CHAPTER 3: PERFORMANACE OF TRADE BALANCE AND
3.3. The fluctuation of exchange rate in 2000-2010 period
3.3.2. Movement of real exchange rates
3.3.2.1. Real exchange rates computation
Because the calculation of bilateral real exchange rate is included in the process of computing REER, we explain the latter only.
42
As mentioned earlier in Part 2.1.2.2, GM method has some advantages to AM method. The study, thus, applies GM method to calculate REER of Vietnam. Also, this is the method IMF use to calculate REER of countries published on IFS. Thereby, we use the equation (2.1) and (2.3) for computing.
REER computation is heavily influenced by many factors, mainly are the choice of indices, weights, data sources, the availability of data and the purpose of study.
* Choices of weight:
Based on the trade shares of trading partners with Vietnam, seventeen largest trading partners are chosen, including: China, Singapore, Japan, Republic of Korea, Thailand, Malaysia, Hong Kong, United States, Indonesia, Germany, Australia, United Kingdom, France, Russia, Philippines, Taiwan, Netherlands as representation of the major trading partners of Vietnam that covers about 85 percent of total trade each year. The trade shares of these trading partners are also the criterion to establish a currency basket with their weight calculated by following formula:
Where: Xit, Mit, Xit + Mit. represent exports of Vietnam to trading partner i, imports of Vietnam from trading partner i and total trade between trading partner i and Vietnam respectively. The subscript t represents the time period which is the time variation component creating a dynamic weighting system. These dynamic weight indices can indicate the change over time which is misrepresented by fixed weight indices.
* Choice of price indices:
There are two popular available price indices: wholesale price index (WPI), in some cases the producer price index (PPI), and consumer price index (CPI). For the price of tradable goods, the WPI/ PPI are used because the WPI/ PPI was influenced by it being heavily weighted with trading goods thus representing a greater proportion of traded goods (Edwards, 1989). For countries whose WPI/PPI are not available, CPI are substituted. CPI is also used in the case of non-tradable goods of Vietnam. This
43
index broadly represents both tradable and non-tradable goods but using as a proxy for the price index of non-tradable goods is a matter of expediency and data availability rather than a perfect (or better) representation of the price of non- tradables.
* Choice of base year:
Although GM method neglects the effect of base year to reflect the trend of REER, the base year is chosen as the time that the value of VND is equilibrium with other currencies for the purpose of evaluating the change of this currency over time.
For this reason, 2000, which is also the base year in published data of financial organizations (For example IMF, ADB, BIS) is chosen. The reasons for this choice rely on that the trade balance of Vietnam is quite balance in this year and that SBV re- adjusts the nominal value of VND to bring it back to it real value relative to other currencies.
* Data collection:
Data for computing is yearly and quarterly data, taken from various reliable sources, mainly from IMF’s international financial statistics CD - April 2009 (IFS).
The specific sources for data are as follow:
Data on average-period nominal exchange rate of VND against USD is taken from SBV. Data on average-period nominal exchange rate of other currencies against USD from 2000(1) to 2008(4) is obtained from IFS. For the rest period, from 2009(1) to 2010(4), these data is obtained from IMF website.
Data on exports, imports of Vietnam with trading partners is taken from GSO.
Data on WPI/PPI of trading partners and CPI of Vietnam from 2000(1) to 2008(4) is obtained from the IFS. From 2009(1) to 2010(4), these data is calculated based on quarter-on-quarter inflation rate of each country obtained from Organization for Economic Cooperation and Development (OECD) websites. One special case is that for countries in Euro area (including Germany, France, Netherlands), WPI/PPI data of Euro area is used instead of
44
countries’ WPI/PPI because it reflects price index of Euro currency better than price index of individual country members.
* Steps of computing and result:
Firstly, we calculate bilateral nominal exchange rates between VND and chosen foreign currencies by using cross exchange rate theory. That means nominal exchange rates between VND and foreign currencies (other than USD) are calculated through USD (USD as intermediary currency).
Secondly, we turn the obtained nominal exchange rates into index form with 2000 as the base year.
In the next step, by using equation (2.1) to compute bilateral real exchange rates (in index form) between VND and foreign currencies, we obtain 17 bilateral exchange rate series, including the bilateral real exchange rate of VND against USD.
Finally, REER is computed by using equation (2.3). Annual RER and REER is reported table 3.8.
Table 3.8 - VND/USD RER and REER
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 RER 100.00 107.33 107.23 107.92 103.69 99.88 96.85 91.82 80.74 79.84 72.52 REER 100 100.14 106.13 112.51 111.33 101.98 103.44 102.26 88.984 85.91 92.61
Source: Calculated by author