CONTENT LIST OF TABLES. ii LIST OF FIRGURES. iv CHAPTER 1: INTRODUCTION.1 Background of the study.2 Overview of dollarization in Vietnam.3 Research objective and research question.5 Research finding and Limitation.6 Structure of Study.9 CHAPTER 2: LITTERATURE REVIEW.1 Definition of dollarization.2 Impact of the dollarization to economy.3 Reason of dollarization.5 Some determinant of dollarization. 22 CHAPTER 3: RESEARCH METHODOLOGY.
35 CHAPTER 4: RESULTS AND ANALYSIS.1 Unit root test.2 Optimal lag selection.3 Johansen Cointegration test.6 Impulse Response Function. 48 CHAPTER 5: CONCLUSION, CONTRIBUTION AND IMPLICATIONS OF RESEARCH.1 Contribution and implication of study. 75 i LIST OF TABLES Table 3.1: Notation of variables.1: The result of Unit Root test.2: Test the significant of coefficient.3: Granger causality result.4: Impulse response of dollarization.5: Variance decomposition of DDL. 48 ii LIST OF FIRGURES Figure 2.1: Theoretical frame model – Design by author.1: Response of DDL to BOL.2 Response of DDL to EXR.3: Response of DDL to INF.4: Response of DDL to INT.5: Response of DDL to TRS.
47 iii ABBREVIATION BOL: Balance of commercial trade CNY: Renminbi CPI: Consumer price index DL: Dollarization DPR: Deposit rate EUR: EURO EX: The total amount of export EXR: Exchange rate FCC: Foreign currency circulated domestically FCD: Foreign currency deposits FDI: Foreign direct investment GDP: Gross domestic product GSO: General Statistics Office IM: The total amount of import IMF: International monetary fund INF: Inflation INT: Interest rate JPY: Japanese Yen LDR: Lending rate NER: Nominal Exchange rate OSD: Foreign currency deposits abroad RER: Real exchange rate TRS: Total reserve USA: United States USD: US dollar VAR: Vector auto regression VECM: Vector error correction model VND: Vietnam dong WB: World Bank WTO: World trade organization iv CHAPTER 1: INTRODUCTION 1.1 Background of the study In the process of international integration, Vietnam confronts many significant challenges. One of the major challenges for Vietnam is the dollarization rate which is the cause of instability in the economy. Vietnam has agreed to anchor VND to other currencies such as the USA dollars, Yuan; the fluctuation in the value of Vietnam compared to foreign currencies will affect the confidence of people and businesses. They will switch to saving foreign currencies instead of VND.
One of the foreign currencies that has the most significant impact on Vietnam and the world, in general, is the dollar. Significantly, under commercial war between the USA and China, foreign investment will exchange from China to Vietnam. Therefore, the topic focuses on studying dollarization to assess its impacts on the Vietnamese economy to provide policy implications to ensure macroeconomic and micro stability. There are two statements: one is liberalizing dollarization and restraining dollarization.
The first view holds that a dollarized country will have advantages in the period of economic integration, creating favorable conditions to attract foreign investment flows. While the second point of view is that dollarization is the cause of economic instability, which causes the local currency to depreciate and the people to lose confidence in the national financial system. Under the evidence of courtesy and lessons from other countries, Vietnam has issued many tools and regulations in line with the actual dollarization of Vietnam from time to time. Some documents and principles are well applied.
However, there are many shortcomings and inconsistencies in implementation.2 Overview of dollarization in Vietnam 1.1 Time: before opening Vietnam’s economic (1988) Vietnam implements the mechanism of centralized management and subsidies; the State holds a monopoly on foreign trade and foreign exchange. The scale of the economy is small, the competitiveness of goods and services is very low, the external economy is underdeveloped, and the banking system is still in its infancy. The foreign exchange 1 management charter promulgated with the Government's Decree No. 102/CP of July 6, 1 1963 , prohibits organizations and individuals from owning and using domestic foreign currency (including storing and carrying per person), and people use VND in domestic transactions.
The conversion of VND into foreign currencies is carried out according to the plan with the multi-exchange rate mechanism (commercial exchange rate, non-commercial exchange rate) announced by the State. Import-export and international payments are mainly under bilateral - multilateral agreements. The currency used in external payment relations is usually the transfer ruble. Therefore, the conversion capacity of VND is limited.
Towards the end of the period when there were signs of economic crisis, the VND weakened enormously after the price - salary - money policy failed, inflation reached three digits, and there were continuous increases in the price of gold. In the population appeared the purchase of gold and foreign currency to hoard, speculate on costs, and use as a means of payment. However, the degree of dollarization is insignificant due to the small opening of the economy.2 Time: During open economic to financial crisis (1988-1998) The phenomenon of the Vietnamese economy widely using the US dollar in trading transactions. only started to be noticed in the late 80s and early 90s, when our economy faced inflation.
VND became depreciated against the USD, leading people's psychology to switch to hoarding USD or gold instead of the local currency. The phenomenon of the Vietnamese economy widely using the USA dollar in trading transactions. only started to be noticed in the late 80s and early 90s, when our economy faced inflation. VND became depreciated against the USD, leading people's psychology to switch to hoarding USD or gold instead of the local currency.
