Devaluation of currency refers specifically to a deliberate and official downward

adjustment in the value of a country's currency in relation to other currencies. In a

devaluation, the government or the central bank takes a proactive decision to lower the
exchange rate of the domestic currency. The primary aim of devaluation is to make the
country's exports more competitive and increase their attractiveness in foreign markets.
By reducing the value of the domestic currency, it takes fewer units of the local currency
to buy a unit of a foreign currency, effectively lowering the price of domestic goods and
services in foreign markets.

There are several reasons why governments resort to currency devaluation and these
include:

1. Boost export competitiveness and increase export revenues.

2. Correct trade imbalances and improve the trade balance.

3. Stimulate economic growth and competitiveness in specific sectors.

The key difference between floating currency and devaluation is in how the exchange
rate is determined. In a floating exchange rate regime, the exchange rate is determined by
market forces without direct intervention from the central bank. On the other hand,
devaluation is a deliberate action taken by the government or the central bank to adjust
the exchange rate downward to achieve specific economic objectives, typically aimed at
improving export competitiveness and addressing trade imbalances.

It's worth noting that a country with a floating exchange rate regime can still experience
fluctuations in its currency's value due to market forces, without any deliberate
devaluation action taken by the authorities. In contrast, a fixed exchange rate regime
involves a government or central bank actively pegging the currency to a specific value,
and devaluation would represent a change in that fixed value, as opposed to a market-
driven fluctuation.

Pros of Currency Devaluation

Currency devaluation, when implemented strategically and in the right economic context,
can offer certain advantages for a government and its economy. Here are some of the
potential benefits:

1. Export Competitiveness: One of the primary objectives of currency

devaluation is to boost a country's export competitiveness. A weaker
domestic currency makes the country's goods and services cheaper in foreign
 markets when priced in foreign currencies. This can lead to increased
demand for exports, which, in turn, can stimulate economic growth and
create jobs in export-oriented industries.

2. Trade Balance Improvement: By increasing the competitiveness of exports

and making imports relatively more expensive, devaluation can help improve
the trade balance. A positive trade balance (where exports exceed imports)
can contribute to economic stability and reduce reliance on foreign
borrowing.

3. Domestic Industries Support: Devaluation can provide protection and

support to domestic industries that compete with foreign imports. Cheaper
domestic products can become more attractive to consumers, leading to
increased demand for locally produced goods.

4. Tourism Boost: A weaker currency can make a country a more affordable

destination for international tourists. This can lead to an increase in tourist
arrivals, benefiting the hospitality and tourism sectors and generating foreign
exchange earnings.

5. Debt Repayment Advantage: Countries with foreign-denominated debt

may find it advantageous to devalue their currency. As the domestic currency
weakens, it becomes cheaper for the government to repay foreign debt in
terms of the local currency.

6. FDI Attraction: A devalued currency can make foreign direct investment

(FDI) opportunities more attractive to foreign investors. Foreign companies
may find it more cost-effective to invest in and set up operations in a country
with a lower-valued currency.

7. Incentive for Domestic Production: Devaluation can incentivize domestic

production and reduce reliance on imports. This can lead to the development
of domestic industries and improve the country's self-sufficiency in certain
sectors.

8. Inflationary Control: Devaluation can help reduce imported inflation, as it

makes imported goods relatively more expensive. This can be beneficial in
controlling overall inflation in the economy.

9. Balance Sheet Improvement: For exporters who generate revenue in

foreign currencies, devaluation can lead to an improvement in their balance
sheets when their foreign earnings are converted back into the local currency.
It is important to note that the advantages of currency devaluation are not universal and
can vary depending on the economic circumstances and the overall policy framework of
the country. Additionally, currency devaluation should be accompanied by appropriate
policy measures to ensure long-term economic sustainability and prevent negative
consequences, such as inflationary pressures and loss of investor confidence.

