VND devaluation: "Different views are also a good thing"

Mr. Truong Van Phuoc,
general manager
Vietnam Export-Import Bank (Eximbank).

Recently, the USD/VND exchange rate has not fluctuated much in the market, but it has fluctuated with conflicting views on the direction of management.

As a doctorate in economics specializing in exchange rate theory, Mr. Truong Van Phuoc, General Director of Vietnam Export-Import Bank (Eximbank), said that the current opposing views are not necessarily contradictory, because the exchange rate Price is always an important, complex issue from different perspectives, and it is attractive.

Do not actively devalue VND

In recent days, some experts have recommended that Vietnam need to devalue the VND this year at a rate of 3-4%, and continue to do so in the following years. The main reason is that VND is overvalued, about 20 - 21% compared to USD, because the exchange rate has been too stable for nearly two years, causing difficulties for exports... According to him, should we proactively devalue like this? So no and why?

Exchange rates are always an attractive topic for academics to debate, and for market forces to speculate and forecast. There are two macroeconomic variables of emerging economies like Vietnam that play an important role in the perspective of foreign investors: inflation and exchange rates. Furthermore, these two variables interact with each other quite complicatedly. So I'm not surprised that there are a lot of comments about the exchange rate.

Now, talking about the current USD/VND exchange rate, we have to rely on many assumptions. With those assumptions, we can relatively say whether the real value of the Vietnamese currency compared to the US dollar is above or below its value. Personally, I am not convinced when I hear that "VND is overvalued compared to USD...; Because the exchange rate has been too stable for nearly two years, it has caused difficulties for exports."

Since 2008, VND has depreciated over 30%, from approximately 16,000 VND, now approaching 21,000 VND/USD. Our country's export turnover in the past 5 years, except for 2009, which decreased by 10% due to the immediate impact of the world economic crisis, has increased at a high speed; 2011 increased by 34%, 2012 increased by 19%.
No one denies the rule that "currency depreciation supports exports". But it is also important to note that the exchange rate itself does not determine the export growth rate, because export turnover can be seen as a function of many variables, of which the exchange rate is just one variable. .

"In the past 5 years, on average, the VND interest rate has been about 10% higher than the USD every year, while the average VND exchange rate has decreased by 6%/year compared to the USD. Therefore, there is a real push from the market. Going down does not allow the USD to increase in price much more because VND holders still enjoy a net benefit of 10% - 6% = 4%."
Mr. Truong Van Phuoc

Besides, exports in Vietnam do not depend too much on exchange rates. This is the result of serious research on the impact of exchange rates on exports in our country. That is to only look at the exchange rate from the perspective of trade competition, whose root is the inflation difference of currencies in a basket of currencies as the basis for operating exchange rate policy.

The exchange rate is coldly regulated by the market, because it is based on the law of interest rate parity, on the expectations, and on the dreams of the market. Simply put, the currency with a high interest rate has the advantage of increasing its price more. In the past 5 years, on average, the VND interest rate has been about 10% higher than the USD every year, while the average VND exchange rate has decreased by 6%/year compared to the USD. Therefore, there is an actual downward push of the market that does not allow the USD to increase in price much more because VND holders still enjoy a net benefit of 10% - 6% = 4%.

You said you are not convinced about the above valuation results, specifically how convincing are you?


Here it is necessary to say more about the concept of "pricing". This concept mainly lies in the fixed exchange rate mechanism. Stating this concept in Vietnam's specific exchange rate mechanism is not right. Because actually the market forces of supply and demand are a reference for the State Bank's intervention in the foreign exchange market.

In my opinion, in that environment, it is more correct to approach the concept of "currency parity" instead of "valuation". Determining this level of “currency parity” is complicated but can be done. Choosing the "base year" is the most difficult task, because it depends on perspective, on the assumption of optimal conditions of the economy...

My own opinion based on my own calculations is that VND is moving towards the "target exchange rate zone" according to the principles of establishing "currency parity", so it is not necessary, and should not be devalued. VND. But this does not mean fixing the exchange rate, but depends on many factors for the State Bank to manage the exchange rate policy on the basis of the chosen exchange rate mechanism.

Not convinced is your view, but if it is a reality, what disadvantages do you think it comes with and how to handle it?

