Vietnam’s economy to suffer hard hit without decisive action

Michael Kokalari, chief economist, VinaCapital

Those estimates assume that the conflict will wind down within the next 2–3 weeks (with a resumption of ships passing through the Strait of Hormuz), and then it takes another 4–5 months for global energy markets to normalise.

Vietnam consumes over 500,000 barrels per day of crude oil (similar to the Philippines, Nigeria and South Africa), nearly 200,000 of which the country produces itself.

Vietnam has two oil refineries that supply 60-70 per cent of the refined products it consumes. One of those refineries was financed by Kuwait and Japan, so it processes heavy oil that is primarily imported from Kuwait, even though Vietnam produces light oil.

Vietnam also produces natural gas and was self-sufficient until recently, when it started importing small quantities of liquefied natural gas.

The country's oil vulnerabilities stem from the facts that it does not have the financial resources to maintain a large strategic petroleum reserve and that its economy is very energy intensive.

Vietnam reportedly has about 10 days of strategic petroleum reserves, and the energy intensity of Vietnam’s economy is more than twice that of the Philippines and nearly three-times Indonesia’s.

Our estimate is that Vietnam’s oil consumption only declined by about 15 per cent during the country’s strict pandemic lockdowns, during which GDP growth was essentially zero.

Given all of the above, Vietnam probably has enough oil and refined products to continue day-to-day life with minimal disruptions until mid-May, after which it will face increasingly severe impacts.

Vietnamese airlines is reducing flights by around 20 per cent, and the government effectively cut retail petrol prices by nearly 20 per cent last week by suspending various taxes and dipping into its small petrol price stabilisation fund.

Our assessments of the damage that the war has already done to Vietnam’s economy, based on the assumption that the most intense hostilities will wind down within the next 2-3 weeks, include: a minus 1.5 per cent point hit to the country’s GDP growth, and average inflation in Vietnam to rise from around 3.5 per cent in 2025 to about 5–5.5 per cent in 2026.

Those assumptions do not include the impact of government measures to dampen the effects of the war on Vietnam, and we assume the average Brent oil price increases by about 25 per cent this year, from $70 in 2025, to circa $87 in 2026.

Our Brent oil estimate aligns with projections from well-known oil analysts, but there is not enough clarity to call this a consensus oil price forecast. Recall that when hostilities initially broke out, the consensus probability of the war reaching the current level of intensity was only around 20 per cent, which illustrates how difficult it is to form estimates or reach consensus in these war conditions amidst the “fog of war.”

Our estimate that Vietnam’s GDP growth would suffer a minus 1.5 per cent point hit in absence of government stimulus measures is grounded in research from the International Monetary Fund on the impact of oil price spikes on emerging market GDP growth.

We have also factored in research from the University of Hanover, Germany on consumption responses to price shocks in Vietnam and Thailand; that research requires us to estimate Vietnam’s CPI.

There is a well-known benchmark in Vietnam: a 10 per cent increase in oil prices roughly translates into a 0.5 per cent point increase in headline CPI. But in addition to that immediate impact, indirect effects further boost inflation with a time lag.

Furthermore, certain other factors are crucial: fertiliser prices have surged and Vietnam’s food price inflation was dampened by China’s weak economy over the last few years, but China may now be hoarding some commodities.

We expect all of these factors to yield a net increase of about 2 per cent point in Vietnam’s headline CPI rate, in the absence of major petrol price subsidies by the government.

It is highly likely that government fiscal stimulus will be used to support GDP growth, including steps to suppress retail petrol prices, which is a form of fiscal stimulus.

Finally, the assumption of an $87 per barrel average Brent oil price in 2026 considers that the average so far has been $76 this year, and we assume that it will take 4–5 months for global oil supply to recover, given physical limitations in restarting shut-in wells and repairing infrastructure.

All of the above is that if prices remain above $100 for the next 4–5 months before falling to around $80 for the remainder of the year, the price will average $87 for the full year.

Interest rates in Vietnam faced significant upward pressure due to tight liquidity in the banking system last year, when credit growth outpaced deposit growth by approximately 5 per cent points.

Surging oil prices are now putting additional upward pressure on rates, so 12-month interest rates have now surpassed the 8 per cent threshold at many local banks, a level at which investors typically shift funds from the stock market into bank deposits.

Furthermore, the surge in oil prices will flip Vietnam’s Balance of Payments into a deficit, putting depreciation pressure on the VND, further constraining the State Bank of Vietnam’s ability to respond to economic weakening through monetary policy easing.

In addition, fertiliser prices have surged, importing thermal coal is becoming more difficult, and the tourism industry is visibly impacted.

Vietnam’s 10-day strategic petroleum reserve and highly energy-intensive economy leave little margin for error.

The government’s early moves were directionally correct, but past petrol subsidies in Vietnam never exceeded 0.5 per cent of GDP; the current situation may require something closer to Indonesia’s 3 per cent of GDP

If hostilities do not subside within 2–3 weeks, Vietnam has a window, until approximately mid-May, before fuel scarcity starts to become acute, so the key risk for the country is a prolonged conflict, especially if the Houthis blockade the Red Sea, which would push Brent well above $100 for the foreseeable future. In that scenario, the impact on Vietnam could be comparable to the severity of the pandemic.

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