Cons of Currency Devaluation

While currency devaluation can have some potential benefits, it also comes with several
disadvantages and challenges for a government and its economy. Here are some of the
main disadvantages:

1. Imported Inflation: Devaluation leads to an increase in the cost of imports

since it takes more units of the local currency to buy foreign currencies. This
imported inflation can result in higher prices for imported goods, leading to a
rise in the overall price level in the economy.

2. Reduced Purchasing Power: As the value of the domestic currency

decreases, the purchasing power of consumers diminishes. This can lead to a
decline in real wages and a decrease in the standard of living for citizens,
particularly for those relying on fixed incomes.

3. High Cost of Imported Goods: As devaluation increases the cost of

imports, it can create challenges for businesses that rely on imported raw
materials and intermediate goods. Higher costs may lead to reduced
profitability or higher prices for domestically produced goods.

4. Debt Burden: If a country has significant foreign-denominated debt,

devaluation can increase the cost of servicing that debt. It effectively raises
the repayment burden in terms of the domestic currency, potentially straining
the government's finances.

5. Investor Uncertainty: Currency devaluation can create uncertainty for

investors and foreign businesses operating in the country. Concerns about
currency volatility may lead to reduced foreign investment, as investors may
be wary of potential losses due to exchange rate fluctuations.

6. Capital Flight: A sudden or sharp devaluation can trigger capital flight,

where investors and individuals move their assets out of the country in
anticipation of further depreciation. This can destabilize the economy and
create liquidity challenges.

Thailand 1997
 7. Impact on Foreign Debt: If a country has foreign-denominated debt,
devaluation can increase the effective value of that debt, making it more
expensive to service.

8. Trade Retaliation: Devaluation can lead to accusations of currency

manipulation by other trading partners, potentially resulting in trade disputes
or retaliatory actions.

9. Loss of Confidence: A significant and abrupt devaluation can erode investor

and consumer confidence in the country's economic stability and
governance.

10. Inflationary Expectations: Devaluation can create expectations of further

depreciation or inflation, which may lead to wage demands and price
increases, exacerbating inflationary pressures.

11. Inequality: Devaluation can disproportionately affect vulnerable

populations, particularly those who rely heavily on imported goods or
foreign remittances.

It's important to note that the impact of currency devaluation varies depending on the
overall economic conditions, government policies, and the country's trade and financial
dynamics. While devaluation may provide short-term benefits, it is not a sustainable
solution for addressing underlying structural issues in the economy. Governments need to
carefully consider the potential disadvantages and implement comprehensive economic
reforms to foster long-term economic stability and growth.
Elasticity approach

Marshall-Lerner condition states that a depreciation of domestic currency can improve

a country’s balance of payments only when the sum of the demand elasticity of exports
and the demand elasticity of imports exceeds unity.

The extent to which they increase depends on the demand elasticity for exports. It also
depends on the nature of goods exported and the market conditions.

- If the country is the sole supplier and exports raw materials or perishable goods,
the demand elasticity for its exports will be low.
- If it exports machinery, tools and industrial products in competition with other
countries, the elasticity of demand for its products will be high, and devaluation
will be successful in correcting a deficit
Being a developing country, Vietnam has have high demand for imported
machinery to innovate technology and importing raw materials to produce
consumer goods and exports

Nợ công: https://cafef.vn/ti-le-no-cong-giam-manh-20220830153918091.chn
Tỷ giá
https://vn.investing.com/currencies/usd-vnd-historical-data
https://www.studocu.com/vn/document/truong-dai-hoc-thuong-mai/kinh-te-vi-
mo/ty-gia-hoi-doai-giai-doan-2018-2022/58590737

https://thanhtrabtc.mof.gov.vn/webcenter/portal/ttncdtbh/pages_r/l/chi-tiet-tin?
dDocName=MOFUCM248867
1. Ajo
1.1. BoT and factors affecting
1.1.1. BoT

Refers to the difference between the value of merchandise exports and

merchandise imports.

