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Samson:  A high-risk destination for overcoming economic crises ... What do you know about the flotation? (report)

23rd March, 2021

- Sudan is the latest country to implement directed flotation in February 2021
- The "float" aims to let the central bank have a currency rate determined according to supply and demand
- Floating currency exchange rates are subject to constant fluctuations

With the intensification of the economic crisis resulting from the repercussions of the Corona pandemic, countries around the world are looking for financial and monetary solutions to recover and adapt to the crisis, including the "floating of the national currency", which carries both pros and cons at the same time.

Countries resort to a policy of floating their currency, in the event of financial and economic turmoil, increasing speculation in the foreign exchange market and the loss of control by the Central Bank.  These disturbances affect the performance of the state's balance of payments, and cause an expansion of the trade deficit, amid the impact of exports and a contraction of foreign investment, due to a decline in confidence in the future of the economy.

Several countries, such as China, India, Brazil, Argentina, Malaysia, Egypt, Morocco, Iraq and Sudan liberalized the exchange rate of their currencies during the past years and decades. However, these experiences were not successful by a large percentage except in China and India, thanks to the high exports and the low prices of local products, which boosted the demand for them externally and locally.

** Currency editing

"Floating" is known as the floating or released rate of currency exchange, and it is one of the tools used by the monetary policy administration in central banks around the world to support economic activities.

"Floating" aims to let the central bank leave the exchange rate of one currency, and its equation with other currencies, that is determined according to the forces of supply and demand in the money market.

Governments' policies regarding floating their currencies differ, depending on the level of liberalization of their national economy, the strength of their international trade, and the efficiency of local production.

Floating currency exchange rates are subject to constant fluctuations, with any change in the supply and demand for foreign currencies, so that they can change several times per day.

** The float type

Floating includes two types. The first is "free float", which includes leaving the central bank the currency exchange rate that changes and is determined freely with time, according to market forces, supply and demand.

Central banks' intervention in this case is limited to affecting the speed of exchange rate change, not to limit that change.

The free float is considered preferred by the advanced industrial capitalist countries in dealing with their currencies, thanks to the strength of their trade balance and the support provided by economies to currencies, and they aim to reduce imports or increase commodity exports.

As for the second type, "managed float" or "directed", it means leaving the exchange rate to be determined according to supply and demand, with the intervention of the central bank whenever there is a need to adjust this price against the rest of the currencies.

The second type depends on determining the response of a set of indicators such as the amount of the gap between supply and demand in the exchange market, the levels of spot and forward exchange rates, and developments in the equilibrium exchange rate markets (black market).

Sudan is the latest country to implement a "directed float", after last February, it unified the exchange rate of the local pound against the dollar and foreign exchange, in an attempt to eliminate economic and monetary imbalances.

** Relieving pressure

The reports of the International Monetary Fund confirm that countries whose inflation targets are well stable depend on exchange rate flexibility to relieve external pressures.

"Flexible exchange rates can be a useful shock absorption tool in the face of volatile capital flows," the reports added.

The IMF also indicated that this mechanism does not achieve adequate protection in all cases, especially when access to global capital markets is disrupted or market depth is limited.

“Intervention in the foreign exchange market was among the central bank’s policy tools that complement the interest rate policy when dealing with capital inflows,” according to the fund.

The Fund stated that these various approaches were also used during the Corona crisis, with large differences between countries' responses.

** The positives of flotation

According to data from central banks around the world, the elimination of the black market is one of the most important advantages of the floatation process, as it returns to the Central Bank the leadership of the foreign exchange file in the country, away from the control of exchange companies and traders.

The "float" also eliminates the phenomenon of "dollarization", which means that citizens keep a dollar and buy it without reason, thus causing scarcity of foreign liquidity in the markets.

Likewise, the float provides great support in reducing the balance of payments deficit, and supports foreign investment inflows, and an increase in commodity exports.

The owners of in-kind assets, such as real estate, factories or land, benefit from the increase in their value without affecting their savings, as well as the holders of foreign currencies whose wealth doubles in the local currency without effort.

** The most prominent negatives

As for the most prominent negative aspects of the flotation, which is the rise in inflation to record levels, as the liberalization of the exchange rate was accompanied by difficult economic conditions, and this is what happened in Egypt, which witnessed inflation rates at 35 percent a few months after the flotation.

The accompanying turmoil is also causing an economic recession and high levels of unemployment, with producers and importers affected in the short term.

