Major master of international trade policy and law

CHAPTER 2: LITERATURE REVIEW 2.1 Current Situation 2.1.1 Overview of the government’s budget and Vietnam current situation 2.1.1.1 Definition As stipulated in the Law on State Budget

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

DISSERTATION

IMPACT OF LOW OIL PRICE ON VIETNAM’S STATE BUDGET

Major: Master of International Trade Policy and Law

Full name: Nguyen Thi Mai Anh

Ha Noi-2016

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

DISSERTATION

IMPACT OF LOW OIL PRICE ON VIETNAM’S STATE BUDGET

Major: Master of International Trade Policy and Law

Full Name: Nguyen Thi Mai Anh Supervisor: Assoc Prof Dr Hoang Xuan Binh

Ha Noi- 2016

REASSURANCE

I declare that this is my own research The data and results outlined in the dissertation are honest and have never been published in any other projects I hereby declare that all the help for the realization of this thesis was to thank and information cited in the thesis was to

specify the source

ACKNOWLEDGEMENTS

At first, I would like to express our profound gratitude to Assoc Prof Dr Hoang Xuan Binh who had given me not only valuable instruction and motivation but also great encouragements and tremendous supports with his all enthusiasm during the time I had prepared this study research

Furthermore, I also want to dispatch a special thanks to program

of Master of International Trade Policies and Laws in general and to teachers in the Faculty of Graduate Studies for giving me opportunity to study on such an interesting and meaningful learning program

Finally, I am obliged to quite a few scholars whose papers and books I have referred to It is from their achievements that we draw rich thoughts for this study research

TABLE OF CONTENT

REASSURANCE i

ACKNOWLEDGEMENTS ii

TABLE OF CONTENT iii

LIST OF ABBREVIATION vi

LIST OF TABLES vii

LIST OF FIGURES viii

CHAPTER 1: INTRODUCTION 1

1.1 The necessity of the research 1

1.2 The objective of the study research 2

1.3 The scope and subject of research 2

1.4 Research Methods 3

1.5 The scientific and practical meanings 3

1.6 The study’s content 4

CHAPTER 2: LITERATURE REVIEW 5

2.1 Current Situation 5

2.1.1 Overview of the government’s budget and Vietnam current situation 5

2.1.1.1 Definition 5

2.1.1.2 Factors affecting government budget 7

2.1.1.2.1 Government revenue 7

2.1.1.2.2 Factors affecting revenues budget and classification revenues budget 9

2.1.1.2.3 Government Expenses 11

2.1.1.3 Current situation of Vietnam’s government budget 12

2.1.1.4 State budget deficit 18

2.1.2 Overview of oil prices 22

2.1.2.1 Definition 22

2.1.2.2 Impact of oil prices fluctuation on the economy 22

2.1.2.3 Factor affecting oil price 25

2.1.2.4 Current situation of oil market in the world 28

2.2 Previous related Research 32

CHAPTER 3: EMPIRICAL STUDY 35

3.1 Relationship between oil prices shock and the government’s budget 35

3.1.1 Model specification and data collection 35

3.1.2 Economic theory review 35

3.1.3 Expectations 40

3.1.4 Data Collection 40

CHAPTER 4: ANALYSIS RESULTS AND DISCUSSION 42

4 1 Analysis data result 42

4.1.1 Unit Root and Stationary Tests 42

4.1.2 Original regression model 42

4.1.3 Eviews results 42

4.1.2.1 Test of significance 44

4.1.2.2 Testing of dropping variables 44

4.1.2.3 Parameters interpretation 47

4.1.2.4 Errors in the model 48

4.1.4 Interpretation of model 52

4 2 Limitations 53

CHAPTER 5: SOLUTIONS AND CONCLUSION 55

5.1 Solutions 55

5.1.1 Orient the government budget revenue in the near future 55

5.1.2 Develop refineries to increase value 55

5.1.3 Prevent loss and increase government’s revenue 56

5.1.4 Control the state’s budget deficit 57

5.1.5 The financial measures to control the state budget deficit 59

5.1.5.1 Shift of the state budget of revenues towards sustainability 59

5.1.5.2 Improving decentralized budget 60

5.1.6 Create other tools to offset state budget deficit 61

5.1.6.1 Domestic borrowings 61

5.1.6.2 Foreign Borrowing 62

5.1.7 Reform of public administration and improve management capacity 65

5.1.8 Develop financial management systems and accounting of public finances systems 66

5.1.9 Innovate fund management mechanism, financial institutions 67

5.1.10 Determine the state budget deficit amid after crisis 68

5.2 Conclusion 69

REFERENCES 71

APPENDIX 76

LIST OF ABBREVIATION

GDP Gross Domestic Product

EIA Energy Information Administration

ERP Enterprise Resources Planning

FDI Foreign Direct Investment

ICOR Incremental Capital Output Ratio

IMF International Monetary Fund

ODA Official Development Assistance

OECD Organization for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries

TABMIS Treasury and Budget Management Information System VIF Variance Inflation Factors

LIST OF TABLES

Table 1: Government budget spending over the years (billion USD) 14

Table 2: Governments’ budget spending for development investment and recurrent spending 15

