Fuel Price Hikes To Boost Progress On Fiscal Reforms

BMI View: Surging crude oil prices have forced the Vietnamese government to hike fuel prices in recent months, and we generally view this as a positive development for the economy over the long term. Although higher fuel prices are likely to take away some of the momentum driving economic growth, we expect recent progress on fiscal reforms aimed at reducing social subsidies to help strengthen Vietnam's fiscal position over the longer term.

Surging global crude prices are adding to Vietnam's fiscal woes, with the Ministry of Finance (MoF) unveiling that the government had already used up US$138.3bn or 98% of its fuel price stabilisation fund by the end of June. Brent crude prices have risen by around 10.8% from US$99/bbl in mid-April to US$108/bbl at the time of writing. Although our commodities team expects Brent crude prices to remain relatively stable at an average of US$106/bbl for 2013 ( see 'Focus on Brent As Sentiment Deteriorates', June 26 2013), we believe that elevated fuel prices will nonetheless weigh on household spending over the coming months. Moreover, with the Vietnamese government facing increased scrutiny over its spending programs as rating agencies warn of further downgrades to the country's credit ratings, we see little scope for policymakers to implement additional fiscal stimulus to prop up economic growth. Consequently, we have downgraded our real GDP growth forecast slightly from 5.6% and 6.3% to 5.3% and 6.0% for 2013 and 2014, respectively.

In line with our long-held view that Vietnam's costly welfare subsidies will need to be gradually withdrawn as part of the government's broader efforts to fix its fiscal imbalances, the MoF raised its fuel price cap by around 2% on July 17 (the fourth hike this year). Given that the fuel stabilisation fund has been depleted, and that local fuel prices remain VND426-465/litre below international prices, we expect further price hikes to come even if global crude prices were to stabilise at current levels. We forecast Vietnam fiscal deficit to narrow gradually from an expected 5.2% of GDP in 2013, to 2.7% by 2017.

Rising Fuel Prices To Hurt The Economy
Asia - Brent Crude Spot, US$/bbl

BMI View: Surging crude oil prices have forced the Vietnamese government to hike fuel prices in recent months, and we generally view this as a positive development for the economy over the long term. Although higher fuel prices are likely to take away some of the momentum driving economic growth, we expect recent progress on fiscal reforms aimed at reducing social subsidies to help strengthen Vietnam's fiscal position over the longer term.

Surging global crude prices are adding to Vietnam's fiscal woes, with the Ministry of Finance (MoF) unveiling that the government had already used up US$138.3bn or 98% of its fuel price stabilisation fund by the end of June. Brent crude prices have risen by around 10.8% from US$99/bbl in mid-April to US$108/bbl at the time of writing. Although our commodities team expects Brent crude prices to remain relatively stable at an average of US$106/bbl for 2013 ( see 'Focus on Brent As Sentiment Deteriorates', June 26 2013), we believe that elevated fuel prices will nonetheless weigh on household spending over the coming months. Moreover, with the Vietnamese government facing increased scrutiny over its spending programs as rating agencies warn of further downgrades to the country's credit ratings, we see little scope for policymakers to implement additional fiscal stimulus to prop up economic growth. Consequently, we have downgraded our real GDP growth forecast slightly from 5.6% and 6.3% to 5.3% and 6.0% for 2013 and 2014, respectively.

Rising Fuel Prices To Hurt The Economy
Asia - Brent Crude Spot, US$/bbl

In line with our long-held view that Vietnam's costly welfare subsidies will need to be gradually withdrawn as part of the government's broader efforts to fix its fiscal imbalances, the MoF raised its fuel price cap by around 2% on July 17 (the fourth hike this year). Given that the fuel stabilisation fund has been depleted, and that local fuel prices remain VND426-465/litre below international prices, we expect further price hikes to come even if global crude prices were to stabilise at current levels. We forecast Vietnam fiscal deficit to narrow gradually from an expected 5.2% of GDP in 2013, to 2.7% by 2017.

Scope For More Cuts
Vietnam - Social Subsidies, VNDbn (LHS) & Share of Total Public Spending, % (RHS)

Transitory Pressure On Inflation, But Positive Long Term

Although we acknowledge that the latest series of fuel price hikes are likely to generate transitory upward pressure on headline consumer price inflation (CPI), we believe that this will help to greatly speed up progress on reducing public spending on social subsidies. In this respect, we believe that higher fuel prices may actually be positive for the Vietnamese economy over the longer term, by pressuring policymakers to speed up on free-market reforms and eliminate price controls. As the Vietnamese economy continues to liberalise and open up to global trade, we also expect domestic price controls to become an increasingly ineffective policy tool. Indeed, we believe that attempts to maintain price controls will not only prove to be futile, but are also likely to come at the expense of the government's long-term fiscal health. Ultimately, the burden of paying for these costly subsidies will eventually fall on taxpayers.

Slashing Subsidies A Crucial Part Of Fiscal Reforms
Vietnam - Fiscal Accounts, VNDbn (LHS) & Budget Balance, % of GDP

Overall, we are encouraged by the government's recent moves to liberalise price controls and we see potential for more aggressive reforms to help bring the fiscal accounts back into balance much earlier than investors are anticipating. Such a scenario could provide an additional boost to investor sentiment towards Vietnam's long-term growth story.

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This article is tagged to:
Sector: Country Risk
Geography: Vietnam, Vietnam, Vietnam, Vietnam, Vietnam, Vietnam, Vietnam, Vietnam, Vietnam, Vietnam
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