BoT = X – IM

- > 0 -> BoP surplus

- < 0 -> BoP deficit
- = 0 -> BoP balance
1.1.2. Factors affecting BoT
- IM: imports tend to rise when GDP increases and may even grow faster. Besides,
imports also depend on the relative price between domestic goods and services
and foreign ones. If the price of domestic products increases considerably relative
to that of foreign products, imports will go up and vice versa. The growth of
imports leads to higher demand for foreign currencies.
- X: exports mainly depend on the situation of other countries because the exports
of one country are the imports of another. Therefore, it is primarily affected by
other countries’ output and income. That’s why, in economics models, exports are
seen as self-determined factor.
- E: exchange rate has an undeniably important role with almost all nations since it
has an impact on the relative price between domestic goods and services and
foreign ones.
+ When the exchange rate increases, the domestic currency devaluates against the
foreign currency meaning that the purchasing power of foreign currency go up.
This may lead to cheaper price of exporting products. As a result, we can witness
higher exporting activities and lower importing activities, followed by an increase
in net export.
+ On the other hand, when the exchange rate goes down or the domestic currency
appreciates against the foreign currency, there will be higher demand for
importing and lower demand for exporting making net export decrease.
- π : The growth of inflation rate results in higher price in home country and a
decrease in exporting. In the long run, the higher inflation rate increases the
exchange rate or implies the depreciation of domestic currency.

Other factors

- The nonresidents’ income: the increase in the income of nonresidents leads to

higher demand for exports
- International trade policy: tariff, quota, dumping…
- Consumer taste
- The economics political and social situation
 BoT plays an important role in determining
- the balance of payment
- the supply and demand and price of goods and services
- the fluctuations of the exchange rate
- the supply and demand of domestic and foreign currencies
- the home country inflation rate
1.2. Devaluation and its effects on BoT
1.2.1. Devaluation
Devaluation of currency refers specifically to a deliberate and official downward
adjustment in the value of a country's currency in relation to other currencies. The
devaluation of VND means a decrease in its value relative to foreign currencies.
1.2.2. The effects of devaluation

Marshall – Lerner

- The price effect

With:

P The price of exports in domestic currency

Qx The number of exported goods and services

E The exchange rate

Pf The price of imports in foreign currency

QIM The number of imported goods and services

+ BoT calculated in domestic currency

= P*Qx – E*Pf*QIM
The increase in E makes BoT calculated in domestic currency go down
+ BoT calculated in foreign currency
= (P/E)*Qx – Pf*QIM
The increase in E makes BoT calculated in foreign currency go down
Exports become cheaper measured in foreign currency and imports become more
expensive measured in the home currency. The price effect clearly contributed to
a worsening of the current account
- The volume effect
The fact that exports become cheaper should encourage an increased volume of
exports and imports become more expensive should lead to a decreased volume of
imports. The volume effect clearly contributes to improve the current account.
 The net effect depends upon whether the price or volume effect dominates.
 1.2.3. The impact of devaluation on BoT
- In the short run
Currency depreciation will lead to a change in the real
exchange rate, increasing the competitiveness of the country and tends
to increase net exports because exports become relatively cheaper in
the international market while imports become relatively more
expensive in the domestic market. However, there are some factors
that prevent this trend from being immediately realized, such as:

+ Existing contracts based on the old exchange rate need time to

adjust. Buyers need time to adjust their behavior before the new price,
and more importantly, it is not possible to quickly mobilize resources
and organize production.
+ Consumer psychology and habits cannot change immediately.
+ For domestic manufacturing firms, when they realize that the
government is encouraging exports and restricting imports, they will
increase production scale and import more machinery and equipment
to support production.
Therefore, in the short term, the number of exports does not increase
significantly and the number of imports does not decrease significantly.
If the price of exports in the domestic market is rigid, the export turnover
will only increase slightly, and the price of imports in the domestic
currency will increase due to the change in exchange rate, leading to a
possible deterioration in the balance of payments.
- In the medium term

GDP, or aggregate demand, includes the components of household

consumption, investment spending, government purchases, and net exports.
Currency depreciation will increase the demand for net exports and
aggregate supply will adjust as follows:
+ If the economy is below potential output, idle resources will be
mobilized and increase aggregate supply.

