International determinants of foreign reserves accumulation in Vietnam

Abstract

Motivated by the recent decline in Vietnam’s foreign reserves, this study investigates their key determinants, with a particular focus on international factors. Based on empirical literature, the research examines three external drivers - exports, Foreign Direct Investment (FDI), and exchange rate - along with three domestic variables: inflation, money supply, and GDP. Using quarterly data from 2005 to 2023 and applying the Autoregressive Distributed Lag Error Correction Model (ARDL-ECM), the study explores both short- and long-run relationships. The results reveal that exports and money supply positively affect foreign reserves in the long run, with elasticity coefficients of 1.37 (p < 0.01) and 1.22 (p < 0.01), respectively. Conversely, exchange rates and GDP exert negative impacts, with coefficients of -5.17 (p < 0.01) and -1.12 (p < 0.05), respectively. FDI and inflation are found to be statistically insignificant. In the short run, only the exchange rate demonstrates a significant effect. These findings underscore the growing importance of international dynamics in shaping Vietnam’s reserve accumulation. The study offers practical policy implications, suggesting that enhancing exports and stabilizing exchange rates could be more effective than relying solely on domestic macroeconomic measures.