Policies reinforced to ease inflation pressure

Policies reinforced to ease inflation pressure

Since last October, Vietnam has witnessed a spike in demand for petroleum products along with an increase in fuel prices in line with global demand.

The global average price of Brent crude oil so far this year has stood at around $116 per barrel, according to Oilprice.com. In Vietnam, early last week saw retail petrol prices reduced slightly following the latest adjustment by the Ministry of Industry and Trade and the Ministry of Finance.

The retail price of RON95 bio-fuel dropped to VND29,192 ($1.27) per litre at most, whereas that of E5RON92 was adjusted down to no more than VND28,330 ($1.23) per litre. This was the first decrease following seven consecutive hikes in petrol prices in 2022. However, such a reduction remains small compared to previous hikes.

The spike in Vietnam’s fuel prices was further accentuated by domestic gas shortages as the Nghi Son Oil Refinery, Vietnam’s largest, cut production by 20 per cent in January due to financial problems.

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

The fuel price hikes have also already led to an increase in the prices of some products. Tyres and lubricants, for example, have expanded 20-30 per cent, while some transport services have raised prices by 5-10 per cent.

Increases have had knock-on effects on retail as these businesses have to pay extra fees for delivery and input materials. Some food and beverage establishments have also raised their prices by 20-30 per cent.

The logistics industry, meanwhile, is facing pressure and has increased prices, while the manufacturing sector is also facing difficulties. Small traders in markets have also looked to increase prices to cut losses.

Pressures in check

To control inflation and reduce petrol prices, the National Assembly Standing Committee on March 23 adopted resolution on environmental protection tax rates on petroleum, oil, and lubricants, which will take effect from April 1 to December 31.

Under the resolution, the tax rate for gasoline will be cut by VND2,000 (9 US cents) per litre; and the rates for diesel, fuel oil, and lubricant will drop by VND1,000 (4.5 US cents) per litre, and grease by the same amount per kg. The tax on jet fuel, which had been lowered by VND1,500 (6.5 US cents) per litre earlier, remains unchanged.

However, if global prices continue escalating, Vietnam may have to find additional solutions to rein in inflation, because the environmental protection tax rate is fixed, while the consumer price index (CPI) is fluctuant.

“The high fuel prices have raised concerns about rising inflation and its negative impacts on Vietnam’s overall GDP affecting the CPI,” Dezan Shira & Associates said.

According to the General Statistics Office (GSO), a 10 per cent increase in fuel prices will lower GDP by around 0.5 per cent and raise the CPI by 0.36 percentage points.

Global analysts FocusEconomics told VIR last week that it expects Vietnam will continue seeing lower-than-expected inflation this year. Inflation came in at 1.4 per cent in February, down from January’s 1.9 per cent and representing the lowest inflation rate since March 2021. The annual average variation of consumer prices remained at 2.1 per cent in February.

“With a projected pickup in domestic demand penciled in for 2022, inflationary pressures should rise in turn, as consumer spending accelerates and fiscal stimulus remains robust,” FocusEconomics said.

The GSO reported that in the first two months of 2022, total goods retail and consumption service revenues reached $38 billion, up only 1.7 per cent on-year. It is expected that the figure for Q1 will be improved.

“On the other hand, with VND set to strengthen slightly in 2022 and monetary policy estimated to tighten throughout the year, price pressures should remain in check, with our panelists forecasting inflation to average below the government’s 4 per cent target,” FocusEconomics said. “The recent outbreaks in COVID-19 cases cloud the inflation outlook considerably, however.”

FocusEconomics expects inflation to average 3.2 and 3.6 per cent in 2022 and 2023, respectively.

Both the World Bank and the Asian Development Bank (ADB) forecast that Vietnam’s economy will recover in the near term. For 2022 and beyond, Vietnam’s economy is expected to grow by 6.5–7 per cent.

This rebound will be supported by a more sustainable global economic recovery, a high vaccination rate in the country, and domestic drivers such as the economy’s digital transformation.

The ADB also recently said that in 2021, inflation for the full year averaged 1.84 per cent, the lowest in six years, mainly due to weak demand. “With a stronger economic recovery and domestic demand expected for 2022, inflation for 2022 is projected to be 3.8 per cent,” the bank stated.

Mitigating the fallout

In the same vein, the World Bank said in its March bulletin that despite rising energy prices, inflation remained subdued thanks to relatively stable food prices and still weak domestic demand. Credit demand remained strong after the Lunar New Year, keeping overnight interbank interest rates at 2.56 per cent at the end of February, compared to less than one per cent at the end of 2021.

“The Russia-Ukraine conflict has increased uncertainty about global economic recovery, created new strains on global supply chains, and heightened inflationary pressures,” read the World Bank bulletin. “Commodity prices have increased sharply and may increase further in the short term. Keeping track of domestic price developments is therefore warranted. Nevertheless, reducing the environmental protection tax would not be the right policy to provide oil price relief.”

Meanwhile, on its website, the International Monetary Fund in Vietnam is now forecasting that in 2022, the country’s economy will grow about 6.6 per cent with a projected consumer price of 2.3 per cent.

And the latest Bloomberg economist survey of consumer price forecasts also showed that Vietnam’s inflation will likely expand by 1.4 percentage points to 3.45 per cent in 2022.

“Vietnam, Indonesia, and China are forecast to see higher inflation in 2022 due to base effects which saw subdued inflation last year,” said Khoon Goh, head of Asia research at ANZ Banking Group in Singapore, as cited by Bloomberg. “It is in part playing catch-up as global inflation pressures feed through into higher prices this year.”

However, Standard Chartered in January forecast that Vietnam may see higher-than-expected inflation this year.

“Inflation may become more of a concern for Vietnam in 2022. Supply-side factors, such as higher commodity prices exacerbated by the pandemic, are likely to be the key driver near-term. Demand pressures will come into play as the economy develops further,” the bank said in a press release. “A prolonged virus outbreak could lead to supply-driven inflation risks. Inflation forecasts for Vietnam in 2022 and 2023 are 4.2 and 5.5 per cent, respectively.”

According to Standard Chartered, the State Bank of Vietnam is expected to keep its policy rate on hold at 4 per cent in 2022 to support credit growth and manage inflation risks and normalise the policy in 2023, with a hike of 50 basis points to 4.5 per cent in the final quarter of 2023.