62551] 0.480361*** (0.16325) [ 2.94243] -0.097608* (0.05611) [-1.73951] 1.214964** (0.51340) [ 2.36652] -1.341521** (0.51756) [-2.59199] 0.002184** (0.00098) [ 2.22106] -0.012229*** (0.00333) [-3.66956] 11.89107* (6.53256) [ 1.82028] D(LCPI(-1)) 154.5411*** (49.6965) [ 3.10970] 0.481218*** (0.16553) [ 2.90706] C -2.597500 (0.75132) [-3.45725] 0.005930 (0.00250) [ 2.36940] Source: The analysis of the author - 23 - Table 4.6: Results of estimation of VECM in the period from Aprial 2011 to December 2017 Error Correction: D(LDDI) CointEq1 -0.230712*** (0.07866) [-2.93292] CointEq2 D(LRES) D(DIF_CE) D(PERF) 5.193282*** 4.094139* (1.03380) (2.42166) [ 5.02351] [ 1.69064] -0.307505*** (0.07223) [-4.25740] -0.082100*** (0.02648) [-3.10095] CointEq3 D(LDDI(-1)) D(LDDI(-2)) D(LRES(-1)) D(LRES(-2)) -3.613014** (1.72592) [-2.09338] -0.194637** (0.07418) [-2.62373] -0.133764* (0.07485) [-1.78710] D(R_USD) -3.738149*** (0.31305) [-11.9412] 0.812886*** (0.15096) [ 5.38493] 0.405961*** (0.05533) [ 7.33660] 3.284083*** (0.57472) [ 5.71424] 1.964383*** (0.52263) [ 3.75863] D(R_VND) 1.936894* -0.013169* (1.01701) (0.00775) [ 1.90450] [-1.69820] 0.012740*** (0.00374) [ 3.40712] 0.004417*** (0.00137) [ 3.22246] 3.902471** (1.86712) [ 2.09010] 0.322399** (0.14126) [ 2.28238] -1.908130* (0.98368) [-1.93978] 4.041740* (2.30426) [ 1.75403] 0.007051* (0.00366) [ 1.92679] 0.006613** (0.00328) [ 2.01759] D(DIF_CE(-2)) 0.015068* (0.00882) [ 1.70844] -0.043134** (0.01843) [-2.34000] -0.032818* (0.01820) [-1.80369] D(PERF(-2)) D(R_USD(-2)) -0.684504** -2.091646** (0.34177) (0.80060) [-2.00279] [-2.61259] D(R_VND(-1)) 0.226740*** (0.08110) [ 2.79574] -37.85836*** (5.81301) [-6.51270] -22.96778*** (6.11833) [-3.75393] -4.903740* (2.60436) [-1.88290] -0.187825** -0.479907** 0.113634*** (0.07981) (0.18696) (0.02417) [-2.35334] [-2.56691] [ 4.70180] D(LER(-1)) D(LER(-2)) D(LCPI(-2)) C -0.014659** (0.00631) [-2.32262] -0.009608*** (0.00231) [-4.15277] -2.351661** (0.96771) [-2.43013] -0.183708** (0.08752) [-2.09908] 0.010207** (0.00463) [ 2.20367] D(LCPI) 0.039660*** (0.01234) [ 3.21303] D(DIF_CE(-1)) D(PERF(-1)) D(LER) -0.686095** (0.33623) [-2.04058] Source: The analysis of the author -0.357499*** (0.10889) [-3.28311] 0.001586*** 0.003542*** (0.00060) (0.00101) [ 2.64879] [ 3.50561] - 24 - ❖ Results of impulse response Figure 4.2: The reaction of the deposit dollarization with 1% of the variables from January 2008 to March 2011 Response of LDDI to LDDI Response of LDDI to LRES Response of LDDI to DIF_CE 1.00 1.00 1.00 0.75 0.75 0.75 0.50 0.50 0.50 0.25 0.25 0.25 0.00 0.00 0.00 -0.25 -0.25 -0.25 -0.50 -0.50 10 12 14 16 18 20 22 -0.50 24 Response of LDDI to PERF 10 12 14 16 18 20 22 24 1.00 1.00 0.75 0.75 0.75 0.50 0.50 0.50 0.25 0.25 0.25 0.00 0.00 0.00 -0.25 -0.25 -0.25 -0.50 -0.50 10 12 14 16 18 20 22 10 12 14 16 18 20 22 24 20 22 24 -0.50 24 Response of LDDI to R_VND 1.00 Response of LDDI to R_USD Response of LDDI to LER 10 12 14 16 18 20 22 24 20 22 24 10 12 14 16 18 Response of LDDI to LCPI 1.00 1.00 0.75 0.75 0.50 0.50 0.25 0.25 0.00 0.00 -0.25 -0.25 -0.50 -0.50 10 12 14 16 18 20 22 24 10 12 14 16 18 Figure 4.3: The reaction of the deposit dollarization with 1% of the variables from April 2011 to December 2017 Response of LDDI to LDDI Response of LDDI to LRES Response of LDDI to DIF_CE 03 03 03 02 02 02 01 01 01 00 00 00 -.01 -.01 -.01 -.02 -.02 10 12 14 16 18 20 22 -.02 24 Response of LDDI to PERF 10 12 14 16 18 20 22 24 03 03 02 02 02 01 01 01 00 00 00 -.01 -.01 -.01 -.02 -.02 10 12 14 16 18 20 22 Response of LDDI to LER 10 12 14 16 18 20 22 24 20 22 24 Response of LDDI to LCPI 03 03 02 02 01 01 00 00 -.01 -.01 -.02 -.02 10 12 14 16 18 20 22 24 10 12 14 16 18 20 22 24 20 22 24 -.02 24 Response of LDDI to R_VND 03 Response of LDDI to R_USD 10 12 14 16 18 Source: The analysis of the author 10 12 14 16 18 - 25 - ❖ Results of variance decomposition Table 4.7: Decomposition of variance of DDI Period S.E LDDI LRES DIF_CE PERF R_USD R_VND LER LCPI 0.000000 0.495861 0.339740 0.277985 0.256544 0.000000 10.39811 12.64411 12.74795 12.91406 0.000000 4.944178 3.550828 2.623592 2.033982 0.000000 1.055848 1.615985 1.859640 