ECONOMYNEXT – The Washington-based International Monetary Fund claimed that Vietnam’s external position was too strong and appeared to support bogus US claims of undervaluation by ignoring a sharply appreciating real effective exchange rate index.
Instead, the IMF used another model based on the external current account to support the load and advocated an unreliable “flexible” exchange rate for Vietnam.
Sri Lanka has followed an exceptionally discretionary policy involving a “ flexible exchange rate ” (no credible external anchor) and “ flexible inflation targeting ” (no credible domestic anchor) and is now on the verge of default and balance of payments deficits after repeated currency crises.
Sri Lanka has been hit by credit downgrades in several episodes of “ flexible exchange rates ” involving currency targeting of the currency trading rate with excess liquidity and excessive outflows and under-sterilizing inflows which led to sharp declines in currencies and the depletion of foreign exchange reserves.
Sri Lanka’s problems came in part from the targeting of the REER, which analysts said was a mad pursuit, as countries in East Asia, from Singapore to Hong Kong (currency boards), and from Thailand to China (tighter than currency boards but not as credible) generally had a high level. real effective exchange rates.
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Credible and coherent policy
The State Bank of Vietnam has established a fairly credible peg with the US dollar around 23,000 dong since the currency’s last collapse at the start of the ‘Great Recession’ where the country was misled into a ‘ stimulus ” as a bubble pulled by the Fed collapsed.
The SBV in general has conducted credible domestic operations involving the sterilization of inputs and the partial sterilization of outflows across a wide political corridor and simultaneous two-way lender of last resort auctions that allow the call money rate of increase and liquidity to tighten when the Fed tightens.
However, the key rate cap has fallen since the last currency crisis.
Such a regime tends to be stricter than a currency board, which is politically neutral and the accumulation of reserves is limited to the growth of the domestic reserve currency.
Unlike currency boards, these pegs can collapse after two or three Fed cycles when the cap rate is too low to dampen domestic credit, or when central bankers who run credible domestic operations pull out and their replacements. fall prey to relentless Keynesian pressure from the IMF and other interventionists.
“Vietnam’s external position in 2019 was deemed to be significantly stronger than fundamentals warrant due to structural features,” according to an IMF staff report.
The claim came shortly after the US Treasury called the country a “ currency manipulator ” after a decade of monetary strength, with the Swiss franc one of the strongest currencies in the world.
The IMF pushed Vietnam to adopt a Sri Lankan-style “ flexible ” inflation targeting framework, saying earlier that it would provide better domestic stability than an external anchor, although countries of Latin America turn into basket case under similar arrangements.
Classical American economist Steve Hanke of Johns Hopkins University said that the US Treasury tends to make false accusations of “undervaluation” against trading partners with hard currencies all the time from Japan.
But to call the Swissie, one of the strongest currencies in the world, was absurd, he said.
“The absurdity of putting the Swiss franc and the dong in the same basket reminds me of May 1, 2002,” he said. written in december 2018.
“It was at that time that I appeared before the Senate Banking Committee, with then-Secretary of the Treasury Paul O’Neill, to testify on exchange rates and the ‘Treasury Report on the macroeconomic and exchange rate policies of the United States’ major trading partners ”.
“I was very critical of both the concept as a whole and the particular methods used to label a country as a currency manipulator. I indicated that the US Treasury report was little more than an invitation to political mischief that would interfere with free trade.
“In short, I thought, and I think the whole semi-annual currency manipulator ritual sucks and should be destroyed. The odd couple from Swissie-dong certainly suggests that I’m on to something.
Vietnam had insisted that the strong Dong was for domestic stability and not to “undervalue” the currency to stimulate exports.
Vietnam’s monetary policy for stability, not trade tells Trump after bogus US accusations of Dong ‘manipulation’
Trump-style mercantilists have long wrongly blamed East Asia, which indexed central banks to exchange rates and currency boards for ‘undervaluing’ their currencies and creating a trade deficit with the United States.
