MASTER IN FINANCIAL MANAGEMENT THE EFFECT OF EXCHANGE RATE MOVEMENTS ON VIETNAM’S TRADE BALANCE Graduate Student: Nguyen Thuy Trang Supervisor: Dr. Nguyen Cam Nhung HANOI, 2021 ABSTRACT Thesis title: The effect of exchange rate movements on Vietnam’s trade balance Pages: 48 University: Vietnam National University, Hanoi Graduate School: International School Date: October, 2021 Degree: Master Graduate Student: Nguyen Thuy Trang Supervisor: Dr. Nguyen Cam Nhung Key words: Exchange rate, trade balance, Vietnam, SPSS, effect. This study clarifies the impact of the fluctuation of the VND/ USD exchange rate on trade balance in Vietnam by using SPSS tool.
Variables used in this research included exchange rate and trade balance. Trade balance was drawn from import and export value from the statistics of Vietnam Customs. The time range for conducting data research was from 2000 to 2018, specifically data used are monthly statistics. The nominal effective exchange rate data is taken from Vietnam customs from the first day of June 2000 to the first day of June 2018 for each.
The result of findings showed that the exchange rate appreciation had negative effect on the trade balance. In details, revaluation in exchange rate had trend to make trade deficit; and devaluation in exchange rate had trend to make trade surplus. ACKNOWLEDGEMENT I wish to express my sincere appreciation to my supervisor, Doctor Nguyen Cam Nhung, who has the substance of a genius: she convincingly guided and encouraged me to be professional and do the right thing even when the road got tough. Without her persistent help, the goal of this project would not have been realized.
The physical and technical contribution of ‘International School’ is truly appreciated. Without their support, this project could not have reached its goal. Thank you! Author Nguyen Thuy Trang TABLE OF CONTENTS CHAPTER 1: INTRODUCTION .1 Rationale and background .3 Scope of research. 5 CHAPTER 2: LITERATURE REVIEW.1 Concepts of exchange rate .2 Effect of exchange rate movements on import and export .2 Exchange rate policy in Vietnam .1 Exchange rate regime .2 Exchange rate policy administration .1 Definition of trade balance .2 Trade deficit and trade surplus .3 Importance of trade balance in economy .4 Effect of trade surplus and trade deficit on economic indicators .4 Factors impacting trade balance .5 Theorical framework of relationship between exchange rate and trade balance .2 Import and export elasticity and Marshall-Lerner .6 Trade balance in Vietnam from 2000 to 2018 .8 Research gaps and aims.
41 CHAPTER 3: RESEARCH METHODOLOGY. Data collection procedures. Data analysis procedures .5 Reliability and validity. 46 CHAPTER 4: FINDINGS AND DISCUSSION .1 Data analysis of VND/USD .1 Correlation analysis of variables .3 Result of regression model .6 Self-correclation test .7 Calibration distribution test of residual .2 Data analysis of NEER.
57 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS. Summary of the findings. The implication of the research. Limitations of the research.
62 LIST OF ABBREVIATIONS VND: Viet Nam Dong CPI: Customer Price Index USD: United States Dollar SVAR: Structural Vector Autoregressive SPSS: Statistical Package for the VECM: Vector Error Correction Social Sciences Model IMF: International Monetary Fund VAR: Vector Autoregressive EURO: European- American Unity IRF: Impulse Response Function and Rights Organization GDP: Great British Pound ARDL: Autoregressive Distributed Lag JPY: Japanese Yen FDI: Foreign Direct Investment E: Exchange Rate EX: Export GDP: Gross Domestic Product EI: Import SBV: State Bank of Vietnam R2: R square TB: Trade Balance F-Test: Fisher Test VECM: Vector Error Correction VIF: Variance Inflation Factor Model P-P: Probability LIST OF TABLES Table 3.1: Variables used in SPSS .1 : Correlation analysis results .3: the result of regression model .4: Suitability of the model.5: Analysis of variance. 40 i LIST OF FIGURES/ GRAPHS Graph 2.1: the effect of devaluation on price and volume of imports and exports .2: the effect of revaluation on price and volume of imports and exports .1: Exchange rate of VND/USD (1/1/2000- 1/1/2018)(Vietnam customs, 2019) .4: Trade balance of Vietnam from 2000 to 2018(Vietnam customs, 2019) .5: the conceptual framework of effect of exchange rate volatility on trade balance .1: Frequency histogram of normalized quadrant .2: P-P plot of standardized regression residuals. The result of research model. 53 ii CHAPTER 1: INTRODUCTION 1.1 Rationale and background Since the early 20th century (supplanting an earlier French term mundialisation), the term ‘globalisation’ has been appeared, developed its current meaning some time in the second half of the 20th century, and came into popular use in the 1990s.
The development of ‘globalisation’ has continuously affected almost every countries in modern economy. Thereby in the context of globalisation and international economic integration, mechanisms and policies to regulate exchange rates are very important to directly affect the trade balance and macroeconomic stability in each country. As a result, imbalance in the trade balance has become a favoured research topic within community of economists. Manyara (2017) concentrates on effects of exchange rates volatility on imports and exports in Kenya.
Volatility of exchange rates has both positive and negative impacts on trade balance; while exchange rate and trade balance have a positive correlation with each other in a long-run. Osoro (2013) share a common opion with Manyara (2017) about the positive relationship between these two variables in Kenya in long term. Positive relationship between exchange rate volatility and trade balance usually happens to developed countries because these countries have high volume and value in exports. In terms of negative relationship, Clark (1973) explains that the volatility of exchange rates reduces international trade transactions and makes profit change.