2.062618 Period from January from 2008 to March 2011 12 18 24 0.027770 0.125164 0.194637 0.236380 0.273699 100.0000 76.24983 57.70258 55.86788 54.76843 0.000000 0.977780 4.680728 5.136346 5.331833 0.000000 0.814130 0.397342 0.374577 0.347594 0.000000 8.265729 16.58884 17.33024 17.81935 0.000000 0.895367 3.265310 3.501780 3.621221 0.000000 1.903191 4.381352 4.763238 4.940965 Period from April 2011 to December 2017 12 18 24 0.021660 0.052690 0.076284 0.098187 0.118687 100.0000 64.03969 58.08687 54.48493 51.15597 0.000000 13.03996 8.468995 7.178807 6.100142 0.000000 6.742469 12.01313 18.11458 22.88908 0.000000 4.791721 7.053852 5.079157 3.850554 0.000000 1.580599 0.833253 0.505543 0.378118 0.000000 3.805531 8.377084 10.15376 11.52954 Source: The analysis of the author c) Testing of VECM’s residuals Test results of Portmanteau and LM show that the remainder of VECM does not have self-correlation phenomenon, White test does not indicate the phenomenon of heteroscedasticity and characterized experimental autoregression and all selfregression specific solutions are in the unit circle so the model has stability (details in Appendix A.7 and B.7) d) Analysis of VECM estimation results Firstly - for foreign exchange reserves (RES): the larger the foreign currency reserves are, the less deposit dollarization is (column 2, line 1, Figure 4.2 and Figure 4.3) Secondly - for the gap of deposit rate ceiling (DIF_CE) In the period before April 2011, the cumulative reaction of DDI decreased due to the shock of 1% decrease of DIF_CE (Figure 4.2) In the period after April 2011, the cumulative reaction of DDI increased due to the shock of 1% increase of DIF_CE (Figure 4.3) Thus, DIF_CE has the same directional impact with DDI in the period of stable exchange rate, low inflation, or DIF_CE > ∆ER + CPI (Period from April 2011 - 26 - to December 2017) In opposite situation, DDI has opposite reaction It can be proved ce ce that, in the period Show that in the period RUSD =0%, RVND >∆ER + CPI, DDI decreases Thirdly - for parallel market profitability (PERF): parallel market makes deposit dollarization increase Fourthly - for foreign currency deposit interest rate (R_USD) In the period before April 2011, DDI increased rapidly, reaching the highest ce level of 1.42% after months After the SBV applied the policy RUSD , DDI reacted very weakly with an increase of 0.06% in the second month, then decreased to 0.47% in the 4th month and gradually increased before reaching the new balance after 11 months The results of variance decomposition in Table 4.7 also provide significant evidence about the differential in the impact of R_USD on the movement of DDI in the two phases When the SBV applied the policy of the deposit interest ceiling for USD, R_USD only explained for 1% of DDI’s movements after 12 months Figure 4.6: Cumulative reaction of DDI due to the shock 1% R_USD Period from 01/2008 to 03/2011 Period from 04/2011 to 12/2017 Source: The analysis of the author Fifthly - for domestic currency deposit rate (R_VND): DDI decreases when R_VND increases Sixthly - for exchange rates (ER) and inflation (CPI): exchange rates and inflation have a positive impact on deposit dollarization In summary, the model (4.4) has the following results: (1) foreign currency reserves and domestic currency deposit rates have a negative impact on deposit dollarization; (2) Parallel market profit, foreign currency deposit rates, exchange rates and inflation have a positive impact on deposit dollarization; (3) The policy of two- - 27 - ce ceiling interest rate with RUSD =0% has a very good impact in reducing deposit dollarization in a stable macroeconomic condition 4.2.2 The relationship between loan dollarization and economic growth and exports 4.2.2.1 Building research model The relationship between loan dollarization status, export activity and economic growth is shown in the following model: Yt = [LDIt, GDPt, DDIt, EXt,IRDt] (4.5) Official figures on foreign currency credit are published by the IMF and the SBV by years (from 2015 to 2017, statistics of IFM is done every months), so the variables in equation (4.5) are taken according