“Noting staff’s assessment that Vietnam’s external position was significantly stronger than warranted by basic principles and desirable policies, Directors called for continued reform efforts.
to remove the remaining obstacles to private investment and strengthen social safety nets, ”said IMF executive directors, one of whom is American.
“At the same time, some administrators called for caution in interpreting the results of the EBA model, which does not
adequately grasp the structural factors and measurement issues specific to Vietnam. “
The US Treasury believes that “ price effects ” are responsible for the performance of East Asian exports, in the Keynesian tradition, and refuses to recognize that the US trade and current account deficit is caused by spending deficit and FDI revenue from the United States and instead blames East Asia for ‘undervaluation’.
Cherry picking patterns
The IMF conveniently ignored Vietnam’s Real Effective Exchange Rate (REER) index, which currently stands at around 130% (as the US has always done) and instead points to the current account surplus, choosing the model to support a preconceived conclusion.
Vietnam’s current account surplus soared in 2019, after the automatic tightening of policy in 2018 in response to the US tightening (squeeze in quantities and hike in rates) that slowed domestic credit, a real estate and housing bubble.
Domestic credit slowed sharply to 12.8% in 2018 and 2019, from around 18% previously, as the spot rate increased (without a formal rate hike) and liquidity tightened.
Reserve build-up slowed sharply in 2018 and reserves were sold to keep the peg at around 23,000, giving domestic stability.
The external current account balance, which was negative 0.6% in 2017 with credit growth of 17.4%, rose to 1.9% in 2018 and 3.8% in 2019. Vietnamese equities were down. collapsed as liquidity tightened, then recovered.
The housing bubble has moderated, allowing the economy to grow steadily with low inflation only slightly higher than in the United States.
The IMF, however, pushed the SBV to adopt a “flexible exchange rate” which reduces credibility, panics domestic and foreign investors and ultimately generates credit downgrades and political instability as happened in Sri Lanka and Malaysia. .
“In the context of reserve adequacy, directors welcomed efforts to allow greater two-way exchange
rate flexibility and modernize the monetary policy framework, which would help the economy
to adapt to the changing external environment, ”said the IMF’s executive director.
Vietnam’s REER is now around 130%.
Mercantilism Effect Price
However, the IMF – as it had done for other countries in the past – instead focused on a current account-based model to denigrate the country and claim that Vietnam’s external position was “significantly stronger. than the fundamentals justify because of structural characteristics ”.
The IMF was set up by a great New Dealer Harry Dexter White. The new dealers devalued the US dollar amid several economic shocks (regime uncertainty) that delayed and killed the first US recovery after the Great Depression.
“There are no structural features in Vietnam other than cautious domestic operations,” said Bellwether, business columnist at EN.
“It goes back to a Keynesian / mercantilist misunderstanding of balance of payments and central banks involving German reparation payments.
“Keynes in 1929 claimed in several intellectual debates to have made similar arguments placing the effects of price on income, which he did not seem to fully understand.
“He also believed that there were ‘structural features’ that condemned countries.”
Keynes wrote among other things that “the economic structure of a country in relation to the economic structure of its neighbors allows a certain natural level of exports”.
Swedish economist Bertil Ohlin (and French economist Jacques Reuff) explained in 1929 that a current account surplus (or any net position) is triggered by income effects (outflows) rather than by price effects warning that ‘A focus on’ price effects’ would have unfortunate consequences in the future.
He warned that apart from clarifying the theory, this was “a matter of considerable practical importance not only for the processing of reparation payments, but also for the future policy of the central bank.”
Countries like Sri Lanka from 2015 to 2020 face a flaw in the style of the Weimar Republic, amid relentless pressure to apply ‘flexible exchange rates’ while pumping liquidity to target a gap production and create deficits not only in the current account but in the overall balance of payments. . (Colombo / Mar03 / 2021)