+ If the economy is already at potential output, aggregate supply will

only increase slightly, leading to an increase in aggregate demand,
followed by an increase in prices and wages, which will eliminate the
competitive advantage of depreciation. Therefore, in this case, to
maintain the competitive advantage and achieve the goal of increasing
exports, the government must use a tight fiscal policy (increase taxes
or reduce government purchases) to prevent aggregate demand from
 increasing in order to prevent domestic prices from rising.
- In the long run
Currency depreciation accompanied by a tight fiscal policy can
eliminate domestic inflationary pressure in the medium term while in
the long term, supply-side factors will create inflationary pressure.
Imports become relatively more expensive and businesses that use
imported inputs will have higher production costs, leading to higher
prices; consumers who consume imported goods at higher prices will
demand higher wages, which will put pressure on wages to rise.
Ultimately, the rise in prices and wages in the domestic market will
still eliminate the competitive advantage due to depreciation.
Experimental studies have shown that the competitive advantage due
to depreciation is eliminated within 4 to 5 years.
1.3. J-curve effect
1.3.1. J-curve
 The J-curve theory recognizes that import and export quantities and prices are often
arranged in advance and set into a contract. For example, an importer of watches is likely
to enter into a contract with the foreign watch company to import a specific quantity over
some future period. The price of the watches will also be fixed by the terms of the
contract. Such a contract provides assurances to the exporter that the watches he makes
will be sold. It provides assurances to the importer that the price of the watches will
remain fixed. Contract lengths will vary from industry to industry and firm to firm, but
may extend for as long as a year or more.
 However, in case the country is on a flexible exchange rate, BOP will get worse when
there is devaluation of its currency. Due to devaluation, there is excess supply of currency
in the foreign exchange market which may go on depreciating the currency. Thus the
foreign exchange market becomes unstable and the exchange rate may overshoot its long-
run value.

The implication of contracts is that in the short run, perhaps over six to eighteen
months, both the local prices and quantities of imports and exports will remain fixed for
many items. However, the contracts may stagger in time—that is, they may not all be
negotiated and signed at the same date in the past. This means that during any period
some fraction of the contracts will expire and be renegotiated. Renegotiated contracts can
adjust prices and quantities in response to changes in market conditions, such as a change
in the exchange rate. Thus in the months following a domestic depreciation, contract
renegotiations will gradually occur, causing eventual, but slow, changes in the prices and
quantities traded.

1.3.2. Some factors influencing the time of impact on the trade

balance in the J-curve effect theory

- Production capacity of import-substitute goods (Import substitution

goods):
For developing economies, there are some goods that these economies
cannot produce, or even if they can produce, the quality is not as good
or the price may be higher. Therefore, even if the price of imports is
higher, consumers cannot choose domestic goods. This prolongs the
duration of the price effect.
- Proportion of goods that meet export standards:
For developed countries, the proportion of goods that meet export
standards participating in international trade is high, so the price effect
usually has a low impact on the trade balance. Conversely, developing
countries have a small proportion of these types of goods, so a
currency depreciation makes the volume of exports increase more
slowly. This makes the quantity effect have less impact on the trade
balance in developing countries. Therefore, the impact of currency
 depreciation on improving the trade balance is usually stronger in
developed countries than in developing countries.
- Proportion of imported goods in the production cost of domestic
goods:
If this ratio is high, the production cost of domestic goods will
increase when the price of imported goods increases. This eliminates
the price advantage of exported goods when depreciating. Therefore,
currency depreciation may not necessarily increase the volume of
exports.
- Flexibility of wages:
The move to devalue the currency usually leads to an increase in the
consumer price index. If wages are flexible, they will increase along
with the consumer price index. This increases production costs,
thereby reducing the advantage of currency depreciation gained from
the price of domestic goods
- Consumer psychology (Consumer Sentiment) and national brand of
domestic goods:
If domestic consumers have a preference for foreign goods, then an
increase in the price of imports and a decrease in the price of domestic
goods will affect their consumption behavior. They will continue to
use imported goods even if the price is higher. Next, the extent of the
increase in the number of exported goods depends on the trust and
preference of foreign consumers for exported goods.