Hooper and Kohlhagen (1978) states a greater risk for personal decision making posing by exchange rate. Economic agents experience greater uncertainty with international trade when they cannot predict the value of foreign transaction; thus, it is difficult for firms to project their trade 1 activities. Chowdhurry (1993) also shows that the exchange rate volatility has a significant negative impact on exports for the G-7 countries. The other study about the impact of exchange rates movements on trade of the G-7 countries done by Kroney; and Lastrapes (1993) states that the effect of exchange rate uncertainty on trade may vary across countries because of the differences in the level of competition, the use of hedging instruments, the economic scale of production and openness to international trade.
In addition, they found that export prices are much more impacted than export volumes. One more time, Caporale and Dorodian (1994) affirm a significant negative relation between exchange rate uncertainty and trade flows through their study on the effect of exchange rate variability on US imports from Canada. The result of a Vietnamese study of Vinh Nguyen and Duong Trinh (2019) about “the impact of exchange rate volatility on exports in Vietnam: bounds testing approach” shows that export performance is influenced by the volatility of exchange rate in long run. This is a negative relationship as a one percent increase in exchange rate volatility reduces export volume significantly about 0.
Thuan Dong (2016) states that real depreciation in exchange rate significantly plays a positive role on improving the trade balance in both aggregate model and disaggregate models. Income of domestic enterprises and its trading partners have negative and positive significant impacts on the trade balance respectively. Passing many years of economic construction, Vietnam has had to face with the situation of trade deficit for a long time due to many different reasons (CEIC, 2019); and exchange rate is one of the important reasons influencing the change of trade balance. In the case that the trade deficit is prolonged; it will lead to a shortage of foreign currency as a consequence, which leads to the insolvency of transactions outside the country and leaves serious 2 consequences for the economy.
Therefore, how to create the trade surplus is an extremely difficult issue for Vietnamese policy makers. Since 2000, Vietnam has experienced much devaluation of VND compared to USD. The exchange rate has been changed, and the nominal exchange rate has risen very high. Although having to face with trade deficit in many periods, Vietnam economy still enjoy trade surplus in other periods.
That is the excess of export over import over a period of time. From 2000 to 2008, Vietnamese economy had to face prolonged trade deficit. In 2008, 2009 and 2010, the balance of payments was fairly balanced because the balance deficit and the capital and financial balance surplus were approximately the same. During the period from 2008 to 2010, as a result of the global economic crisis, trade declined and capital mobility also declined.
Thereby, the balance deficit and the surplus of capital and finance balance both decreased. Foreign currency reserves decreased from 2008 to 2010 because the State Bank sold foreign currencies to peg the VND during this period. In 2011 the foreign currency reserve increased slightly because the State Bank temporarily did not sell foreign currency. It is notable that Vietnam’s trade deficit was already at its peak, especially the trade deficit with neighbouring China.
Of the total deficit of 17 billion USD in goods of Vietnam to the world, the deficit with China alone reached 12 billion USD, followed by the trade deficit with competitors ASEAN countries and South Korea, only in surplus with the US and EU. Thus, in order to maintain growth, Vietnam needs to control macroeconomic policies to promote the effectiveness of these policies to economic indicators and cope with the crisis. The management of exchange rate and balance trade is extremely important to in Vietnam which directly impacts trade balance. Therefore, it is 3 necessary to examine the impacts of exchange rate on the trade balance in order to give recommendations for better managing exchange rate and trade balance in Vietnam.
Thus, the author chooses "The effect of exchange rate movements on Vietnam’s trade balance" as master thesis research topic.2 Research objectives Main purpose of this research is to analyse impact of exchange rate on the trade balance of Vietnam. Thus, the research aims to analyse application of exchange rate policy to increase the competitiveness of domestic export goods. Moreover, the research also aims to assess the reliability of the multilateral real exchange rate in determining whether the currency is highly or lowly priced and its impact on the competitiveness of goods. The results of the analysis show how the exchange rate policy affects the balance of trade.3 Scope of research The thesis studied fluctuations of exchange rate and trade balance in Vietnam in the period from the second quarter of year 2000 to the second quarter of 2018.
The reason for choosing this time period was to have accurate evaluation about the impact of exchange rate volatility on trade balance; whether that there was negative or positive relationship between exchange rate and trade balance and whether that exchange rate made trade balance deficit or surplus. It would be difficult to assess the impact of exchange rate on trade balance if the given time period was too short. Moreover, there is a prolongation on trade deficit in the period from 2000 to 2008. In the period 2008-2018, Vietnamese economy achieved important and particularly impressive results, especially when looking back at the developments and difficulties caused by the global financial and economic crisis in the year 2008.
Macro-economic difficulties, difficulties from markets and especially business and production activities not only require attention on 4 economic management, governance, issuance and management and adjusting policies, especially monetary policy of the State Bank (SBV), but also be a measure, be a quantitative evaluation of the effectiveness of monetary policy in the past period.4 Research methods Main method used to examine the relationship between exchange rate and trade balance is Statistical Package for the Social Sciences (SPSS) model. In other words, SPSS will determine the impact level of exchange rate on trade deficit and trade surplus. Moreover, qualitative research method is used to statistics, describe, and compare the situation of the influence of the exchange rate on Vietnam's trade balance. Quantitative method is used to analyze and verify factors affecting trade balance.