HOANG LE TUNG DUONG EXAMINATION OF THE DETERMINANTS OF EXCHANGE RATE: THE CASE OF VIETNAM Field: Financial Management Code: 8340202.01 Hanoi, 2024 1 HOANG LE TUNG DUONG EXAMINATION OF THE DETERMINANTS OF EXCHANGE RATE: THE CASE OF VIETNAM Field: Financial Management Code: 8340202. Nghiem Xuan Hoa Hanoi, 2024 2 LETTER OF DECLARATION -----🙡🕮🙣----- I hereby declare that this thesis is the results of my own research and has never been published in any work of others. During the implementation process of this project, I have seriously taken research ethics; all findings of this project are results of my own research; all references in this project are clearly cited according to regulations. I take full responsibility for the fidelity of the number and data and other contents of my graduation project.
Hanoi, May 8th, 2024 Student Hoang Le Tung Duong 3 ACKNOWLEDGEMENT -----🙡🕮🙣----- I would like to express my deep gratitude to Dr. Nghiem Xuan Hoa, my thesis advisor, for her patient guidance, enthusiastic encouragement and useful critiques of this research work. His willingness to give her time so generously has been very much appreciated. I would also like to express my special thanks of gratitude to our principal – Associate Professor.
Le Trung Thanh - who gave me the golden opportunity to do this wonderful project on the topic Examination of the determinants of exchange rate: The case of Vietnam, which also helped me in doing a lot of Research and I came to know about so many new things. I would like to express my deep gratitude for that valuable support. I would like to express my very great appreciation to all the lecturers of the Vietnam National University - International School for supporting me with distributing survey questionnaires. Thanks to their support, I have reliable evidence for acquiring result of this research.
Last but not least, I would like to thank my family who have been supporting me from time to time in making this research. 4 TABLE OF CONTENTS CHAPTER 1. 8 CHAPTER 2: LITERATURE REVIEW. An overview of the Vietnamese economy and its exchange rate system.
Exchange rate determination in Vietnam. Empirical literature review of exchange rate determination in other countries. Exchange rate determinants in Vietnam. The roles of renewable energy.
Research objectives and research question. 28 CHAPTER 3: ESTIMATION METHODS. Model specification for nominal exchange rate determination. Data and variable description.
Variable Definitions and Sources. Descriptive Sstatistics and Unit Root Tests Results. Empirical results and discussion of nominal exchange rate determination. Unit Root Test Results.
Result discussion and implications. Contributions of the research. 48 Limitations and future research direction .02 Descriptive Statistics for Nominal Exchange Rate Model (Annually Frequency). Unit Root Test Results for Nominal Exchange Rate Model (Annually Frequency).
Correlation coefficient values for Nominal Exchange Rate Model (Annual Frequency). 63 6 ABSTRACT In the last decade, there has been a tremendous growth in the trend toward environmental sustainability with the shift to renewable energy sources. Nevertheless, the fundamental question is whether using renewable energy could spur economic growth in general and Vietnam exchange rate in particular. This study aims to examine a number of determinants of exchange rate in Vietnam, with the emphasis on renewable energy.
To investigate the issue, this study looks into six widely accepted determinants of exchange rate: Income, Money supply, Total reserves, Inflation rate, Brent crude oil price and Interest rate, and an addition determinant - Renewable energy consumption percentage. By employing unit root test, I attempt to illuminate the effect of all determinants on the rate of exchange, in either positive or negative direction. The estimated results reveal that in the short term, the use of energy from renewable sources in Vietnam has a significant and positive effect on the rate of currency exchange. In other words, a growth in the use of renewable energy in Vietnam will significantly cause the Vietnam’s exchange rate to depreciate, which may result in a surge in Vietnam’s exports and GDP growth.
Therefore, it is recommended that Vietnam should encourage the transition to exploitation and utilization of renewable energy. This action will also promote a zero-carbon society in the near future. INTRODUCTION Since 1986, as part of the "Doi Moi" (Renovation) policies, the Vietnamese economy implemented a significant transition, from a centrally planned to a market- oriented economy (Le, 2008). Even though the Doi Moi was started in 1986, Vietnam did not carry out a full-scale transition toward a market economy until the spring of 1989.
A proper exchange rate policy as well as stringent monetary and fiscal policies were the program's main pillars. The reforms consist of devaluing and unifying exchange rates, hiking nominal interest rates (which in turn, helped drive the real interest rates from negative to positive levels), cutting down subsidies to State-owned enterprises, reining in public sector spending, holding back wage increases and spending on the State sector and State budget, and ceasing to print money to cover state budget deficits. A more innovative banking system was designed to substitute the outdated mono banking system, which operated with a two-tier banking system that distinguished between the managerial duties performed by state-owned banks and the commercial banks' business operations. Despite having an annual growth rate of 6.92% on average in the period from 1991 to 2020 (General Statistics Office-GSO, 2020), the economy of Vietnam has exhibited symptoms of diminishing and lagging behind other regional nations.