to years in the period from 1992 to 2017 Table 4.8: Variables and data sources Variable names Symbols Variables used/ Calculation method Loan dollarization LDIt Foreign currency credit /Total credit Economic growth GDPt GDP index (%) DDIt Foreign currency deposit / Total deposit Deposit dollarization differential in cost to pay Export IRD = LSCVvnd − LSCVusd − ER Source IFS, SBV GSO IFS, SBV IFS, IRDt ER t − ER t −1 ER = 100 ER t −1 VCB EXt Export value IFS Source: The author All variables take the natural base logarithm (except for the variable IRDt because in some cases, this variable has a negative number) The results of variables are non-stationarity in the original I(0) and stationarity at the first difference I(1) (Appendix C.1) and have a cointegration relationship (Appendix C.3) Hence, the thesis still uses the VECM model to estimate equation (4.5) in the order in section 4.2.1.2 The estimation results as well as the stability test of the model are detailed in Appendix C.4; Appendix C.5 - 28 - 4.2.2.2 Research findings The results of estimating the cointegration equation in Table 4.9, in long-term, LDI has a negative relationship with GDP, has a positive relationship with DDI and IRD at the level of 1%, EX and LDI not have long-term relationship Table 4.9: Results of estimating the cointegration equation LLDI 1.000000 LGDP LDDI LEX IRD 1.658370*** (0.14700) [ 11.2817] -1.030840*** (0.11159) [-9.23796] -0.076727 (0.04475) [-1.71443] C -0.013747*** -2.070719 (0.00416) [-3.30706] Source: The analysis of the author In short - run model (Table 4.10), the LDI makes EX increase but has no or less impact on GDP (because the estimation coefficient does not have statistical significance) Table 4.10: Results of estimating short-run equations Error Correction: D(LLDI) D(LGDP) CointEq1 D(LDDI) -0.272626** (0.10743) [-2.53762] D(LLDI(-1)) 0.414154** (0.19712) [ 2.10098] D(LEX) D(IRD) 0.181678** (0.08316) [ 2.18475] -10.21177** (3.91625) [-2.60753] 0.288957* (0.16789) [ 1.72115] Source: The analysis of the author Figure 4.7: Cumulative reaction of GDP and EX due to the shock of 1% of LDI Response of LEX to Cholesky One S.D LLDI Innovation Response of LGDP to Cholesky One S.D LLDI Innovation 12 02 00 10 -.02 08 -.04 -.06 06 -.08 04 -.10 02 -.12 10 12 14 16 18 20 22 24 10 12 14 16 18 20 22 24 Source: The analysis of the author The cumulative reaction results of GDP and EX due to the shock of 1% of LDI in Figure 4.7 show that the EX increases whereas GDP decreases - 29 - Figure 4.8: Cumulative reaction of LDI due to the shock of 1% of DDI and IRD Response of LLDI to Cholesky One S.D LDDI Innovation Response of LLDI to Cholesky One S.D IRD Innovation 05 006 005 04 004 03 003 02 002 01 001 00 000 10 12 14 16 18 20 22 24 10 12 14 16 18 20 22 24 Source: The analysis of the author The results of the estimation of long-run relationship (Table 4.9) and LDI’s cumulative reaction increasing to the shocks of IRD and DDI (Figure 4.8) prove that there exists a positive relationship among these variables In summary, the VECM model (4.5) has the following results: (1) loan dollarization has a positive relationship with deposit dollarization and there is a differential in costs which must be paid when borrowing VND compared with USD; (2) loan dollarization has a positive relationship with exports in the short term; (3) loan dollarization has a negative relationship with economic growth CONCLUSION OF CHAPTER In chapter 4, the thesis uses VECM model to deal with the problems: (1) The relationship between the deposit dollarization and the monetary variables under the impact of the deposit interest rate ceiling policy, (2) The relationship between loan dollarization with economic growth and export CHAPTER CONCLUSIONS AND SOLUTIONS LIMITING DOLLARIZATION STATUS IN VIETNAM 5.1 CONCLUSIONS 5.1.1 General conclusions on dollarization status in Vietnam Vietnam is no longer among the countries with high dollarization, deposit and loan dollarization tends to decrease but not stably, activities of payment, valuation, listing and illegal trading are gradually narrowed and regularly inspected and - 30 - supervised by