I'm a bit surprised at the opinion "VND is overvalued" but the data also specifically states "20 - 21% compared to USD". As I stated above, the choice of “base year” is very important in real exchange rate calculation models. They are like "milestones" that need to be pursued in the "vehicle" of world economic integration. Because in the process of globalization, scientific and technical advances, international economic and trade policies, the process of liberalization of capital flows, the phenomenon of export inflation... make calculation models Exchange rates must be adjusted to variables very sensitively.

So I don't think the above opinion is correct. Observe the market, see how the liquidity in the foreign exchange market is, how foreign currency supply and demand are, how much other macroeconomic indicators fluctuate, including the increase or decrease in the price of the USD compared to other currencies. currencies of other countries with which Vietnam has relations in terms of trade, investment, loans... to have appropriate behavior. That's the way I think the State Bank is and will continue to do it.

Increasing foreign exchange reserves is not simple!

There is a calculation that if Vietnam devalues ​​VND 4%/year for 3 consecutive years, foreign exchange reserves will double. How do you see the relationship between the USD/VND exchange rate adjustment and the increase - decrease in foreign exchange reserves?

If there is a mathematician who takes the trouble to model the relationship between the exchange rate and the increase or decrease in foreign exchange reserves, that model, in my opinion, establishes a "non-linear" correlation, not There is a rule "when the exchange rate increases α, reserves increase β". The increase in foreign exchange reserves is not that simple!

There is only one simple rule that affects the inventory of any type of goods, which is the amount of goods exported and imported into the warehouse. Our country's foreign exchange reserves increased sharply last year, because our exports increased higher than the increase in imports, creating a trade surplus phenomenon. Without discussing in depth how the trade surplus affects the economy, it must be admitted that the trade surplus has improved the current balance much better than before. Along with the surplus on the capital balance, the trade surplus has made the overall balance of payments better, and foreign exchange reserves have increased higher than before.

"Always having comments on exchange rates is, after all, a good thing. Because of that, management agencies always put themselves in a state of having to constantly observe fluctuations in the foreign market." regret."
Mr. Truong Van Phuoc

Returning to the above recommendations of some experts, there is one point beyond expertise: it is easy to see that there is a contradiction in public opinion. In previous years, the USD/VND exchange rate continuously fluctuated and increased sharply, requiring creating tension that the State Bank must stabilize and maintain stability. Now, to maintain stability, there is pressure to "have" to devalue. Can you talk about this conflict, or is it a constant pressure?

It must also be fair to admit that there is a common, objective rule that in any country where the domestic purchasing power of the currency, expressed through inflation, decreases, the foreign purchasing power of the currency also decreases. That, expressed through the exchange rate, is lower.

In the past few years, our country's inflation has increased, creating a mentality that the currency is constantly losing value. In fact, the State Bank has also adjusted the average interbank exchange rate and the allowable fluctuation range in accordance with market conditions, thus bringing stability to the exchange rate. But a few years ago, the exchange rate also fluctuated a lot.

Always having comments on exchange rates is, after all, a good thing. Because of this, management agencies always put themselves in a state of having to constantly observe fluctuations in the foreign exchange market. As for all kinds of opinions, I think there is a certain level of accuracy and there is no contradiction at all, because the exchange rate is always an important and complicated issue. Each person has access to different dimensions.

This year the exchange rate will fluctuate in an upward direction

This year, the State Bank did not state the direction to control specific fluctuations in the USD/VND exchange rate like last year. And you, do you have your plans or a forecast that you can share?

Announcing in advance what the exchange rate will be in a year has advantages and disadvantages that policymakers must consider.

The advantage is that it makes the market forces involved in the exchange rate easier to calculate, in a sense implicitly hedged. The disadvantage is that pre-orienting the percentage increase or decrease in exchange rates, unintentionally distorting market expectations and potentially negative consequences. Because unfortunately for some reason the exchange rate is not like that?

But because I am not the person making exchange rate policy, the forecast seems more comfortable. My forecast may or may not be accurate. But I must ensure that this forecast is truthful from my calculations and speculations.

I think, increasing exchange rates this year is not beneficial. It is necessary to pay attention to the law of resonance and transmission between exchange rates and inflation. If this year the economy gradually recovers, import demand will increase. This year's import turnover is forecast to be over 130 billion USD. If the exchange rate increases sharply, inflation will be affected. If inflation is not well controlled, it will have the opposite effect, forcing exchange rates to increase. The country's due debt obligations are also a topic that needs to be carefully calculated when considering the exchange rate... That is the foundation of my thinking when predicting that this year the exchange rate will fluctuate in an upward direction, from 2 - 3%.