ANZ expert ponders over oil price fall effects

Global oil prices have dropped 57 per cent since July last year. How is this drop affecting Vietnam’s economy?

As the correction in the international price of oil now enters its seventh month, the disparate impacts on Asia are starting to become more apparent. For most of Asia – with the exception of Malaysia – the oil price fall is a significant positive, although to varying degrees. As local oil consumption has steadily risen in Vietnam, posting a 7.5 per cent compound annual growth rate over the last 20 years, the impact of the decline in oil prices could be significant, across sectors, expenditures and prices.

However, Vietnam is both an exporter of crude and an importer of refined products. Therefore we expect to see a barbell effect across trade and expenditure patterns. What is lost at the crude end should be offset by gains at the refined end. Hence it is important to estimate where the net impact will fall. Though the gross moves are large, this barbell dynamic suggests that on many important macro-aggregates – such as state finances – the net impact will be marginal.

Many people argued that the fall in global oil prices has not yet positively impacted on the economy, especially local consumption, even though the inflation rate has been already very low. What is your view?

Vietnam’s transfer pricing policy has limited the decline in the local oil prices, and that will lead to a price decline in other products. When that occurs, we expect retail sales to continue rising. We’ve already seen something like 16 per cent growth in retail sales in general. If you consider less than 1 per cent inflation in the same period, that means retail sale increased 15 per cent. We expect any sustained decline in inflation in Vietnam to be supportive of local consumption. The first obvious effect of the decline in oil prices is further softening of headline inflation. The persistent decline in oil prices in the second semester exacerbated the already-soft price gains in non-food and non-oil items in the consumer price index basket due to sluggish domestic demand.

A big ratio of Vietnam’s budget collection is dependent on crude oil exports. Will the low oil price affect the state budget, limiting public investment that is expected to spur economic growth?

Although the budget deficit continued to improve, the transfer pricing policy of various commodities in Vietnam cost the state at least VND103 trillion in 2013, accounting for 2.9 per cent of GDP. Nevertheless, the cost of social subsidies has declined from a peak of 4.7 per cent of GDP in 2008. Over the past four years it has been broadly unchanged at 2.96 per cent of GDP. Due to the lack of complete breakdown of the state’s subsidy bill, we assume that the marginal change in social subsidies in 2014 was due to the decline in oil prices.

As of September 2014, we estimate that expenditure on social subsidies has slightly declined as a portion of GDP to 2.8 per cent. Although the subsidy bill has marginally declined, we expect that total tax revenues from crude oil exports have also decreased. Crude oil is a significant source of government revenues as the state collects various taxes including royalty tax, crude oil export tax, and windfall tax. However, the loss in crude oil export also means fewer subsidiaries to petroleum import.