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The effects of the plummet in oil price on the Vietnamese economy

Wednesday 01, 04 2020
For the Vietnamese economy, the continuation of oil price decrease in 2020 has both negative and positive consequences.
The effects of the plummet in oil price on the Vietnamese economy

Benefits

Firstly, the strong decrease in oil price helps to reduce the oil import cost, thus lessening the import deficit as well as saving a large number of oil-importing foreign currencies for Vietnam, especially in the context of the gas and oil import deficit of Vietnam from 2015 until now.

According to the General Department of Customs, the total gas and oil import value in 2019 of Vietnam was 9.55 billion USD, decreasing by 830 million USD compared to 2018; meanwhile, the gas and oil export of the country was 3.94 billion USD, dropping by 284 million USD compared to 2018. The gas and oil import deficit in 2019 of the country was 5.6 billion USD, decreasing by 500 million USD compared to 2018.

Thus, being a nation with a gas and oil import deficit, the decreasing oil price is a positive factor, helping Vietnam lessen the gas and oil import price. Secondly, the drop in oil prices affects people’s consumption and the enterprises’ activities positively. Thanks to the drop in the petrol price, people can save more money, thus increasing the consumption of the economy.

From the beginning of 2020 until now (with the latest adjustment session being on 29th March 2020), the oil price has been adjusted 6 times, falling by 30-40%, helping people save money, thus increasing the spending on other services, contributing to the improvement in goods and consumption retails.

For enterprises, especially those operating in the fields of transportation, the decreased oil price helps to reduce the input costs and the product costs, increasing the competitiveness, as well as improve revenue in general.

For example, the transportation industry will benefit the most because this is the petroleum-consuming industry and the cost of gasoline accounts for a large proportion of the cost structure (35-40%). In addition, a number of other industries will also benefit from this reduction, such as plastic production, fertilizer, metallurgy, fishing, and construction of transport works, etc. because gasoline accounts for about 20-30% of their input costs.

Thirdly, gasoline price fall also helps to reduce the pressure on inflation, contributing to macroeconomic stability. The sharp drop in oil prices has a direct impact on transport, utility services, fuel, and construction materials, etc.; thereby reducing the pressure on the CPI (currently, gasoline has a weight of 4% in the CPI basket).

Besides, the reduction of gasoline price also affects the transportation group (with the weight of 9.37%); At the same time, it has an indirect impact on the food, food products, and non-family dining group (the group with the largest weight of 36.12% in the basket of goods calculated by CPI), contributing to stabilizing the fluctuations of this group. Currently, the CPI in March 2020 has increased by 0.34% compared to December 2019 and by 4.87% over the same period in 2019.

Generally, the average CPI in the first quarter of 2020 has increased by 5.56% compared to the same period last year, being the highest level in 4 years while the core inflation has increased by 3.05% compared to the same period in 2019.

Therefore, the reduction of petrol and oil prices will contribute to reduce the pressure on inflation and to increase macroeconomic stability.

Drawbacks

Firstly, it reduces the State budget revenue from crude oil. From 2000 to present, the proportion of revenue from crude oil in the state budget revenue structure has decreased, from an average of 25% in the period 2000-2008 to about 13% in the period of 2009-2014 and currently, it stays at only about 4.7% in the period of 2015-2019.

The total budget revenue from crude oil has also decreased from 115 trillion VND in 2013 to only 53 trillion VND in 2019, which is only about 46% of that in 2012-2013 and equal to 54.3% of that in 2014. In addition to the direct impact on revenues from crude oil, taxes on gasoline (such as import and export duties, the added value taxes, excise taxes) have also been affected, due to the decline in oil prices.

For example, the current price structure of gasoline (from January 1, 2020) has received 8 additional items, including the CIF price tax (10%), the added value tax (10%), the special consumption tax (10% for gasoline RON95 and 8% for gasoline E5), the environmental protection tax (4,000 VND), the business cost norms (depending on the type of gasoline RON95 or E5), the norm profit and deduction for stabilization fund (depending on the type of petrol), etc.

Therefore, falling petrol prices will directly affect the taxes collected from gasoline. Because the role and proportion of crude oil revenues in the total state budget have decreased, the impact of the oil price reduction on the budget is not much, but when oil price plummets (especially sharply lower than the estimated price), it will lead to a decrease in state budget revenue, in the context of increasing public investment by the Government, to compensate for the decline in investment of businesses and the private sector due to the impacts of the COVID-19 epidemic; Moreover, it will also make budget balance more difficult, as well as increase the budget deficit and public debt, etc.

Secondly, it will have negative impacts on the mining industry (especially that of oil and gas) which currently contributes about 7.8% of the GDP structure. For some corporations whose oil and gas are core activities such as PVN, PVD, GAS, etc.

The low oil price will reduce the revenue source; thereby affecting the exploitation and exploration plan of 2020, as well as those in subsequent years. In addition, a number of listed petroleum enterprises are also affected by sharply falling stock prices, and are under pressure to divest from investors. Accordingly, the income tax payment of these enterprises to the State budget has also decreased accordingly.

For example, according to PVN's assessment, with the plan and scenario of oil price in 2020 being about 60 USD / barrel, PVN's revenue will be 4.67 billion USD. If the oil price drops to about 30 USD / barrel, revenue will be only 2.36 billion USD. As a result, the state budget of PVN is expected to decrease from nearly 1.6 billion USD to only 800 million USD.

Some suggestions

The effects of the plummet in oil price on the Vietnamese economy

To minimize the negative effects of the sharp drop in oil prices, to actively support macroeconomic stability, and to promote sustainable growth in the long term, there have been some recommendations as follows:

Regarding fiscal administration:

Regulatory agencies need to coordinate and closely monitor oil price movements, in which the impact of the oil price scenario of 20 USD / barrel should be considered to take appropriate measures to respond, ensuring stable budget revenues.

To ensure the sustainability of the fiscal year, the related ministries and branches need to review the 2020 and the medium- and long-term budget plans in the period between 2020 and 2025 in the direction of continuing to increase other sources of revenue to replace the revenues from the exploitation of crude oil and other resources, striving to reduce the contribution of crude oil in the State budget revenue to 2-3%, both contributing to the protection of resources, while avoiding the fluctuations due to external influences.

Regarding risk management in petroleum import and export activities:

  • Import and export businesses of petroleum and oil-processed products should increase the use of future contracts and the options contracts to control the petrol import prices.

  • Enterprises should reduce the export of fossil fuels such as crude oil, coal while increasing the export of refined products and processed products to increase the export value while reducing the need to import gasoline products.

  • It is also wise to balance between import and export of petroleum and the domestic market demand, especially in the primary energy sources for electricity production.

​Regarding oil exploitation activities:

Petrochemical and refining enterprises need to adjust production and business activities in the direction of:

  • Reduce or stop exploiting at oil fields with production cost being higher than the average expected cost of exploitation in 2020 (of 30 USD / barrel);

  • Strengthening cost reduction activities to strive to bring the mining costs to below 30 USD / barrel in order to cope with the scenario of oil price falling to below 20-25 USD / barrel;

  • Reviewing the investment allocation plan for oil and gas projects.

Regarding the management of petrol and oil prices:

The management agency should calculate and manage the price of petrol and raw materials in Vietnam at an appropriate level which is more balanced with prices in regional countries in order to encourage businesses to invest in production, business, export processing, etc. thereby contributing back to the budget.

>> The price of rice reverses after the export suspension direction

Source: http://nhipsongviet.toquoc.vn/

Categories:
Economy News

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