On the other hand, due to the weakness in the value of the dong, people switched to short-term deposits in local currency instead of long-term deposits, which greatly affected the amount of investment capital for the economy in the middle of the period construction section. Based on that situation, the Government issued the Investment Law in 1987 to welcome and encourage foreign organizations and individuals to invest capital and technology in Vietnam while allowing banks to receive deposits in USD. 1 Article 2, Government's Decree No. 102/CP of July 6, 1963 2 This policy has increased the dollarization rate of the economy by increasing the number of dollars flowing into the country through channels such as FDI, foreign aid, and remittances.
By 1991, after Vietnam normalized relations with China and several other countries and the State's open-door policies, the USD entering Vietnam increased sharply. Besides, the inflation rate peaked at 67.5%, and the USD/VND exchange rate skyrocketed (from 5,133 VND/USD to 9,274 VND/USD). It led to a sharp increase in dollarization, with more than 41% of deposits in banks being in USD Faced with this situation, the State Bank of Vietnam tried to reverse the dollarization of the economy and was quite successful when it sharply reduced the number of USD deposits in banks to 20% in 1996. On the other hand.
At this time, inflation was only around 10%, the exchange rate fluctuated slightly, and holding VND proved to be more profitable, so dollarization decreased sharply, FCD/M2 ratio in 1997 was 23. At the same time, the Government also began to restrict payments in foreign currencies, abolished foreign currency selling points, and strengthened foreign currency exchange desks. However, due to habits and underground economic activities, the free foreign currency market, foreign currency quotes, and payments among the population are still out of control. Some opinion agrees that illegal foreign exchange activities exist because they have not been dealt with decisively.
So far, this problem is still unresolved in existence.3 Time: After financial crisis to now (1998-2019) 1998-2007 After stable periods of 20%, the FCD/M2 ratio increased again during this period and by 2000-2001 to nearly 30%. The reason is that for a long time, the USA economy's high and stable growth has made the USD more attractive than other foreign currencies. On the other hand, newly issued policies have created people's trust and attracted a large amount of foreign currency from the free market into the banking system. During this period, dollarization is impacted by the regional financial crisis and the market's expectation of the devaluation of the VND.
2007-2019 3 The ratio of FCD/M2 continued to decrease by 2003 to 23. Payment and foreign currency trading continued to grow. According to the survey results in 2002, the operation of the free foreign currency market had a scale of 4-6 billion USD/year, equivalent to one-third of the export turnover that year, the amount of foreign currency floating outside the free market. It was estimated at 5 billion USD.
Dollarization in the listing and pricing in foreign currencies is still prevalent. However, by 2004 when inflation was at 9.5%, and VND deposit interest rates were not much more attractive than USD deposit rates, people had the mentality to exchange VND for other currencies with high stability, such as USD, EUR to deposit into commercial banks, causing FCD/M2 to increase to 24. With the sales of foreign currency deposits constantly increasing, commercial banks must also find ways to lend this foreign currency, avoiding capital backlog. The phenomenon is mobilizing capital and structuring the banking system.
In 2005, the USA introductory interest rate increased from 3. According to that effect, domestic and commercial banks simultaneously increased USD deposit interest rates, and VND deposit interest rates also increased while inflation was still high, attracting foreign currency deposits to commercial banks. 2006 marked a spectacular growth of direct investment in Vietnam, reaching 10.2 billion USD, bringing a significant source of foreign currency revenue and making the FCD/M2 ratio remain above 20% In 2007, Vietnam officially became the 150th member of the World Trade Organization (WTO) and committed to permanent normal trade status with the United States, which has created opportunities to expand export markets, limit trade restrictions, and reduce trade barriers. However, in 2007, the fluctuations of the USA economy also partly affected the Vietnamese economy, making the exchange rate unstable in the country.
These effects once again increase the rate of dollarization in the economy. The 2008 year is considered a tumultuous year for the Vietnamese economy in general and the issue of the USD/VND exchange rate in particular. In 2008, the State Bank announced the issuance of bills in VND and made it compulsory for commercial banks with a total value of issued bills of VND 20,300 billion, term of 364 days, and interest rate of 7. At the same time, the State Bank did not buy USD in order to limit the injection of money into circulation.
4 In the third quarter of 2008, when the exchange rate stabilized, the State Bank announced the USD reserve ratio and strictly controlled foreign currency exchange agents due to failure to register with commercial banks). The bank controls all activities to prohibit the purchase and sale of foreign currencies to circumvent the margin, the import and export of gold, and selling foreign currencies to intervene in the market through commercial banks. Large trade has overcome the shortage of USD, stabilized the foreign exchange market, and at the same time, stabilized the FCD/M2 ratio by around 20%. The inflation rate increased to approximately 20% the VND decreased the value that people tried to hold the USD at the end of 2008.
The importing enterprises increasingly use foreign currency for payment, and the remittances flow to the market. It is a reason the dollarization to become serious again. On the other hand, commercial banks increased the deposit interest rate in USD to 7.2%, nearly 2% higher than the one-year US government bond rate of 5. The big difference in the international market has created a sentiment of attaching importance to the dollar, fueling foreign currency speculation and increasing the economy's dollarization level.
After the shock of the financial crisis in 2008, the world economy recovered slowly. The US dollar is increasingly depreciating, but the USD/VND exchange rate is increasing, exceeding 20,000 VND/USD. People are increasingly distrustful of VND, and the cult of the dollar is becoming more serious. The dollarization rate of Vietnam is currently at 20%.