**1. Introduction**

The impact of exchange rate volatility on exports has generated a grea<sup>t</sup> degree of interest among policymakers, economists, and practitioners (exporters and importers in particular). The impact is playing an increasingly important role in many emerging Asian and South American countries, where exports are considered the engine in export-orientated growth models (Kandilov 2008). It is widely believed that an increase in exchange rate volatility could have devastating effects on an economy and its trade, and such outcomes would be the most damaging in emerging nations, where capital markets are likely to be underdeveloped (Prasad et al. 2003). In the context of an emerging market, a comprehensive understanding of the nature and magnitude of the nexus between exchange rate volatility and exports is of grea<sup>t</sup> importance to policymakers. Unfortunately, this crucial issue has been largely ignored.

In Vietnam, researchers have examined a variety of factors, such as foreign direct investment (Xuan and Xing 2008), trade policy (Nguyen 2016), and the impact of trade partnerships or agreements

(Xiong 2017), that have affected aggregated exports. Nguyen (2016) examined the trade liberalization policy in Vietnam and its link to the level of export sophistication. The study's findings reveal that trade liberalization has had a stronger effect on the non-manufacturing sector than the manufacturing sector and that being a World Trade Organization (WTO) member does not have any impact on the level of export sophistication in Vietnam. In their analysis, Narayan and Nguyen (2016) used Vietnam as a case study to demonstrate how the variables in the gravity model are dependent on trading partners. Their results indicate that the country's trading activities are more sensitive to exchanges with rich nations than low-income ones. Also, the issue of Vietnam's currency depreciation (or devaluation, to use the more accurate term) has been the subject of debate in recent years. Some believe that although this strategy would enhance export performance, it would have the side effect of making exchange rates volatile, which, in turn, may be harmful to exports.

On balance, there are conflicting views in the literature on the relationship between exchange rate volatility and exports: empirical studies have produced mixed results due to differing methodologies, volatility measurements, and the types of data used. To the best of our knowledge, few of these studies have been conducted in the context of Vietnam, so policies may lack evidentiary support from academic studies. Our efforts here are an attempt to fill this gap. This paper aims to provide empirical evidence of the link between exchange rate devaluation, volatility, and export performance in Vietnam at disaggregated levels over a period of 16 years, from 2000 to 2015.

The contributions of this paper are as follows. *First*, a panel model was used to analyze the relationship between the two main variables of interest—the exchange rate volatility and exports, with a special focus on the manufacturing industry and its 10 subsectors. Details of the 10 subsectors, as well as 26 of Vietnam's key export partners, are shown in Tables A1 and A2 in the Appendix. These partners make up a significant share of Vietnam's export transactions compared with the rest of the world, and the manufacturing sector plays a substantial role in Vietnam's export structure. We argue that, in recent years, Vietnam has become a preferred destination for supply chain production for many multinational corporations (MNCs) due to the rise of China (Hooy et al. 2015). Also, the country has become deeply involved in further international economic integration by joining multilateral free-trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP). *Second*, we reexamined the effect of exchange rate volatility on exports in three different regions (Asia, Europe, and America). We are of the view that the manufacturing exports between Vietnam and its partners in different regions may be influenced by regional factors such as geographic distances, political and economic relationships, and others. This may alter the export structure and the target destination, especially for the manufacturing sector. Therefore, we separated all of the data into three subsamples based on geographical characteristics, which enabled the exploration of whether location contributes to the impact on the nexus between exchange rate volatility and manufacturing exports in Vietnam.

The structure of this paper is as follows. Following this Introduction, information on manufacturing exports and the trend of exchange rate volatility in Vietnam are briefly discussed in Section 2. Section 3 summarizes relevant theories and empirical studies related to exchange rate volatility and exports. Model specifications are presented in Section 4. Section 5 describes the data and presents the empirical results. A concluding remark follows in the remaining section of the paper.

### **2. Overview of Vietnam's Exports and Exchange Rate**

This section provides some background to provide insight into how the exchange rate market in Vietnam operates, as well as the state of manufacturing exports in Vietnam during the 2000–2015 period. In Vietnam, the exchange rate market is controlled by the State Bank of Vietnam (SBV). In early 1999, it was announced that the exchange rate system would follow a managed floating regime, in which the SBV would publish a daily interbank exchange rate, the average of the exchange rate based on the previous day, and a fluctuation band. The SBV predetermines the fluctuation band for exchange rates to adjust to the market forces of demand and supply, and market participants are expected to trade within the setting band. Table 1 provides a summary of fluctuation bands specified by the SBV from

(%)

0.1

0.25

0.5

0.75

1999 to 2015. Before 2007, the setting bands of VND/USD fluctuated within a narrow range of around 1%. During the 2008 global financial crisis, the SBV allowed the band to widen to 5%, relative to the official quotation, before narrowing it down to 1% in 2011. This band was stable until late 2015, when it increased by 2%. However, according to the exchange rate regime classification by Ilzetzki et al. (2017), Vietnam was classified as a "dual market in which parallel market data is missing" prior to 2002, but the country was set to follow a crawling peg until 2016.


1

**Table 1.** Fluctuation Bands of USD/VND Exchange Rate, 1999–2015.

2

3

5

3

1

3

Figure 1 presents the annual values of Vietnam's manufacturing exports, and the line depicts the trend in the VND/USD exchange rate from 2000 to 2015. There was an upward trend over the timeframe considered. The total value of manufacturing exports started at around 10 billion USD in 2000, gradually increased to approximately 45 billion USD in 2008, and then had a relatively slight decrease in 2009 because of the global financial crisis. After that, the increase was even more significant during the 2009–2015 period, ending up at over 150 billion USD in 2015. A similar trend was seen in the export pattern of 26 other major countries. Regarding the exchange rates, the line graph shows an upward trend from around 14,000 VND per 1 USD in 2000 to approximately 22,000 VND per 1 USD in 2015, indicating a depreciation in VND of more than 120% over the selected period. The most striking detail is that, after the global financial crisis, the exchange rate depreciated dramatically, with a depreciation of around 30% over a period of three years.

**Figure 1.** Quarterly Vietnam's Total Exports and VND/USD.

A closer look at Vietnam's manufacturing sectors is illustrated in Figure 2, which shows the percentage of export value from each subsector of the manufacturing sector in four different years during the period from 2000 to 2015. Importantly, these proportions changed significantly over the period surveyed. In 2000, the largest subsector contributing to overall manufacturing exports was *Textiles, wearing apparel, leather*, making up more than two-fifths. This was followed by *Food products, beverages, and tobacco*, which accounted for nearly one-third of the total of manufacturing exports. Textiles continued to account for the majority of exports until 2010. In 2015, *Machinery and equipment* became the most significant contributor after experiencing a considerable rise from nearly 13% in 2000 to just under two-fifths in 2015. *Chemicals, rubber, plastics, and fuel products* and *Furniture, other*

*manufacturing products* were large contributors to the country's manufacturing exports from 2000 to 2010, but their share declined marginally in 2015. Other industries made up a minuscule part of the total value of manufacturing exports throughout the period of interest.

**Figure 2.** The exporting share of each subsector in the manufacturing industry (%).

Based on the above statistics, some observations can be summarized. *First*, the manufacturing sector is playing an increasingly important role in Vietnam's exports with regard to the monetary value and the share of total exports, but there has been significant variation in its structure, and it is now dominated by machinery and equipment products. *Second*, the VND depreciated and fluctuated over the study period, potentially generating detrimental effects on exports, especially in the manufacturing sector.
