Vietnam: A Country of Over 94M Inhabitants & Vast Economical Advantages - Essay Sample

Introduction

Vietnam is considered the far most country in the Indochina peninsula and is home to over 94 million Vietnamese inhabitants and is bordered by China, Malaysia, the Philippines, Thailand, Cambodia, Indonesia, and Laos. With the population mentioned above, Vietnam is considered to be one of the most populated countries in the world with this kind of population prone to be realizing different kinds of advantages to the economy. The contains various agricultural and industrial which are centrally placed within the country considering the market-based economy. Apart from this, the economy of Vietnam thrives since the significant population is mainly the young population which assists in good sources of capable labor in both the industry and the agricultural farms.

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A stable political system as well as the extensive commitment to sustainable growth that s backed up by good leadership assists in boosting economic integration hence a stable currency. With the integration between various sectors of the economy, Vietnam has been able to make adjustments that will assist in bringing out their financial capabilities such as the reduction of non-performing loans that are common in its banking sector as well as the increased financial sector transparency in matters of lending. This introduction on Vietnam serves the purpose to provide information about the economic state of Vietnam and the direction the paper is intended to take. For many years Vietnamese dong, as well as the US dollar, has been used in Vietnam to process payments and make transactions. The paper intends to find out the major economic events as well as the impact of the currency due to its appreciation or depreciation as depicted in the graph presented.

Major Economic Events that Caused the Appreciation and Depreciation of Currency

Most Asian countries, as well as countries around the world, are interdependent on one another in the sense that most of them exchange goods and services which necessitates the exchange of currency. The exchange rates involving currency may therefore rise or fall depending on the local as well as international factors that may affect the state of the currency at the time. The appreciation and depreciation of a country's currency are therefore measured depending on those of other countries. For example, one Kenya shilling will be able to buy 230 Vietnamese dong according to the prevailing conditions of the market at the moment. This exchange rates may change depending on the rates of unemployment, debts, political stability as well as other monetary factors (Thuy and Thuy).

Appreciation is, therefore, the increase in the value of the currency compared to other currencies in the market hence the ability to acquire more of the other currency than before. On the other hand, depreciation is the reduction in the value of a currency due to the particular conditions; hence the currency is not able to acquire as much of the other currency. The fall of the value of the currency is also termed as devaluation. The rise and fall of the currency may have various impacts on the country's economy such as inflation ("The Impact Of Currency Appreciation & Depreciation On Inflation | Study.Com.").

From the graph, it is evident that there has been a relative increase in the exchange rates of the currency of Vietnam. The rise in the exchange rates involves the changes that were made in the policies set by the government. Various individuals set out to explain the rise in the exchange rates as presented by the graph. Alex Joiner (2006), stated that from history the exchange rates were set from government decree as a form of legislation in Vietnam. This, however, led to the establishment of black markets in the 1980s. This prompted the devaluation of the currency up to the 21st century where the graph has started the analysis. Also, the changes that were made resulting from the devaluation of the currency from the policies, it was essential that the currency exchange rates be manned by the state bank of Vietnam so that they could account for the changes in the variable such as inflation and as well as loan and lending interest rates.

Another economic event that led to the rise in the was the agreement between the state bank of Vietnam and the commercial banks to stabilize the foreign exchange markets through auction-based rates. Auction-based rates imply that the State Bank of Vietnam (SBV) allows the commercial banks to trade in the foreign exchange based on the highest bidder. The bank will, therefore, possess some amount of the currency through the commercial banks. This procedure, however, led to the massive devaluation of the Vietnamese dong due to the high availability and the nature of the auction trade (Huy, 363).

Also, the stability of the currency was highly promoted by the influence of the macroeconomic fundamentals in the country such as employment and current account surplus per year. According to Michael Kokalari, CFA (2018), the average of the surplus has increased exponentially throughout the years starting 2001 all through to 2017 which contributed to about 4% GDP increase in 2018. This was a measure by the government's economy to curb the foreign investors from losing their money due to the devaluation of the currency over time. At this time, the investors would tend to exchange their currencies in order to make an impact on their business which in turn assists in curbing the influence of inflation as well as the devaluation of the currency (Thuy and Thuy).

