The ongoing Israel-Palestine conflict sent the Brent price of oil rising to $93.3 per barrel Friday. RMIT economist Dr. Bui Duy Tung says this can pose serious challenges for Vietnam.
Oil prices jumped 4% immediately after the conflict and 10% compared to October 20. Although Israel is not a major oil producer, its geopolitical significance and the potential for further conflict escalation have made it a focal point for the global oil market. The Middle East, one of the world's largest oil suppliers, is prone to price volatility during conflicts.
During such times of instability and oil supply disruptions, traders often tend to adopt a 'buy first, ask questions later' approach. The ongoing conflict has also rattled global financial markets and affected stock prices and currency values. The market is closely monitoring responses from key regional players like Saudi Arabia and Iran, as their actions could exacerbate oil supply instability.
The conflict has not only led to the rising oil prices over concerns about supply disruptions, but also triggered apprehensions about geopolitical events affecting the global economy.
If the Palestine-Israel conflict were to escalate further, it would present a significant challenge for the State Bank of Vietnam (SBV), the nation’s central bank. 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 just 6.9%, well below expectations.
Although the central bank has managed to control overall inflation, reducing it from 4.9% year-on-year in January 2023 to 2.1% year-on-year in July 2023, core inflation showed slower deceleration, decreasing from 5.2% to 4.1% 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-Palestine conflict compounds the challenges faced by the central bank. 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 a 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-Palestine conflict, Vietnamese consumers and businesses will 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 about 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 take tough decisions regarding its monetary policy and exchange rate management to ensure economic stability.