Nation braces for global shifts in recovery journey

Vietnamese citizens are feeling the pinch at the pumps with global oil price rises, photo Le Toan

Events in Ukraine since February 24 have sent commodities worldwide into an upward spiral, with European gas soaring to the equivalent of $50 per metric million British thermal unit, and oil above $100 per barrel.

By late last week, the global uptrend in oil prices continued due to big concerns over the sanctions of the US and European nations against Russia, which could cause disruptions in oil and gas flows from a major producer of these products.

Russia’s supply chains and exports have been disrupted as many of its banks have been removed from the SWIFT international payment gateway.

According to Goldman Sachs, shortages of commodities, especially oil and gas, may increase the prices of these products in the global market. It raised its forecast of the Brent oil price from $95 per barrel to $115 per barrel within the next month.

Last week, the selling prices of petrol and assorted oil in the Vietnamese market increased by another VND550 (2.3 US cents) and VND500 (2.1 US cents) per litre, respectively. This has been the sixth price expansion since October 2021 and the fifth rise since early this year.

According to pan-Asia consultancy firm Dezan Shira & Associates, Vietnam’s gasoline and oil prices have been increasing sharply for several reasons.

As Vietnam opens up along with other countries after harsh pandemic restrictions, many governments have begun to reopen their economies and resume production, increasing fuel demand resulting in higher prices. Moreover, because the Organization of Petroleum Exporting Countries still limits oil production instead of increasing output, supply is limited.

Political uncertainty and geopolitics occurring in some areas such as the Russia-Ukraine crisis have also indirectly pushed up prices, Dezan Shira noted.

Also, the spike in Vietnam’s fuel prices was further accentuated by domestic gasoline shortages as Nghi Son Oil Refinery, Vietnam’s largest refinery, cut production by 20 per cent since January due to financial problems. While it has secured temporary investment, there are fears that it may have to shut down if the refinery operator fails to secure enough liquidity or loans to pay for Kuwaiti crude to feed its operation.

Luong Van Khoi, vice director of the National Centre for Socioeconomic Information and Forecast, said that under his centre’s forecast, if the oil price in the global market sits at $100 or $140 per barrel, it will decrease Vietnam’s economic growth by 0.2 and 0.4 per cent, respectively.

Impacting competition

The General Statistics Office (GSO) last week reported that the consumer price index (CPI) in Vietnam for the first two months of 2022 increased 1.68 per cent on-year.

One of the key drivers of the increase is the on-year price hike of 3.55 per cent in February in the transport group, including a rise of 8.61 per cent in petrol prices since last December. On average, the 2-month price of petrol skyrocketed by 45.3 per cent on-year – causing an expansion of 1.63 per cent in CPI. Meanwhile, the 2-month gas price rose 18.64 per cent on-year, causing a 0.27 per cent rise in CPI.

Currently, petrol costs account for about 3.5 per cent of the economy’s total production costs. This is a large percentage and immediately affects the cost of manufactured products.

According to Dezan Shira & Associates, nationwide, the higher fuel prices have businesses concerned as they want to balance price increases with keeping customers as Vietnam looks to bounce back from last year’s lockdowns.

Gasoline prices have a significant impact on both production and people’s daily lives, as well as on the competitiveness of enterprises. Thus, when gasoline prices increase, it will raise the cost of input materials both directly and indirectly.

Directly for people, businesses, and industries that consume petroleum products such as road transport, fishing, agricultural production, food processing, and indirectly for any other businesses that demand the transport of goods from the place of production to the place of consumption, affecting the price of consumer goods.

For example, each month, Indo-Trans Logistics Corporation (ITL) has to earmark hundreds of thousands of US dollars for petrol for its 200 tractor-trailers and 110 trucks. Petrol is now occupying 35 per cent of ITL’s transportation costs. This means that since last December, the fuel price hikes have forced ITL to pay additional tens of thousands of US dollars as transport costs.

In another case, Hanoi-based Hoang Ngoc Trading Co., Ltd’s director Nguyen Thi Tuat said this rice trader had to pay $1,300 for its trucks’ fuel a day, and the fuel costs over the past two months have dented the company’s financial costs remarkably.

“It has become a big additional burden, especially in the context that the government is committed to supporting enterprises,” Tuat said.

Slow-paced manufacturing forecasts

According to US-backed economic and financial information provider Fitch Solutions Inc., Vietnam’s manufacturing will face further disruptions in 2022. “We expect Vietnam’s industrial production to face further pandemic-related disruptions over the coming months, weighing on the pace of recovery,” Fitch Solutions told VIR.

On the one hand, Vietnam’s rollout of COVID-19 vaccines will make the economy somewhat more resilient to domestic outbreaks, allowing for less stringent restrictions on activities.

On the other hand, with cases once again rising since December, the emergence of the Omicron variant and authorities re-imposing some restrictions on activities, disruptions are likely to persist through 2022.

“This will hamper the pace of the recovery in industrial production,” Fitch Solutions said. “The Omicron variant will likely add to concerns and further stall the normalisation of manufacturing activity. The disruptions to manufacturing will mean that Vietnam’s exports remain hampered over the coming months, adding to disruptions to global supply chains in 2022.”

According to the GSO, in the first two months of 2022, Vietnam’s index for industrial production (IIP) is estimated to increase 5.4 per cent over the same period last year when the IIP expanded 6.8 per cent on-year. In which, the IIP of the manufacturing and processing sector, which created over 80 per cent of industrial growth, climbed 6.1 per cent on-year, lower than the on-year rise of 9.4 per cent in the corresponding period last year.

Nguyen Duc Do, deputy general director of the Academy of Finance’s Financial and Economic Institute, said that hikes in fuel prices and the lingering health crisis will badly affect the economy’s growth, which he forecast will be about 5.5-6 per cent on-year for Q1 of this year.

“This is also because the economic recovery process just began last November, and the growth rate will gradually continue bouncing back in the next quarters,” Do said.

Can Van Luc, a member of the National Advisory Council for Financial and Monetary Policies, also said that in the first two months, the economy has continued regaining its recovery momentum, with a growth rate for Q1 of this year expected to be 5-5.5 per cent on-year.

Meanwhile, global analysts FocusEconomics said that after the economy rebounded sharply in Q4 of 2021, with growth once again underpinned by strong output from the manufacturing sector, momentum is likely to carry over into 2022.

“The economy is estimated to grow at the fastest rate in the region this year, following 2021’s relatively weak expansion. Higher growth in consumer and capital spending, combined with a robust external sector, should boost activity in 2022,” FocusEconomics said in a March report on Vietnam’s economy.

“Our panellists estimate that industrial output will grow 10.5 per cent in 2022, which is up 2.1 percentage points from last month’s forecast, and expand 8.3 per cent in 2023. Our panellists expect GDP to expand 7.2 per cent in 2022, and 7 per cent in 2023.”

However, Carolyn Turk, country director for Vietnam of the World Bank – which predicted that the economy may grow 5.5 per cent this year – commented that Vietnam’s economic recovery will “face serious downside risks, including the lingering effects of the 2021 crisis on worker and household incomes that could affect the recovery of domestic demand.”

“New coronavirus variants can affect Vietnam and its trade partners’ economic prospects. The financial sector faces heightened risks because of the non-performing loans that may transmit this risk to the real, broader economy. Good policies could mitigate these risks to a certain extent and help the economy return to a pre-crisis growth path.”