Fuel prices set to put pressure on inflation

Nguyen Duc Thanh, VEPR’s Director, said at the launching of the report about the Vietnamese macro-economy in Hanoi on October 10 that inflation in 2019 would exceed the 4% target set in recent years.

“The Government should have strong measures to control inflation next year,” Thanh said.

With environmental protection taxes on petroleum to be raised from VND3,000 to VND4,000 per litre from next year, VEPR estimated this increase might push up inflation by 1.6 percentage points within 12 months.

“The pressure on inflation next year requires the State Bank of Vietnam to be cautious with money supply and credit policies,” Thanh added.

Previously, the National Assembly Finance and Budget Committee, however, estimated that tax hikes on petroleum would push up CPI in 2019 by 0.07%-0.09%.

For inflation this year, Thanh said: “The Government’s target of keeping inflation under 4% this year is within reach if there are no big fuel price shocks in the quarter.”

VEPR projected inflation to be at 4.25% in the last quarter of this year.

Deputy Prime Minister Vuong Dinh Hue at a meeting of the Price Management Steering Committee at the end of September asked efforts to keep inflation at 3.7%-3.95% in 2018, urging close watch on global prices updates, especially oil prices and the impacts of unpredictable weather.

Hue also asked relevant ministries to plan for 2019 with the goal of controlling inflation at around 4%.

The National Financial and Monetary Policy Advisory Council proposed that the inflation target should be set at around 4 percent in 2019 rather than below 4 percent.

Thanh said economic growth will be impressive, adding that VEPR predict it to be at 6.85% for 2018, far exceeding the National Assembly’s target at 6.5%-6.7%.

“However, in the context of escalating trade war and rising protectionism, the Vietnamese economy might face uncertainty from shocks in the global markets,” he said.

The Fed’s interest rate hikes would create pressure on the domestic currency and exchange rates, he said. While, the use of foreign currency reserve to stability exchange rates was only short-term and might bring risks, given the thin reserve of Vietnam, Thanh said.  

“The US - China trade war is an opportunity for Vietnam to speed up reform and enhance resilience to global risks, including reducing budget deficit, increasing trust surplus, improving business climate and simplifying administrative procedures,” Thanh said.