Central bank not pursuing unhealthy competitive advantage in trade

The U.S. department stated in a semiannual report on the macroeconomic and foreign exchange policies of the country’s major trading partners that it had reviewed and assessed the policies of an expanded set of 21 major U.S. trading partners and found that nine partners, including Vietnam, deserved scrutiny over their currency practices.

In response to the report, the SBV pledged it would further coordinate with the relevant ministries and agencies to discuss and address the issues raised by the U.S. Treasury.

The central bank will continue regulating its monetary policy to curb inflation, stabilize the macroeconomy and support economic growth in reasonable ways, it added.

The bank said that it would pursue a flexible foreign exchange rate, aligned with domestic and international market conditions and the characteristics of the Vietnamese economy, with no intentions of creating an unhealthy competitive advantage in international trade.

The U.S. report stated that Vietnam’s trade surplus with the largest economy had reached US$40 billion in 2018, the sixth highest among the United States’ trading partners.

This growing trade surplus reflects not only the large expansion of Vietnam’s export capacity in apparel and technology and its growing global supply chain integration but also the tariff and nontariff barriers that have impeded U.S. companies’ and agricultural producers’ access to the Vietnamese market for automobiles, agriculture, digital trade, electronic payments and so on.

According to the report, Vietnam’s authorities tightly managed the value of the Vietnamese dong. Until 2016, the SBV had utilized a crawling peg exchange rate system, where the bank would only periodically announce changes in the reference rate (i.e., the peg), usually in response to heavy pressure on the dong.

In January 2016, the SBV announced a more flexible exchange rate policy that would allow daily updates to its reference rate and stated that it would allow the dong to float within a previously established +/- 3% trading band.

While these changes introduced greater de jure flexibility to the dong, in practice, the dong remained tightly managed, particularly against the U.S. dollar, the report claimed.

Based on cross rates between the dong and the currencies in the basket, the report stated that the SBV still appears to manage the dong far more closely against the greenback than any other reference and in very few instances has the dong reached the edge of the band during trading.

The dong has been relatively stable on a nominal basis since 2011, both against the dollar and on a broad, trade-weighted basis.

In this context, and amid strong productivity growth with the rise of the foreign-invested enterprise sector, together with bouts of much higher inflation than its trading partners, the real effective exchange rate (REER) appreciated considerably from end-2010 to end-2015, rising by 22%, and was broadly stable from 2015 to the present day.

In 2018, the dong depreciated 2.1% against the dollar, while the nominal effective exchange rate and REER appreciated 1.2% and 2.3%, respectively. The most recent International Monetary Fund assessment indicated that the dong was 7% undervalued on a real effective basis as of 2017.

The U.S. Treasury said Vietnam does not publish data on foreign exchange intervention. However, the Vietnamese authorities have credibly conveyed to the department that net purchases of foreign exchange were 1.7% of the gross domestic product in 2018.

These purchases were concentrated in the first half of the year amid relatively easier global financial conditions, while there were more modest sales of foreign exchange over the second half of the year as financial turbulence in a few large emerging markets led to a pullback from many other smaller emerging markets and created downward pressure on many emerging market currencies, including the dong.

Therefore, the Treasury urged the Vietnamese authorities to enhance the timeliness and transparency of data on foreign exchange reserves, intervention and external balances.

“Further structural reforms are crucial for building greater resilience and stability in this dynamic economy. A stronger, modernized monetary policy framework will allow the SBV to transition to an inflation-targeting monetary policy regime,” said the department.

Vietnam should prioritize improving the quality and accuracy of its financial data, which will allow the SBV to better monitor and respond to financial vulnerabilities, including by introducing loan-to-value ratios and other macro-prudential regulations.

Also, reducing the reliance on credit growth targets, which contribute to financial sector risks, will enable financial institutions to better allocate capital and manage risks.

As Vietnam strengthens its monetary policy framework and reserves reach adequate levels, the department suggested Vietnam should reduce its interventions and allow for movement in the exchange rate in line with economic fundamentals, including the REER’s gradual appreciation, which will help reduce external imbalances, including the bilateral trade surplus with the United States.