4. What type of exchange rate regime Vietnam?

How do you think about State Bank of Vietnam

(SBV) intervention to stabilize the nominal exchange rate recently?

In the past years, the State Bank of Vietnam (SBV) used two nominal anchors to control
inflation, i.e. the money supply (M2) and the exchange rate. Nevertheless, these two anchors
have not shown enough strength and credibility to control inflation. To cope with difficulties in
controling inflation under the fixed exchange rate regime, at the beginning of 2016, the SBV
launched a new exchange rate regime between the Vietnamese dong and the U.S. dollar, under
which the SBV announces daily the central exchange rate with reference to the average interbank
exchange rate, exchange rates between the Vietnamese dong and eight countries' currencies (i.e.
the U.S. dollar, the Euro, the Chinese yuan, the Japanese yen, the Singapore dollar, the Korean
won, the Taiwan dollar and the Thai bath) that Vietnam has close trade and investment
relationships, and macroeconomic balances. (CÓ THỂ BỎ)This exchange rate mechanism
allows the exchange rate between the Vietnamese dong and the U.S. dollar move more flexibly in
accordance with the supply of and demand for the U.S. dollar in the Vietnam foreign exchange
market and the international foreign exchange market as well as in compatibility with the SBV's
monetary policy targets.

The SBV has managed the exchange rate in a way that has both created room for the
exchange rate to develop flexibly, absorbing the external shocks, and intervened into the forex
market to limit the fluctuations of the exchange rate, contributing to maintaining the stability the
economy.

Obviously, from 2016 to 2020, Vietnam's economy was affected by world events such as
the UK leaving the European Union, the results of the US presidential election, the US Federal
Reserve (Fed) raising interest rates, the escalating US-China trade war. Especially in 2020, the
outbreak of the Covid-19 epidemic caused economic difficulties. The unstable international
financial and monetary market put pressure on the USD/VND exchange rate, requiring the State
Bank of Vietnam to take measures to avoid VND depreciation, control inflation and stabilize the
economy. The period of 2016 – 2020 became a bright spot of economic development when
strengthening confidence in the VND, reducing foreign exchange holdings, and controlling
inflation. Although 2020 was affected by the Covid-19, the economic growth was steady and
improving, the economic scale was expanded, and the large balances of the economy were
ensured. The exchange rate management of the State Bank of Vietnam showed that although
there were confusions in the early stages, after that, the exchange rate management was
increasingly improved, thereby helping the financial market operate stably and achieved success.

From 2021-2023, this is the period when Vietnam's economy is directly affected by the
Covid-19 pandemic and overcoming the consequences of the pandemic. In general, the
appropriate central exchange rate management, flexible and proactive foreign currency
intervention along with other measures of the State Bank contribute to stabilizing market
sentiment, limiting abnormal and excessive fluctuation pressure on the market rate, contributing
to foreign currency market stability and macroeconomic stability. In fact, although CNY and
many other Asian currencies fluctuated sharply, the USD/VND exchange rate was still relatively
stable, market liquidity was smooth, and legitimate foreign currency needs were fully met.
 Vietnam’s economy is developing, it is very important for us to pay attention to every
problem related to exchange rate, because it directly affects imports/exports, foreign investment,
and inflation. Vietnam's exchange rate policy in the last 34 years has undergone many changes to
meet the requirements of an increasingly open economy and integration into the international
market. It can be clearly seen that while now the world has many fluctuations (like Fed’s
maintaining high interest rate, trading war between the US and China, wars in Ukraine and
Middle East, ...) and the world economy is still recovering after the COVID-19 pandemic, our
government always tries to control, stabilize exchange rates, and promptly adapt to fluctuations
in the world economy.

Despite facing many fluctuations from the financial market from 2016 to now, Vietnam's
exchange rate remains stable. That is the success of managing of the SBV. Intervention can help
to prevent speculative attacks on the currency, stabilize the currency in the face of external shock
and maintain confidence in the economy. central bank intervention can play a vital role in
maintaining the stability of the peg. However, there are also some drawbacks to central bank
intervention in currency pegs. One of the main concerns is that it can be expensive for the central
bank to maintain the peg, particularly if it is forced to intervene heavily in the foreign exchange
market. This can lead to a drain on the central bank's foreign exchange reserves, which could be
problematic if these reserves are already low. Additionally, central bank intervention can
sometimes be seen as a sign of weakness, which could encourage speculators to continue
attacking the currency.
Overall, it is clear that central bank intervention can be an important tool in maintaining
currency pegs. However, it is important to carefully consider the costs and benefits of this
intervention before deciding whether or not to use it. Ultimately, the decision will depend on a
range of factors, including the strength of the economy, the level of confidence in the currency,
and the risks posed by external shocks.