Vietnam accelerates efforts to lower retail fuel prices, diversify middle distillate supply sources

Vietnam has further cut taxes on transport fuels for the second half of 2022 and encouraged fuel traders to diversify their middle distillate import sources in an extended effort to help domestic consumers cope with surging retail oil prices, industry and government sources said July 11.

Under a resolution passed by the Standing Committee of Vietnam's National Assembly, the duty for gasoline will be trimmed to Dong 1,000/liter (4 cents/liter) from Dong 2,000/l (8 cents/l) from July 11, the Ministry of Finance said in a statement.

The latest tax cut signals the government's strong focus on protecting consumer spending power and curbing rising inflation, after Hanoi had already cut the tax on gasoline from Dong 4,000/l to Dong 2,000/l in April, a distribution and sales manager at state-run Petrolimex said.

Apart from gasoline, the tax for diesel was cut to Dong 500/l from Dong 1,000/l and the duty for jet fuel cut to Dong 1,000/l from 1,500/l, according to the finance ministry.

The reductions will apply over July 11-Dec. 31. From Jan. 1, 2023, the taxes on the products will return to the original rates.

Vietnam's headline inflation remains under 4% as Hanoi has successfully controlled domestic food prices so far this year. The additional fuel tax cuts could prove to be a prudent move as record-high transportation fuel prices could threaten the government's 4% inflation upper limit target, according to fixed income analysts at Vietcombank Securities.

Fuel import diversification

In addition to fuel tax cuts, National Assembly chairman Vuong Dinh Hue has formally asked the central government to consider adjusting import taxes on oil products in order to not just help lower retail fuel prices, but to encourage diversification of supply sources.

The finance ministry also proposed to the central government a lowering of gasoline and ethanol import duties from most-favored-nations, or MFNs, in terms of international diplomacy and geopolitics.

Under the proposal, the import duty for gasoline from MFNs including China, the US and major Middle Eastern oil producing nations would be cut to 12% from current 20%.

Vietnam mainly imports gasoline and other refined products from South Korea and Association of Southeast Asian Nations countries, the regional partners that Hanoi had signed free trade agreements with.

The import taxes under the Vietnam-South Korea Free Trade Agreement, ASEAN Trade in Goods Agreement, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and Free Trade Agreement with Eurasian Economic Union involving Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan, are currently fixed at 8%.

The finance ministry said it believes the difference between the 8% import tax for FTA sources and the lower standard duty for MFNs of 12% is reasonable enough to encourage domestic oil importers and distributors to look for new suppliers and avoid over-dependence on South Korea and ASEAN in case of disruptions in supply chains.

However, it would be extremely difficult for Vietnam to reverse its hefty reliance on South Korean supplies as most of the Middle Eastern refiners are heavily focused on supplying diesel and other middle distillate products to Europe amid faltering Russian oil product demand in the West, while China's oil product exports are expected to drop sharply in 2022 as Beijing remains hesitant to grant adequate export quotas to local trading firms and refiners, middle distillate traders based in Hanoi, Seoul and Singapore told S&P Global Commodity Insights.

Besides, many Asian nations are struggling to produce enough oil products to cover their own domestic requirements, middle distillate traders said, indicating that South Korea and Singapore were the only two standout nations capable of producing large volumes for sales across Asia and Oceania.

It would be most cost-effective for Vietnam to rely on South Korean oil products, considering the high quality, transparent pricing, large production volume and prompt delivery, analysts at Korea Petroleum Association and middle distillate marketers at major South Korean refiners including SK Innovation said earlier.

South Korea exported 14.8 million barrels of oil products to Vietnam over January-May, more than double the 6.2 million barrels exported during the same period a year earlier, latest data from state-run Korea National Oil Corp. showed.