The reason is that Vietnam's growth model is primarily resource-intensive rather than capital-intensive, which in turn, results in low efficiency and poor quality of growth (Nguyen, 2021). Following the outbreak of the COVID-19 pandemic by the beginning of 2020, Vietnam’s economic development has suffered a substantially lower growth rate. The COVID-19 pandemic, according to the World Bank, caused a drop in Vietnam’s GDP growth rate, from 7.91% in 2020, then reached 2. However, it is crucial to remember that Vietnam is among the few nations in the world enjoying positive economic development throughout this period (GSO, 2021).
In the new global economy, exchange rate has become a central issue for researchers to study. It plays an essential role in various aspects of economic performance. For example, international trade of a nation is directly impacted by 8 exchange rates. A country's exports may become more competitive if its currency appreciated since they will be more affordable for overseas consumers.
On the other hand, a more powerful currency may enable domestic customers to purchase imports at a lower cost, thereby increasing imports. A country's trade balance, or the ratio of imports to exports, is a key indicator of its economic health (Broll and Eckwert, 1999). Besides, exchange rates and inflation have been shown to be strongly related. A declining value of the currency may result in increased import costs, which might raise inflation.
However, by lowering the price of imported products, an appreciating currency can control inflation rate. Nevertheless, in order to control inflation, central banks frequently keep an eye on currency rates (Ghosh et al. In addition, it is impossible not to mention the impact on government spending and revenue. The value of foreign transactions, including import and export taxes, can be affected by fluctuations in currency rates.
Various studies have found that exchange rate devaluation helps to improves the government budget, however, not been confirmed for problem debtor countries (Reisen, 1990). When preparing their budgets, governments frequently take exchange rate swings into account There is a growing body of literature that recognizes the importance of studying exchange rate’s effect on the global economy in general, and Vietnamese economy in particular. Devaluation results in decline in the price of exports denominated in foreign currency, thus increasing demand for exports (Broll and Eckwert, 1999). At the same time, prices of imported goods denominated in local currency become higher, reducing demand for imported goods.
Vietnam is in the process of integrating deeply into the international economy with tariff and quota barriers for trade protection being gradually removed, thus signaling the crucial importance of the exchange rate on Vietnam's trade balance (Vo et al. On the one hand, employment and economic growth can possibly be affected by exchange rates. Domestic industries and exports can benefit from a competitive exchange rate, which may accelerate economic growth and the creation of jobs. Notwithstanding, export-oriented sectors may face difficulties due to a strong currency (Yokoyama et al.
For instance, due to the significant decline in the Taiwanese dollar and Japanese yen’s value recently, Vietnamese laborers in both 9 countries are receiving lower pay than they expected, which will probably cause domestic labor to rise dramatically, while export labor might decrease. It is not overstated that the exchange rate can exert significant effects on various aspects of the economy especially a developing one as Vietnam, necessitating an in-depth understanding of its determination. With regard to the internal and external balances of the economy - including economic development, price stability and trade balance stabilization, the Vietnam Dong/USD exchange rate serves as an important tool of monetary policy1. In line with the comprehensive economic rehabilitation and renovation policies “Doi Moi” initiated in 1986, Vietnam’s economic integration into the global economy has become increasingly advocated.
Several crucial bilateral and multilateral free trade agreements were inked and come into effect (such as the bilateral Vietnam-US FTA or the EVFTA), not to mention those that are still being negotiated. The liberalization of trade, investment, and capital flows is a common trend that reflects the goals of the trade agreements in which Vietnam is a signatory. The exchange rate regime in Vietnam is managed float (de jure-which is self- declared by the SBV) or stabilized arrangement (de facto-which is classified by the International Monetary Fund - IMF). The foreign exchange rate fluctuates in accordance with the market’s relationship between demand and supply, while the central bank intercedes to influence the exchange rate, but does not commit to keep the exchange rate at a constant level or any range of fluctuation around the central rate.
The managed floating exchange rate regime is a compromise between the fixed exchange rate regime and the freely floating exchange rate regime. Therefore, it combines the advantages of both modes but at the same time has certain limitations. It has the advantage of a relatively stable exchange rate, thereby supporting global economic relations, fostering economic stability, ensuring the relative independence of exchange-rate policy and reducing the impact of external shocks on the financial system. However, in exchange 1 According to the Law on State Bank of Vietnam (2010), the central bank in Vietnam (State Bank of Vietnam- SBV) has several tools to implement its monetary policy, including the exchange rate, re-financing, interest rates, reserve requirements and open market operations.
10 for maintaining this regime, the central bank has to reserve an appropriate amount of foreign currency to intervene in the market when needed and to manage the extent of intervention; or else, it may become a fixed exchange rate regime. Since the early 1970s, research in determinants of exchange rate has passed through various stages in its development. Several researchers take the position that three categories of explanatory variables, including national price levels, interest rates, and the balance of payments have traditionally been the focus of exchange rate determination models (Taušer, 2007). In addition, a recent study by Tran and Dao (2020) was more detailed and explicit in defining exchange rate determination in the case of Vietnam, which focused on economic growth, inflation, oil price, balance of payment between Vietnam and other countries.
Based on the above-mentioned discussions, it can be noticed that most traditional theories focus on monetary factors while ignoring the roles played by non-monetary factors. Among non-monetary factors, the effects of renewable energy deserves greater attention because of the following reasons. First, the application of renewable energy to replace non-rechargeable sources of energy has become an indispensable trend. Coal, oil, and natural gas and other fossil fuels are only available in limited amount.