Investment & Finance

Gas price hike not affecting GDP

Saigon Investment
(SGI) - The sharp increase in gas prices recently will surely affect the speed of economic recovery and increase prices of goods. However, this is not the time to intervene and regulate the domestic petroleum market through tax exemption or reduction. 

Ilustrative photo.

Ilustrative photo.

This viewpoint was expressed by Asso. Prof. Dr. NGO TRI LONG, former Director of the Market Price Research Institute under the Ministry of Finance, in a talk with Saigon Investment, when asked about the impact of increase in petrol prices.

JOURNALIST: - Sir, what do you think about the petrol prices in coming time?

Dr. NGO TRI LONG: - In recent months, the world has witnessed a spike in petroleum products as well as fossil fuels. More recently, on 11 October, the price of WTI oil exceeded the threshold of USD 80 per barrel, the highest level since November 2014. Thus, the price of WTI oil has increased by nearly 30% from mid-August 2021 until now. Similarly, the price of Brent oil has also increased steadily since then and has now surpassed the USD 80 mark per barrel.

Oil prices in the world increased sharply due to many reasons. Firstly, it is taking place when the Covid-19 pandemic situation is gradually improving globally, and many countries are beginning to reopen their economies and restore production, with fuel demand increasing, causing gasoline prices to rise. Secondly, because the Organization of Petroleum Exporting Countries (OPEC) still restricts oil production to keep prices from increasing, instead of increasing output, supply is still limited. Thirdly, coming winter, European countries will need to store gas and fuel for production and daily living. Fourthly, the power crisis in some countries has also indirectly pushed up gasoline prices.

Forecasting the trend of gasoline prices in the world market today has two viewpoints. One, oil prices will continue to increase and reach the USD 100 per barrel mark. The basis of this view comes from analysis of the economic situation of countries that are gradually recovering after a long period of stagnation due to the Covid-19 pandemic, so the demand for gasoline and fuel in the market will increase. Two, oil price increases, but finds it difficult to reach the USD 100 per barrel mark, so it will go down.

Now the question is whether the price of oil can rise to USD 100 or not. In fact, studies show that it is difficult for the world oil price to rise to USD 100 per barrel. Because when this level increases, the consumption demand will decrease, directly affecting oil producing countries that do not make profits. Recent moves show that the OPEC + group is considering a plan to increase oil production. Thus, it can be seen that it is difficult for oil prices to maintain a prolonged high level.

- Sir, the increase in the retail price of domestic gasoline in the past will have a significant impact on production activities when the input cost for petrol is too high. Is it time for the Government to intervene to stabilize prices?

- The domestic petrol price depends on the world petrol price. When world prices increase, domestic prices will also increase. Currently, in petroleum management, we have the Petroleum Price Stabilization (PPS) Fund. However, due to the continuous increase in gasoline prices over the last few months, this fund used for regulating has almost run out. Before such a situation occurs, we need to question how to manage gasoline prices and how to operate. The problem here is that we have to keep abreast of the world petroleum market, from which to make appropriate forecasts and manage accordingly.

Currently, forecasts show that the increase in gasoline prices will not last long, because the global economic recovery still has many uncertainties. Many opinions are still concerned that the economic recovery of countries will only be temporary, while the Covid-19 pandemic with its variations is still complicated, and the possibility of a return of another wave is very much possible, so the process of economic recovery may be disrupted, so the recovery momentum is still unstable, at least in the short and medium-term.

The International Monetary Fund (IMF) in its recently released World Economic Outlook report also emphasized the breakdown in supply chains and price pressure that are restraining the recovery of the world economy after the pandemic. Therefore, the IMF has reduced its forecast for global growth in 2021 to 5.9% from the 6% forecast in July. Thus, the increase in petrol prices is not expected to last, therefore for using the domestic retail gasoline price intervention tool, it may be too early.

- Sir, there is an opinion that when a business has just re-operated after a long period of stagnation due to the Covid-19 pandemic, the increase in gasoline prices will be a blow in terms of cost burden, so it is necessary to implement the right policy for reducing taxes or fees on gasoline to support businesses to recover. What is your opinion on this?

- We are recovering the economy and businesses, and people are all facing difficulties due to the prolonged Covid-19 pandemic wave. Petrol prices have a comprehensive impact on both production and people's lives, and on the competitiveness of enterprises. Therefore, if the price of petrol increases, it means an increase in input costs and an increase in product prices, which will reduce competitiveness.

Currently, the PPS Fund has been exhausted, and when gasoline prices increase, it will affect input materials both directly and indirectly. Directly for people and businesses that consume petroleum such as for road transport, aviation, offshore fishing, agricultural production, and indirectly for any goods transported from the place of production to the place of consumption. When the price of petrol increases, it will be included in the cost of intermediary transportation, causing the price of goods to increase accordingly.

Looking at the current petrol price structure, taxes and fees account for a very large proportion of about 40%. However, our budget revenue is currently facing great difficulties. Revenue from import and export is limited because Vietnam participates in many new generation FTAs, with commitments to cut tariffs according to the roadmap, so the revenue from import and export is no longer significant.

Tax collection now relies on domestic sources. This year, budget revenue and expenditure balance are very difficult due to anti-pandemic spending, investment spending, in addition to production delays due to the pandemic, leading to many limitations in revenue from profitable activities of enterprises. Therefore, it is very difficult to reduce taxes and fees on gasoline immediately. This is a matter of great caution. It can only be reduced to a certain extent, but it must be at the right time and with a roadmap not immediately applicable.

- Sir, how will high gasoline prices affect economic growth and inflation in the fourth quarter?

- High gasoline prices will not have much impact on GDP growth in the fourth quarter, because this is only a small factor. However, if gasoline prices increase for a long time, it will slow down the recovery speed and economic growth, inhibiting production. In the fourth-quarter growth, exports and public investment are important, but petroleum has little impact.

In 2021, according to the Resolution of the National Assembly, the growth rate of the Consumer Price Index (CPI) is set at about 4%. In fact, not only gasoline but this year the pressure to increase domestic prices also comes from the continued adjustment of prices of some public services according to the market roadmap, and some items with higher input costs. Compared to the first nine months of the year, there is still room for inflation. In the fourth quarter, if gasoline prices keep increasing at the current rate, inflation is definitely still under control, and it is unlikely to exceed the target of 4%, but in operation we still have to be careful.

- Thank you very much.

Luu Thuy (interviewer)

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