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Long-term thinking needed as oil prices fall

Released at: 10:22, 16/12/2015

Long-term thinking needed as oil prices fall

Tumbling oil prices have cut into State budget revenue and the short-term measures adopted in the past are no longer suitable.

by Quynh Nguyen- Huong Huong

The Ministry of Finance (MoF) has announced it has prepared plans to cope with the fall in global oil prices but is yet to release any specifics.

According to Dr. Pham The Anh from the National Economics University, the MoF is certainly facing difficulties in addressing the decade-long State budget deficit and the continued decline of the oil price is another burden it must bear.

The proportion of revenue from crude oil is decreasing, he said, but it has still accounted for 10 to 15 per cent in recent years. The figures for 2013 put revenue from crude oil at VND120 trillion ($5.28 billion), accounting for 14.54 per cent of total budget revenue, while the proportion in 2012 was 19 per cent and just over 10 per cent in 2014.

When the oil price is lower the State budget is also proportionately lower, Dr. Anh said. It also results in falling input prices, which bring down domestic commodity prices.

With inflation at a low level, falling commodity prices will result in less revenue from value-added taxes. Although the lower crude oil price has a positive effect on raw material prices and production, if the country’s production is not large enough to fully offset the reduction in oil revenues the State budget will suffer.

It is difficult to evaluate MoF’s plans, Dr. Anh said, because at the moment there is nothing specific. He added that the absence of long-term solutions has been common in the past, with the focus instead on increasing crude oil production, promoting the issuance of government bonds, or borrowing from the State Bank of Vietnam, which express the passive nature of agencies in charge of the State budget.

“They were and are only temporary measures,” Dr. Anh stressed. “There is no choice but to reduce spending because there is now way to increase revenue.”

Analyzing the movement in global oil prices and its impact on Vietnam’s economy, Head of the National Center for Socio-Economic Information and Forecasting from Ministry of Planning and Investment, Mr. Luong Van Khoi, said that Vietnam’s economy this year is being affected by global economic circumstances, especially the falling oil price and China’s slowing economic growth.

The falling oil price has cut into State revenue and also brought down inflation and slowed export growth. China’s economic slowdown and devaluation of the Yuan have also affected Vietnam’s trade situation.

The falling oil price has also had a positive impact on Vietnam’s economy in 2015, boosting consumption and reducing transport costs, helping to remove obstacles for enterprises, promoting investment and development, and allowing investors to accelerate their projects.

With an unpredictable global economy, tensions in Syria and Iran, slowing economic growth in China, the appearance of Islamic State (IS), and illegal mining in Libya and Iraq resulting in cheaper oil, the global oil price will continue to fall in the near future.

Vietnam should closely monitor developments in oil prices and the policies of major economic partners. Depending on macro-economic conditions there should be other measures adopted, such as aid for enterprises, especially small and medium-sized enterprises, to stimulate economic growth, consideration given to reducing prices of petroleum products to stimulate industries such as transport, reduce production costs at enterprises, and stimulate economic growth and reform the taxation system. At the same time Vietnam needs to seize this opportunity to conduct economic restructuring, focusing on sector and institutional reforms to create a positive platform for the economy to take off.

Mr. Luong Van Khoi, Head of the National Center for Socio-Economic Information and Forecasting

If oil prices were only temporarily falling then interim measures would be acceptable. However, the current movement in oil prices is unpredictable and dependent on the recovery of the global economy and OPEC policies. MoF is having difficulties in State budget planning. But it needs to understand that the serious problems in the State budget would not be oil prices in it could be balanced.

Dr. Pham The Anh, National Economics University

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