authorities However, the volume of foreign currency and gold floating outside the banking system still remains and is used as a means of payment Foreign currency trading locations still exist and illegal trading is still taking place The belief in VND value is not high 5.1.2 Conclusions of factors affecting the deposit dollarization The relationship between deposit dollarization and macro variables is concluded as follows: (i) Exchange rate and inflation are always the decisive factor, having the same relationship with deposit dollarization Accordingly, to limit deposit dollarization, exchange rate must be kept stable and inflation must be kept at a low level; (ii) Exchange rate differential between official foreign exchange market and unofficial foreign exchange market has the same relationship with deposit dollarization For this reason, to restrict dollarization, effective solutions have to be given to eliminate these two exchange rates; (iii) foreign exchange reserves plays an essential role in reducing deposit dollarization and stabilizing foreign exchange market; (iv) the policy of two-ceiling interest rates and the ceiling of foreign currency deposit rate of 0% have a good influence in limiting deposit dollarization and keeping foreign exchange market stable in stable macro economy; (v) In the period of applying the USD deposit ceiling rate of 0% and the stable macro economy, the deposit interest rates of VND plays a decisive role in the situation of deposit dollarization; (vi) Beliefs and trend of storing gold and USD are deeply rooted in Vietnamese people’s thought Hence, the elimination of dollarization is a long-term program by keeping macro economy stable, thereby regain the trust in the value of VND 5.1.3 Conclusions of factors affecting loan dollarization The relationship between loan dollarization status and variables is concluded as follows: (i) deposit dollarization makes loan dollarization increase; (ii) loan dollarization depends heavily on the differential in cost which must be paid when borrowing VND compared with USD; (iii) loan dollarization does not promote economic growth; (iv) loan dollarization increases export value in a short term - 31 - 5.1.4 Conclusions of factors affecting the status of cash dollarization and valuation and listing dollarization The qualitative analysis shows that foreign exchange management policies are the main cause of cash dollarization and valuation and listing dollarization In addition, the thought of regarding gold and USD as a normal means of payment, which can be stored is also a crucial factor for dollarization In addition, the preference of imported products, corruption and smuggling also contribute to make the dollarization status in the Vietnamese economy worse 5.2 ORIENTATION AND OBJECTIVES OF THE STATE ON THE LIMITATION OF DOLLARIZATION Objectives: “Gradually reduce the ratio of foreign currency credit/total credit, strive for the proportion of foreign currency deposits/total payment to reach 7.5% by 2020 and 5% by 2030; gradually stop lending foreign currency and basically resolve the dollarization status by 2030” (Decision No 986/QD-TTg on 08/08/2018 of the Prime Minister) 5.3 SOLUTIONS TO LIMIT DOLLARIZATION IN VIETNAM A successful dollarization policy will increase the value of domestic currency compared with foreign currencies In Vietnam, to limit dollarization successfully, it is necessary to continue maintaining the stability of macro economy and use marketbased measures in combination with the following administrative measures: 5.3.1 Solutions to stabilize macro economy 5.3.1.1 Monetary policy Inflation and exchange rates have a relationship of the same direction, are decisive factors on holding foreign currencies of economic entities Therefore, it is necessary to regard the following points in operating monetary policies: ❖ Inflation must still be the highest priority target in the monetary policy There are frameworks of monetary policy: the monetary policy for controling volume, price and inflation For Vietnam, regardless of which monetary policy frameworks are applied, the highest priority target must still