1.4. Conditions needed for a successful devaluation

When considering whether to devalue the currency, policymakers need to

carefully consider the factors that affect the effectiveness of devaluation:
- Export products with many imported origins:
In some production sectors in a country, it is necessary to import raw
materials or processed products as inputs for export production. In this
case, devaluation of the currency increases the cost of producing
exported goods and limits the opportunity to be more competitive in
price than those exported goods that only include domestic goods for
inputs. Therefore, devaluation is particularly favorable for
manufacturing industries whose inputs are domestic goods – for
example, minerals and agriculture.
- Cost of essential products:
Developing countries are particularly dependent on a number of
imported products, investment, energy, and medical products.
 Devaluation of the currency makes the cost of these products
relatively expensive and can have a negative impact on growth and
people's lives.
- Foreign debt:
Some poor countries are always in a state of high foreign debt. The
devaluation of the nominal value of the domestic currency increases
foreign debt in domestic currency. This poses many problems for the
government budget, due to interest payments, and high foreign
repayments due to the appreciation of the foreign currency. In these
cases, changes in taxes and government spending are needed. Private
companies with foreign debt can also be significantly affected,
especially if their products are aimed at the domestic market.
- Structural policy issues:
When the impact of policies such as subsidies, price controls, or
export quotas, will disrupt the balance of external factors according to
economic laws. These issues need to be addressed immediately if
devaluation is to be meaningful.

Even if a country’s home currency weakens, there are several reasons why its
balance-of-trade deficit will not necessarily be corrected.

- When a country’s currency weakens, its prices become more attractive to foreign
customers; hence many foreign companies lower their prices to remain
competitive.
- A country’s currency need not weaken against all currencies at the same time.
Therefore, a country that has a balance-of-trade deficit with many countries is
unlikely to reduce all deficits simultaneously.

EXAMPLE: Despite weakening against European currencies, the dollar might

strengthen against Asian currencies. Under such conditions, U.S. consumers may
reduce their demand for products in European countries but increase their demand
for products in Asian countries. Hence the U.S. balance-of-trade deficit with
European countries may decline but the U.S. balance-of-trade deficit with Asian
 countries may increase. Changes of this nature would not eliminate the overall
U.S. balance-of-trade deficit.

- The home country’s international trade involves importers and exporters under the
same ownership. Many firms purchase products that are produced by their
subsidiaries in what is known as intracompany trade. This type of trade amounts
to more than 50 percent of all international trade. Such trading will normally
continue even if the importer’s currency weakens.
- Quốc tế trừng phạt

VD: Mỹ cho VN vào danh sách phá giá tiền tệ

2. Reality in Vietnam
2.1. The characteristic of Vietnamese economy

- Vietnam is a developing country, so it has a high demand of importing machinery

to update the latest technology and raw material used as input factors in
manufacturing.

- Vietnam has been mainly exporting agricultural and fishery products and natural