The negatives also include a decrease in the value of monetary assets in the local currency (the erosion of deposits denominated in the local currency), in addition to the high bill for repaying the state's external debt.   LINK

Courtesy of Dinar Guru

Frank26   Article:   "The Central Bank adds a new feature to the Iraqi banknotes"  Quote:  "the Central Bank of Iraq announced on Monday, that it has added a feature to protect banknotes from bacteria and viruses to the national currency"  If you go to the CBI website you will be able to see when they last printed currency.  It was in 2018.  It's the 250's the 500's that they are going to be including with the new small category notes...the coronavirus came out in 2020 but...they haven't printed any new currency since 2018...something doesn't sound right...this is a marketing ploy...bring me your infected 3-zero notes...says the CBI...We want to protect you...I will give you brand new small category notes with a new value to it against the American dollar...We believe this is a propaganda ploy to bring in as many zeros as possible.  I'm impressed with this tactic...

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Harambe:  VIR: Ripple effect of US fiscal stimulus to Vietnam’s  growth (3/24/21)

Regarding the former, the size of the latest US fiscal stimulus package is enormous at over 8 per cent of GDP, and most economists expect that the package, which includes $1,400 stimulus checks to US households, will also boost the economies of countries that have close economic ties with the US.

Canada has the closest economic ties to the US, and the International Monetary Fund estimates that every $1 of US fiscal stimulus spending also boosts Canada’s economy by about $1. Vietnam is obviously not as closely linked, but the US is Vietnam’s largest export market at circa one-quarter of total exports, and Vietnam’s overall trade activity is higher than any other country in modern history, so the country should benefit significantly from the US stimulus plan.

The clearest, most concrete evidence that US fiscal spending will benefit Vietnam is included in the economic statistics of both for the first two months of this year, because the US government sent $600 fiscal stimulus checks to US households at the end of December 2020. Those stimulus checks, which were part of a previous aid package, significantly boosted US retail sales in January. This in turn boosted Vietnam’s exports and manufacturing activity since US consumers purchased an enormous amount of products that are made in Vietnam.

For example, sales of electronics jumped by 15 per cent on-month in January, and furniture sales rose 12 per cent on-month. As a direct result of the surge in the sales of those products, Vietnam’s exports to the US soared by 35 per cent on-year in the first two months of 2021, and Vietnam’s total electronics exports increased 34 per cent on-year.

There are two reasons that so much of the stimulus money US consumers spent was used to purchase products that are made in Vietnam. The first reason is that US consumers are currently unable to spend much of their disposable incomes on services such as restaurants or cinemas due to social distancing restrictions.

Instead, they are purchasing products (especially ordered online), so the ratio of consumer spending in the US and in most developed countries on goods versus services has surged since the outbreak emerged.

The second reason is that US consumers have been buying so-called “stay at home” goods such as electronics, furniture, and home gym equipment, and many of those products are made in Vietnam.

To illustrate how powerful this phenomenon is, PC sales in the US increased by 15 per cent in 2020 (versus 1 per cent in 2019) and sales of games and hobby items jumped by 19 per cent because consumers are buying products that make spending time at home more enjoyable and/or that facilitate working from home.

The production and export of such goods to the US and other developed countries supported Vietnam’s manufacturing sector and GDP growth last year – and looks certain to do so again this year.

Furthermore, foreign-invested companies that manufacture high-tech products in Vietnam import most of the components required to make those products, and imports of those critical parts/inputs surged by 35 per cent on-year in the first two months of this year. This is a clear indicator that these companies are preparing to ramp up production this year, presumably in response to the increased demand those companies expect from US consumers.

Finally, in 2020 and in the first two months of 2021, the two main drivers of Vietnam’s economic growth were consumption and manufacturing. This explains why we expect a direct connection between US fiscal stimulus and Vietnam’s GDP growth this year, but strong GDP growth in Vietnam should also support the VN-Index.

However, in addition to directly supporting Vietnam’s economic recovery, the US fiscal stimulus package may also indirectly benefit Vietnam’s stock market because a significant portion of the money that US households received from the government was invested in the US stock market, according to the NY Federal Reserve.

Many economists believe the massive scale of the US fiscal stimulus will lead to a decline in the value of the US dollar, which would in-turn help boost stock prices in emerging and frontier stock markets like Vietnam’s.

https://www.vir.com.vn/ripple-effect-of-us-fiscal-stimulus-to-vietnams​-growth-83314.html

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