be controlling inflation, - 32 - thereby stabilizing the value of money, contributing to maintaining macroeconomic stability ❖ Exchange rate: continue to implement the regime of managed floating exchange rate with maintaining the central exchange rate mechanism ❖ Interest rates: continue to maintain the policy of two-ceiling interest rates, in which the deposit rate ceiling is equal to 0% 5.3.1.2 Fiscal policy and public debt management Operating fiscal policy tightly, reducing state budget overspending, strengthening management of investment projects funded by the state budget, combining with monetary policy in firmly maintaining macroeconomic stability and macro balances For public debt, focusing on developing the Government bond market in domestic currency, enhancing the efficiency of capital mobilization and the use of loans, fostering the inspection and supervision of the use of loans effectively to ensure the possibility of paying debts 5.3.2 Market-based solutions Firstly, to develop the foreign exchange market in mordern orientation in line with the trend of global economic integration, firstly, make market information clear and then develop the derivative foreign exchange market Secondly, supporting interest rates for the loan of VND for export, changing completely the relationship of loan-borrowning into buying-selling foreign currencies Thirdly, fostering foreign exchange reserves 5.3.3 Compulsory administrative solutions Firstly, completing the legal frameworks on foreign exchange management Secondlly, stating the origin of foreign currencies Thirdly, the agreement the policies of the management of foreign currency in the orientation of “In Vietnam, only VND is used to pay” 5.4 REQUEST 5.4.1 The SBV - 33 - It is essential for the SBV to strongly develop derivative affairs in the foreign exchange market appropriate with in accordance with international practices, creating conditions for all organizations and individuals to participate in the foreign exchange market publicly 5.4.2 The Ministry of Finance Allowing payment of VND in projects signed with foreign contractors doing construction works in Vietnam 5.4.3 The Ministry of Commerce Creating conditions for VND to be used in payments of import and export, eliminating the priority of selling foreign currencies for enterprises importing essential commodities such as petrol and pharmaceuticals on the basis of ensuring sufficient demand for legal foreign currences 5.4.4 Ministry of Public Security The Ministry of Public Security together with the SBV and market management agencies and People’s Committees at all levels constantly inspects and deals with violations of foreign exchange management policies such as price listing and valuation, payment, illegal trading in foreign currencies It is necessary to improve anti-smuggling work in border areas 5.4.5 Ministry of Culture and Information The Ministry of Culture and Information coordinates with the SBV to be responsible for providing information to mass media agencies on regulations of Ordinance on foreign exchange and propagating the policy of “In Vietnam, only VND is used to pay” CONCLUSIONS OF CHAPTER In chapter 5, the thesis presents conclusions on the dollarization status Based on these conclusions, policies to limit dollarization in the economy, including: solutions to stabilize macro economy combined with market-based solutions and mandatory administrative solutions, and give requests for relevant ministries and agencies to limit the dollarization status in Vietnam ... limit dollarization in Vietnam CHAPTER THEORETICAL BACKGROUND OF DOLLARIZATION 2.1 DOLLARIZATION IN ECONOMY 2.1.1 General theories on dollarization and the dollarization status 2.1.1.1 Dollarization... dollarization and semi-official dollarization; Based on the -6- monetary functions including dollarization replacing assets, dollarization replacing payment also known as the currency dollarization,... 2.1.3.2 Correlation between dollarization and macroeconomic indicators ❖ Correlation between deposit dollarization and macroeconomic indicators • Deposit dollarization and inflation Inflation ↑ purchasing