From the graph, the beginning of the first years the exchange rates have not picked up but is on the rise. This is accrued to the reason that SBV was trying to employ the strategies that were acquired the Chinese in a bid to attract direct foreign investments. The strategy involved the rise in the interest rates or to alternatively use the foreign exchange reserves to acquire the dong in the interbank foreign exchange market. The latter option could be preferred as interest rates will ensure to limit the rate of transactions of the currencies ("Macroeconomic Stability In Vietnam | VOX, CEPR Policy Portal.").

Also, the stabilization of the currency that further led to the rise in the towards the end of the 2008-2009 regime was the influence of the outrageous influx of foreign capital due to the event of privatization of various companies. Due to this endeavor, the reserves of the US dollar in the SBV increased the value in the reserves to a higher value. This influx of foreign currency in the country of Vietnam created a shortage of the dollar in countries outside the US which required the SBV to trade hence leading to an appreciation in the USD-dong exchange rates.

Impact of the Appreciation or Depreciation of the Currency to the Economy

The appreciation and depreciation of the currency exchange rates have various impacts on the economy of the country starting from the inflations. These changes in the currency influence the inflation in that it affects the costs of imported as well as exported goods. The investors may feel intimidated by the prices of the currency since the purchasing and selling power of the currency is now affected, and the sale of the products may scare aware customers due to the ambiguous prices (Huy, 363).

On the other hand, currency appreciation may bring about a reduction in the inflation rates as the prices of the imports become cheap where the customers are influenced to make purchases. The demand for local products at this time falls as more substitutes are imported hence boosting the company competitiveness within a country. Due to this competitiveness, the country can deliver the best quality goods with variety at affordable prices which have been achieved from the appreciation of the currency exchange rates. The governments may also like to prevent the appreciation of the currency due to the adverse effects on the imports.

An appreciation in the currency also led to trade deficits within the country of Vietnam. With stronger currencies, the imports into the country become cheaper which in turn influences the country to import more. This affects local industries such that local goods become more expensive compared to cheap imported products. Apart from this, it is essential to note that the trade deficit that will be formed from the imbalance between locally manufactured goods and those of imported goods will cause the exports to become even more expensive. The buyers of the exports will, therefore, take fewer products leading to minimal profits from exports. This is one of the adverse effects of the depreciation of the exchange rates ("Macroeconomic Stability In Vietnam | VOX, CEPR Policy Portal.").

Conclusion

In conclusion, the sluggish growth of currency that was experienced by the country of Vietnam is as a result of the slow implementation of the currency stabilization measures that were being adopted from China. The country is faced with slow approval, and decision-making individuals since the transition from a command to a market economy are still tough. Apart from this, the implementation of well-set currency and exchange rate policies is affected by corruption and inefficient use of public funds to ensure that public investments thrive compared to the private sector or direct foreign investments. Although Vietnam is faced with various exchange rates and currency appreciation problems, it is still one of the most fast-growing economies among the Asian countries as they have managed to establish some form of balance between their credit, money supply, and inflation levels. This ensures that they maintain the required capital inflows as well as a favorable trade deficit.

Works Cited

Huy, Tran Quang. "The linkage between exchange rates and stock prices: Evidence from Vietnam." Asian Economic and Financial Review 6.7 (2016): 363.

"The Impact Of Currency Appreciation & Depreciation On Inflation | Study.Com." Study.com. N.p., 2019. Web. 2 May 2019.

Anz.com. N.p., 2019. Web. 2 May 2019.

"Macroeconomic Stability In Vietnam | VOX, CEPR Policy Portal." Voxeu.org. N.p., 2019. Web. 2 May 2019.

"Vietnam'S Economy Shows Fundamental Strength, With Stable And Positive Medium Term Outlook." World Bank. N.p., 2019. Web. 2 May 2019.

Thuy, Vinh Nguyen Thi, and Duong Trinh Thi Thuy. "The Impact Of Exchange Rate Volatility On Exports In Vietnam: A Bounds Testing Approach." Journal of Risk and Financial Management 12.1 (2019): 6. Web.