US embassy cable - 05HANOI2309

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