A slump in crude prices poses a risk to government revenue from oil, which makes up about 10 percent of state income, according to Bui Duc Thu, a member of the National Assembly’s finance committee. Growth may miss this year’s target, Thoi Bao Kinh Te paper reported this week, citing an official study.

Vietnam, which set this year’s budget based on oil at $100 a barrel, is now grappling with the impact of crude below $50 a barrel. The Finance Ministry canceled a gasoline import tariff increase on the same day of the announcement last week, showing the challenge for the oil-exporting nation as it tries to shield businesses and consumers from higher taxes while addressing a fiscal shortfall that is wider than that of Malaysia, Indonesia and Thailand.

“This back and forth shows it is a complicated problem and the government has to tread carefully as it balances various interests in the economy,” said Alan Pham, Ho Chi Minh City-based chief economist at VinaCapital Group, the nation’s biggest fund manager. “It is a dilemma.”

‘Critical’ Situation

It is a dilemma that also confronts Malaysia, where oil-related contributions make up almost 30 percent of annual state revenue. Prime Minister Najib Razak said last week the 2015 budget gap will be 3.2 percent of GDP, bigger than an October target of 3 percent. Growth will be 4.5 percent to 5.5 percent from an earlier estimate of as much as 6 percent, he said.

In Vietnam, which is a net exporter of crude and a net importer of oil products, revenue will fall by 1 trillion dong ($47 million) for every $1 per barrel decline in global prices, said Thu in Hanoi. While officials initially said lower manufacturing costs from cheaper oil made the 6.2 percent growth (VEGDYOY) target “achievable,” the study showed expansion may slow to 5.2 percent with crude at $40 per barrel, Thoi Bao reported.

Vietnam’s budget deficit will probably be 5.3 percent of GDP in 2015 from 5.45 percent last year, according to a Bloomberg survey. That’s higher than the target of 5 percent and compares with a 1.14 percent gap in Indonesia and a 2.15 percent shortfall in Thailand.

“The budget revenue in 2015 is in a very critical situation,” said Le Dang Doanh, a Hanoi-based economist and former government adviser. “Declining oil prices are leading to a big loss of budget revenue and a huge number of private companies are unable to pay taxes as they are struggling for survival.”

Avoid Losses

Vietnam Oil and Gas Group, the nation’s largest oil company, plans to reduce its output this year to avoid losses if crude prices drop further, Saigon Times reported this month, citing Chairman Nguyen Xuan Son. The state-owned company estimates 2015 revenue will be 31 percent lower than last year if oil is at $60 a barrel.

The value of Vietnam’s crude oil exports dropped 37 percent in January from a year earlier, even as the volume shipped rose 47 percent, according to official data released today.

Since mid-2014, Vietnam’s government has ordered fuel retailers to cut prices at least 20 times, resulting in about a 30 percent drop in prices at the pump, compared with a more than 50 percent decline in global prices. At the same time, officials raised the petroleum import tariff several times in a bid to increase revenue, leading to the gap with international prices, said Ngo Tri Long, an independent economist in Hanoi.

Less Dependent

The slide in oil comes as the government tries to spur growth by restructuring loss-making public enterprises and cleaning up bad debt at banks. Vietnam has also cut corporate taxes to help businesses, which will reduce state revenue by 19 percent in 2011-2015 and 18 percent in 2016-2020, Nguyen Cong Nghiep, deputy finance minister, said last August.

The economy grew 5.98 percent in 2014, the fastest pace in three years. The nation is less dependent on oil now: crude-related revenue which made up 30 percent of the budget in 2005, fell to a fifth five years ago and accounts for about 10 percent now, according to Long, a former finance ministry official. Meanwhile, foreign direct investment rose to $8.9 billion last year from $7.6 billion in 2009, World Bank data showed, as the country gained favor as a manufacturing hub for apparel and electronics.

“Though there may be lower direct revenues coming through, the indirect revenues from an improving growth outlook may be positive,” said Glenn Maguire, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “As we see disposable income freed up in the developed economies, external demand for the type of goods Vietnam is producing should pick up, and pick up significantly.”

Meanwhile, Vietnam is looking for ways to cut spending, with Industry and Trade Minister Vu Huy Hoang calling on officials last week to fly on budget airlines. Imposing higher tariffs on imported gasoline, while easing budgetary pressures in the short term, may encourage smuggling, and would eventually be counter productive, Doanh said.

“The government is under pressure to curb the budget deficit, so it wanted to raise the import tariff on petroleum,” Thu said. “However, that will reduce the chance for businesses to enjoy cheap oil prices and boost growth.”

By John Boudreau & Nguyen Dieu Tu Uyen - Bloomberg - January 27, 2015