3, Effect of exchange rate movements on Vietnam’s economy
*in case of the exchange rate increases
-When the exchange rate is high, the value of the domestic currency is low, it makes the price of Vietnamese goods
abroad lower and cheaper than those of other countries, increasing competition and fast consumption of goods,
thereby creating conditions to expand and develop export activities.
Accordingly, for exporting businesses, being self-sufficient in domestic raw materials such as agricultural products,
and seafood... will benefit because of additional foreign currency revenue.
-Meanwhile, for importing businesses, an increase in exchange rates will cause the cost of input materials to
increase. For example, with fertilizers, importing businesses have to spend extra money on exchange rate
differences, which pushes up the cost price and forces business to increase domestic fertilizer prices.
-Normally when exchange rates increase, the cost of imported goods will increase, thereby affecting many goods
and services and also affecting the inflation situation in the country.
- Businesses with large foreign loans in USD and public debt (foreign loans) will have to spend additional money
from exchange rate differences. "This puts pressure on business and affects the balance of budget revenues and
expenditures,"
* how about the effect of exchange rate when it decreases
-When the exchange rate is low, meaning the value of the domestic currency is high, it will cause the price of
Vietnamese goods abroad to increase, becoming more expensive than goods from other countries, reducing
competitiveness and limiting consumption, thereby limiting the development of export activities. -
-for exporting businesses, being self-sufficient in domestic raw materials will less benefit
In contrast, for importing businesses, a decrease in exchange rates will cause the cost of input materials to decrease
- Businesses with large foreign loans in USD and public debt (foreign loans) will have to spend less money from
exchange rate differences
4, Central bank’s intervention: What are policies of Central Bank of Vietnam regarding the USD/VND
exchange rate for the last 3 years and next year?
The State Bank of Vietnam (SBV) manages the foreign exchange rate in Vietnam. The central bank uses a
combination of methods to control the exchange rate, and its approach has evolved over the years. Here are some
evidence of how the SBV has controlled the foreign exchange rate in the past:
The first one is Fixed Exchange Rate Regime: the SBV maintained a fixed exchange rate system where the
Vietnamese dong (VND) was pegged to the U.S. dollar (USD) at a specific rate. The SBV would intervene in the
foreign exchange market to buy or sell dollars to keep the exchange rate within the established band.
Devaluation: the SBV has devalued the VND to adjust the exchange rate. Devaluation involves officially lowering
the value of the VND against the USD. This policy can make Vietnamese exports more competitive in international
markets, potentially boosting economic growth.
Managed Float: the SBV has adopted a managed floating exchange rate system. The VND is on a managed float,
similar to a crawling peg, to the US dollar.
Foreign Exchange Reserves: The SBV has been known to use its foreign exchange reserves to stabilize the VND.
When there's pressure for the currency to depreciate, the central bank can intervene by using its reserves to buy
VND, thus reducing its supply in the market and supporting the exchange rate.Vietnam has dipped into its reserves
to the tune of around US$20 billion in 2021.At the end of 2021, according to the World Bank, Vietnam had total
reserves of just over US$109 billion. That’s just over 18 percent of its reserves that have been spent buying up
VND – a sizable chunk of its rainy-day fund.
And the last one is Capital Controls: The SBV has also implemented capital controls to limit the flow of capital in
and out of the country. These controls can include restrictions on the amount of foreign currency individuals and
businesses can hold and limitations on foreign direct investments.
Effects of SBV's Exchange Rate Control: there are five effects
Export Competitiveness: By managing the exchange rate, the SBV can influence the competitiveness of
Vietnamese exports. A weaker VND can make exports more attractive to foreign buyers, potentially boosting
export-oriented industries.
Inflation Management: Exchange rate policies can affect inflation in Vietnam. Devaluation, for example, can lead
to imported inflation as the cost of imported goods rises.
Foreign Investment: Exchange rate stability is crucial for foreign direct investment (FDI). A stable exchange rate
can provide confidence to foreign investors, while sharp fluctuations may deter investment.
Currency Reserves: The SBV's interventions in the foreign exchange market can impact the country's foreign
currency reserves. Maintaining an adequate level of reserves is essential for maintaining exchange rate stability.
Economic Growth: The exchange rate policy can influence overall economic growth. A stable and competitive
exchange rate can support economic expansion, while a volatile or overvalued currency may hinder growth.
