How an oil prices surge could hurt Vietnam’s economy: Scholar

As the Israel-Hamas conflict has caused a spike in oil prices, RMIT Economics lecturer Dr Bui Duy Tung provided insightful analysis on how this surge is affecting Vietnam’s economy.
How an oil prices surge could hurt Vietnam’s economy. (Photo: Freepik)
The conflict has not only led to the rising oil prices but also triggered apprehensions about geopolitical events affecting global economic indicators. (Photo: Freepik)

Oil prices jumped 4 per cent immediately after Hamas's attack on Israel. Although Israel is not a major oil producer, its geopolitical significance and the potential for further escalation have made it a focal point in the global oil market. The Middle East, one of the world's largest oil suppliers, is historically prone to volatility during conflicts.

During times of instability, traders often adopt a 'buy first, ask questions later' approach following disruptions in oil supply. The conflict in Israel is also rattling global financial markets, affecting stock prices and currency values. The market is closely monitoring the responses from key regional players, such as Saudi Arabia and Iran, as their actions could exacerbate oil supply instability.

The conflict has not only led to the rising oil prices due to concerns about supply disruptions, but also triggered apprehensions about geopolitical events affecting global economic indicators. If the Hamas-Israel conflict were to escalate further, it would present a significant challenge for the State Bank of Vietnam (SBV).

In 2023, the SBV implemented a loose monetary policy stance, reducing the key policy interest rates by 150 basis points between March and June 2023 to stimulate economic growth. However, as of September, the credit growth rate stood at only 6.9 per cent, indicating that the expected results have not been fully achieved.

Although the SBV has managed to control overall inflation, reducing it from 4.9 per cent year-on-year in January 2023 to 2.1 per cent year-on-year in July 2023, core inflation showed slower deceleration, decreasing from 5.2 to 4.1 per cent over the same period. This highlights ongoing inflationary pressures and prompts the question of whether the SBV should adapt its monetary policy to manage potential new shocks.

The surge in oil prices following the Israel-Hamas conflict compounds the challenges faced by the SBV. Elevated oil prices not only impact transportation costs but also extend to other commodities, including food, exacerbating inflationary pressures. Vietnam, being heavily reliant on oil imports, faces increased challenges. The SBV must consider the possibility of tightening its monetary policy to control inflation while sustaining economic growth.

One feasible solution is to shorten the oil price adjustment timeframe from 10 to five days. This would enable Vietnam to respond more swiftly to global fluctuations. The current 10-day regulatory lag could amplify inflationary pressures during the period of rising global oil prices. Under existing regulations, domestic gasoline prices remain unchanged for 10 days, regardless of international market fluctuations.

If global oil prices spike due to events like the Israel-Hamas conflict, Vietnamese consumers and businesses would face prolonged high prices before government interventions take effect. This could potentially cause a ripple effect on the economy, raising the costs of transportation, goods and services, thereby fuelling inflation.

The International Monetary Fund (IMF) has cautioned Vietnam regarding the risk of exchange rate fluctuations, especially as interest rates have been adjusted downward. As oil prices rise, the demand for foreign currency to import oil also increases, potentially weakening the value of the Vietnamese dong. A depreciating currency can lead to inflation as the prices of imported goods, including oil, go up in domestic currency terms.

Currency devaluation could further complicate the SBV's efforts to manage inflation. In this scenario, Vietnam may have to cope with a series of tough decisions regarding monetary policy and exchange rate management to ensure economic stability.

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