VIETNAM: PETROLEUM PRODUCT PRICE HIKE FUELS

UNCLAS SECTION 01 OF 02 HANOI 002309

SIPDIS

STATE FOR EAP/BCLTV and EB
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO
TREASURY FOR OASIA
USDOE FOR INTERNATIONAL AFFAIRS/DPUMPHREY

E.O. 12958: N/A
TAGS: ENRG EFIN ECON VM SOE
SUBJECT: VIETNAM: PETROLEUM PRODUCT PRICE HIKE FUELS
INFLATION


1. Summary: The Government of Vietnam (GVN)'s USD 400
million subsidy of gasoline and petroleum products in the
first six months of this year has made a significant dent in
the budget. To reduce pressure on the National Government
budget at a time of high oil prices, the GVN has raised the
prices of petroleum products for domestic use. According to
the Ministry of Finance (MOF),this price hike will boost
costs in sectors using petroleum products as inputs and will
likely boost inflation. The availability of gasoline and
other petroleum products at subsidized prices in Vietnam has
resulted in product smuggling to China, Cambodia and Laos.
END SUMMARY.


2. According to Vietnam's Ministry of Finance (MOF),the
Government has spent about VND 6,454 billion (about USD 406
million) subsidizing gasoline and petroleum products in the
first six months of this year. MOF eliminated import
tariffs on petroleum products on March 17, 2005 in an
attempt to curb price increases in Vietnam. The subsidy
coupled with tariff cuts has resulted in a significant loss
in GVN budget revenue. In order to reduce pressure on the
Government budget in a period of high world oil prices, the
GVN has raised the prices of gasoline and petroleum products
twice in two months. Following an increase on July 3,
consumers paid the following prices:

Category Former Price July 3rd Price
(VND/liter & USD) (VND/Liter & USD)
Gasoline Octane 92 8,000 ($0.51) 8,800 ($0.55)
Gasoline Octane 90 7,800 ($0.49) 8,600 ($0.54)
Gasoline Octane 83 7,600 ($0.48) 8,400 ($0.53)
Diesel 5,500 ($0.35) 6,500 ($0.51)
Kerosene 4,900 ($0.31) 6,500 ($0.41)
Mazut Oil 4,000 ($0.25) 4,700 ($0.29)


3. Faced with recent record prices for crude oil worldwide,
the GVN has had no choice but to pass the latest price
increases to consumers. On August 18, the GVN raised
gasoline prices to their highest levels ever, as shown
below:

Category July 3rd Price Current Price
(VND/liter & USD) (VND/Liter & USD)

Gasoline Octane 92 8,800 ($0.55) 10,000 ($0.63)
Gasoline Octane 90 8,600 ($0.54) 9,800 ($0.61)
Gasoline Octane 83 8,400 ($0.53) 9,600 ($0.60)
Diesel 6,500 ($0.41) 7,500 ($0.47)
Kerosene 6,500 ($0.41) 7,500 ($0.47)
Mazut Oil 4,700 ($0.29) 5,200 ($0.32)

This is the second petroleum product price increase this
year. Last year there were three price increases. Despite
these increases, MOF estimates that the GVN will still have
to spend approximately VND 2,500 billion (USD 157 million)
on price subsidies for the remainder of the year.


4. Lower prices for refined products in Vietnam have
encouraged smuggling into China, Laos and Cambodia. Before
the July price hike, petroleum product prices in Vietnam
ranged from USD 0.126 to USD 0.269 cheaper per liter than in
neighboring countries according to MOF. Faced with the
country's porous borders, the GVN remains concerned that
petroleum product smuggling will continue for the
foreseeable future because prices still remain lower than
neighboring countries despite the recent record price
increases.


5. With the higher cost of refined petroleum products, costs
for sectors dependent on petroleum as an input are also on
the rise. For example, after the July increase in prices
there was a ten percent rise in input costs in the cement
industry; a nine percent rise in the fisheries industry; a
5.72 percent rise in land transportation; a 2.82 percent
rise in rail transport sector; and a 1.3 percent rise in the
electricity sector. Vietnam Airlines has also imposed a
fuel surcharge on international airfares. Prices of basic
commodities such as food and foodstuffs have also slightly
increased, but the GVN has announced that the prices for
three essential items which it sets -- electricity, coal and
cement -- will remain unchanged until the end of this year.
The price increases have greatly affected the purchasing
power of ordinary Vietnamese, whose average per capita GDP
is about USD 550 per year. According to MOF, the GVN is
unlikely to meet its targeted CPI of 6.5% for this year
because of the August 18 price hikes. According to one
press report, the Vietnam Road Administration reported that
transport services would be allowed to raise prices by no
more than eight percent. As a result, the Vietnam Railway
Corporation announced it would raise fares by VND 10,000-
50,000 per customer, and more than 200 bus service providers
in Ho Chi Minh City agreed to raise all fares by seven to
ten percent.


6. Comment: Although Vietnam is an oil producing country,
it has no refinery so it must import all refined products,
thus exposing itself to world oil price fluctuations.
Vietnam plans to build three oil refineries in Dung Quat,
Nghi Son and Baria Vung Tao, but in fact, financing for none
of these projects has been secured. Serious doubts remain
as to the commercial viability of both the Dung Quat and
Nghi Son projects. Neither is close to Vietnam's petroleum
production sites, and neither is located near major areas of
consumption. At the same time, though its transition to a
market economy continues, the Government maintains its
steadfast determination to intervene in the market to set
prices for key commodities. In the case of petroleum
products, while the Government has been absorbing the cost
of this subsidy, we do not know the complete implications
for the budget since the books and hence oil export revenues
of state-owned enterprise Petro Vietnam are not publicly
available. The price increases, while needed to alleviate
budgetary pressures, will place a strain on the economy that
is struggling this year to meet growth and export targets.
End Comment.

MARINE