Vietnam fuels inflation by hiking petrol prices

The government raises the price of gasoline by 31%, spooking the stockmarket and prompting economists to say inflation remains a problem.
Vietnam government officials surprised commuters and economists when they increased fuel prices by 31% yesterday, in an effort to cut state subsidies. They also said the move was designed to ward off smuggling, according to state media reports.

The price of gasoline rose 31% to Vnd19,000 ($1.10) per litre, while a litre of diesel rose 15% to Vnd15,950. This is on top of a hike in February, when the government increased gasoline prices by 11% and diesel prices by 36%.

ôTodayÆs fuel price hike announcement from Petrolimex, the state-run oil company, comes as a surprise as recent statements from government officials gave no indication that a further hike was in the making after the February move,ö wrote Prakriti Sofat in a research report issued yesterday by HSBC. ôIt is public information that that the prime ministerial order for keeping a cap on the price of 10 essential goods, including petrol, expired in June. However, the general understanding was that the already high level of inflation would see the government extend the price controls.ö

The increases help "to limit smuggling of fuel across the borders ... and partly reduce state subsidies," finance minister Vu Van Ninh told the Tien Phong (Pioneer) newspaper. According to the state media, traders have been smuggling thousands of litres of gasoline each day into neighbouring Cambodia because of Vietnam's cheap fuel prices.

While Vietnam exports about 17 million tonnes of crude oil each year, it has to import all refined oil products as the countryÆs first refinery is only due to begin operations next year. This has put pressure on the government. According to government officials, local fuel importers have lost $854 million in the first six months of this year because of the difference between international fuel prices and the domestic retail prices set by the government. The importers are expected to lose an additional $2.63 billion in the second half of the year if world crude oil prices remain near $139 per barrel û and those losses are covered by the government.

Light, sweet crude for August delivery was hovering near $130 a barrel Monday in electronic trading on the New York Mercantile Exchange, off a record above $147 hit earlier this month.

But the decision to increase prices definitely surprised locals and had a negative impact on the stock market. This short, e-mailed note that a broker in Vietnam wrote to investors on Monday morning as the news of the petrol increase broke, summed up the sentiment: ôEffective 10am today, the price of gasoline will increase from 14,500 VND/litre to 19,000 VND/litre, effectively throwing off all economic forecasts of slowing inflation for the coming months. This news certainly is behind some of the strong selling mood today.ö

Not surprisingly, Vietnam's VN Index, a measure of 153 companies on the Ho Chi Minh City Stock Exchange, plunged more than 2.5% Monday, the biggest one-day drop since March 25. The benchmark has declined 49% this year.

One of the main concerns that investors have with Vietnam is sky-rocketing inflation. HSBCÆs Sofat went on to write in his research report: ôWe estimate that the fuel price hike will add around two percentage points to headline inflation and this should be reflected in the August print. As such, with inflation already running at 27%, and with the lagged effects of higher food prices and strong demand still feeding through, we think inflation in the country will probably breach the 30 handle.ö

But he did go on to say that inflation is probably reaching the peak, and should ease somewhat later in the year. ôOur year-end target, taking account of todayÆs announcement, is 26%.ö

Thanks to the runaway inflation the government has had to cut its 2008 GDP growth target from 8.5% to 7%.
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