VIETNAM’S EXCHANGE RATE POLICY AND IMPLICATIONS FOR ITS FOREIGN EXCHANGE MARKET, 1986-2009 Tran Phuc Nguyen* and Duc-Tho Nguyen Griffith Business School (AFE) Griffith University Nathan, QLD 4111, Australia ABSTRACT Vietnam’s foreign exchange (forex) market has remained relatively poorly developed despite more than two decades of general reform throughout the economy. This paper adopts a microstructure approach to the analysis of the root-causes underlying the operational deficiencies of this market. The analysis suggests that the authorities have tended to follow a de facto adjustable peg exchange rate regime which, in turn, has acted as a retardant to the development of the country’s forex market. Consequently, market signals have become increasingly non-transparent. There are indications that market forces have often moved beyond
the framework of current regulations. Key words: Foreign exchange market; market microstructure; Vietnam; VND/USD exchange rate. August 2010 * Corresponding author, Tran.Nguyen@grifffith.edu.au 1 1 Introduction In line with a general economic reform process dating back to at least the late 1980s, the Vietnamese authorities have endeavored to allow and encourage financial markets to develop. The formation of an organized foreign exchange (forex) market in the early 1990s was an example of such efforts. Yet, as is the case in a number of other developing economies, the forex market in Vietnam has remained relatively poorly developed, with low trading volumes, limited use of derivative products, and poor liquidity. What are the main reasons behind such weaknesses? This paper will adopt a market microstructure approach to this question. Specifically, the paper will examine how the conduct of Vietnam’s exchange rate policy has shaped the ways in which its forex market is organized and administered, and draw implications for the market’s level of operational efficiency. In so doing, the paper seeks to make contributions in two main respects. First, it will help to address the relative dearth of systematic analyses of the forex market in Vietnam. The existing literature in English on this particular topic is rather thin. While the literature in Vietnamese is more voluminous, apart from several reflective contributions, to date much of the relevant information has come piecemeal from disparate sources, such as short articles in trade journals, and undergraduate student dissertations or research papers (for examples of these, see Nguyen Tran Phuc 2009b). Reconciling and synthesizing such piecemeal and potentially conflicting information is a non-trivial task. Further, the paper will offer some new information obtained through a recent survey of market participants (the survey was conducted by the authors in February-May 2010). It is expected that a systematic analysis of the structural and operational characteristics of this forex market, with an emphasis on more recent years, will be of documentary interest to scholars and analysts whose research focus includes Vietnamese affairs and socio-economic development. Second, through the application of the market microstructure approach, the paper seeks a better understanding of the root-causes of the poor functioning of this particular forex market. Accordingly, the paper may also be of interest to researchers and policy analysts who are concerned with the workings of forex markets in general. The remainder of the paper is structured as follows. Section 2 provides some background...
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