resources such as: rubber, crude oil… Additionally, in the composition of

exported goods, imported raw materials account for 70% of the exporting value.
 -
202
Export 2017 2018 2019 2020 2021 2
3. 3.5 3.1 2.91 2.58 2.88
fishery products 79% 3% 6% % % %
1. 1.5 1.3 1.13 1.03 0.89
Vegetables and fruit 60% 3% 9% % % %
1. 1.3 1.2 1.11 1.06 0.81
Cashew nut 60% 5% 2% % % %
1. 1.4 1.0 0.95 0.89 1.07
Coffee 48% 2% 6% % % %
0. 0.0 0.0 0.08 0.06 0.06
Tea 10% 9% 9% % % %
Articles of apparel and 1 12. 12. 10.30 9.53 9.89
clothing accessories 1.88% 22% 15% % % %
0. 0.2 0.2 0.16 0.23 0.23
21% 1% 2% % % %
6. 6.5 6.7 5.80 5.16 6.29
Footwear 68% 1% 7% % % %
Electronic parts (including TV
1 11. 13. 15.40 14.78 14.6
parts), mobile, computer and
1.84% 75% 28% % % 3%
their parts
2 19. 19. 17.68 16.74 15.2
0.65% 67% 00% % % 7%

202
Import 2017 2018 2019 2020 2021 2
5. 5.1 5.0 4.42 3.95
Textile fabrics 16% 8% 6% % 4.21% %
Auxiliary materials for
textile, garment, leather, 2. 2.3 2.2 2.00 1.79
footwear 46% 1% 4% % 1.84% %
4. 4.0 3.6 3.00 3.20
Iron, steel 09% 1% 2% % 3.38% %
Electronic parts (including
TV parts), mobile, computer 1 17. 19. 23.80 22.16 21.9
and their parts 7.12% 10% 56% % % 9%
Machinery, apparatus, 1 13. 14. 13.86 13.60 12.1
accessory 5.29% 67% 00% % % 3%
 - Although the inflation rate in Vietnam has been controlled at below 2 digits, it is
still unstable and there are many potential factors increasing the price level.
Besides, the budget deficit and external debts should also be paid attention to.

From 2011 to 2017, the country's foreign debt ratio to GDP tends to increase
rapidly, approximately by 16.7% per year on average, higher than the GDP growth
rate in terms of price. The reason is that enterprises and credit institutions borrow
money from oversea sources for the rise in capital demand. As a result, by the end
of 2017, the country's external debt to GDP stood at 49%, nearly 50% ceiling
allowed by the National Assembly.
In 2020 and 2021, the global pandemic caused a sharp decrease in global flow
of funds as countries had to apply measures to “close” the economy to prevent the
spread of the disease. Therefore, it created a significant decline in Vietnam GDP
growth rate from 7.02% in 2019 to 2.91% in 2020, which is the lowest growth rate
in the last 10 years. With the decline in GDP growth rate and global flow of funds,
foreign debt to GDP ratio dropped to 38.4% in 2021.
 Both government foreign debt and corporate foreign debt grew between
2012 and 2021.

- Globalization, especially in economy has made more and more capital

inflow in Vietnam with higher pressure on the inflation rate. Like most
countries that begin to open their doors to integration, Vietnam needs to
stabilize the macroeconomic conditions.

2.2. The impact of exchange rate on BoT of Vietnam

Year 2018 2019 2020 2021 2022

E 22.605,96 23.054,17 23.208,78 23.160,69 23.277,35
282654980.2 336310646.3
X 243483284.21 264189366.96 371304160.48
1 3
262700632.9 332234926.9
IM 236687924.66 253070916.40 358901915.00
8 2
BoT 6795359.56 11118450.56 19954347.23 4075719.41 12402245.48
 E
23400.00

23200.00

23000.00

22800.00

22600.00

22400.00

22200.00
2018 2019 2020 2021 2022

BoT
25000000.00

20000000.00

15000000.00

10000000.00

5000000.00

0.00
2018 2019 2020 2021 2022
 E
23500
23000
22500
22000
21500
21000
20500
20000
19500
14 14 14 15 15 15 16 16 16 17 17 17 18 18 18 19 19 19 20 20 20 21 21 21
n- y- p- n- y- p- n- y- p- n- y- p- n- y- p- n- y- p- n- y- p- n- y- p-
Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se

BoT
25000000

20000000

15000000

10000000

5000000

0
2014 2015 2016 2017 2018 2019 2020 2021 2022