Table 3: Expenditure decentralization of the central budget and local budget 17

Table 4: Oil revenue in Total Government Revenue (%) 24

Table 5: Description data 41

LIST OF FIGURES

Figure 1: Budget revenue from 2005 to 2014 13

Figure 2: Proportion of GDP in Government’s Budget 13

Figure 3: Government’s revenue from domestic 14

Figure 4: Expenditure decentralization of the central budget and local budget 16

Figure 5: Brief State budget over years 19

Figure 6: Percentage of Deficit/ GDP 20

Figure 7: World crude oil consumption (Thousand barrels per day) 28

Figure 8: World oil price data in 1989-2015 30

Figure 9: Export and import crude oil quantity in Vietnam from 2010-2015 32

Figure 10: Vietnam’s government Balance Budget (billion USD) 36

Figure 11: Vietnam’s oil imports data 37

Figure 12: Vietnam’s Real GDP and government balance budget movement from 1989 to 2014 38

Figure 13: Annual average value of world oil price from 1989 to 2014 39

Figure 14: List of Vietnam refineries and their capacity 56

CHAPTER 1: INTRODUCTION 1.1 The necessity of the research

Oil and fuel is one of the most important input in the production process of a modern economy, a significant proportion of oil used to produce electric energy and fuel of all vehicles to transport goods to market; The remaining are used for the production of petrochemicals to plastics, solvents, fertilizers, asphalt, pesticides and many other products

Vietnam had started exporting crude oil since April 1987 (Nguyen Manh Thuong, 2015) According to the data collected from the General Statistic Officer’s annual report, in 1991, crude oil exporting quantity was three million tons In 2003, this exports amount was reach at about 20 million tons per year and then descending

in 2015 to 9.18 million tons per year Meanwhile imports of petroleum Vietnam in

2015 was 10.1 million tons greater than the crude oil export

Due to the important given role of oil, oil price fluctuations may affect the operation of the economy in general The increase in oil prices causes a temporary reduction of total production, because oil is a fundamental element in input factor of production thereby affecting exports reduced the trade balance of the country Higher oil prices also led to price increases of other goods caused to inflation To curb inflation, the central bank was forced to sacrifice economic growth, investment and apply tightening the monetary policy In the other situation, when the oil price decreases, the revenue from exporting crude oil reduces consequently In this case, government revenue would become smaller if other factors remain unchanged Most previous studies related to shocks or instability of oil prices on economic activity will be carried out in developed countries situation, especially the US The research related to the impact of oil price fluctuations in the economic context of the developing countries very little This is due to the lack of reliable data and also because of less dependence on oil in the history of the developing countries However, since the energy demand of the country is increasing, the study of the

influence of oil price fluctuations on the economy in countries such as Malaysia, Thailand, Indonesia, etc also was performed Acquiring the result from the research, I conducted a study "Impact of low oil prices on Vietnam government budgets"

The reason I made this study because of the role of oil for Vietnam's economy is not only reflected in the application It also stimulated Vietnam’s economy to take pass backward agricultural era and became developing countries with average growth rates of 7.3% per year; crude oil exports contributed 26%-30% in the state budget, 18%-22% to the GDP, and exports of crude oil accounts for about 16% of the average total value of exports per year Although Vietnam is a crude oil exporter but most serve domestic consumption must be imported This issue would be the same in the near future Consequently domestic oil price is greatly affected by price fluctuations on the world market And oil's role becomes even more important factor to become an oriented industrial country in the near future

1.2 The objective of the study research

This study aims to analyze the impact of fluctuations in oil prices through the oil revenue variable, the real GDP variable and money supply on the government budget variables, then answer the question how much the change in oil price affects Vietnamese government budget Consequently, based on the finding results of historical data, addressing suspected problems and quantified the relationship and impacts of the oil prices and government budget After those findings, this study supposed to give basic solution to prevent and reduce the effect of oil price on the government budget in specific and expand to other economic variables in general

1.3 The scope and subject of research

After taking into consideration the available of data sources as well as empirical studies have been conducted in countries around the world and for the purpose of research, this study research was conducted based on data from the time series annually monitoring from 1989 to 2014 of Vietnam government budget balance in

relation to world oil price variable, the value of real GDP, and the money supply variable

1.4 Research Methods

The objective of this paper is to investigate the dynamics of the relationship between oil revenue, government budget and money supply in Vietnam using the annual data for the period 1989 to 2014 In this study, the variables are world oil price (OILPRICE), government budget balance (GOVB), real GDP (GDPR) and money supply (M2) OILR, GDPR and M2 the variables are taken in their natural logarithms to avoid heteroscedasticity There are a large number of macroeconomic variables which affects government budget and may equally be considered, beside oil price, real GDP and money supply M2 Including such variables into the specification increase the fit of the model, but would decrease the degree of freedom For this reason the model is restricted to only these three interested variables To reach the purpose of this study some econometrics techniques are employed, especially the Ordinary Least Square method to estimate the impact of oil revenue on budget deficit The entire estimation consists of three steps: first, specification model, second, coefficient and other related test, third, the detection errors in models then correcting the errors (if any)

1.5 The scientific and practical meanings

Vietnam is one of countries with large reserves of crude oil in the world, ranked

at number 28 in the world Vietnam's oil and oils with a high price (According Petrotimes) However, the recent sharply decline in oil prices led to more potent effects or activate various risks The most visible is the decrease in crude oil prices led to the country's export volume decreased, so the state budget revenues from crude oil would be affected Also the real GDP and money supply M2 in Vietnam was taken into consideration

The research results can help quantify level of impact of oil prices on the state budget and listed out the risk that low oil prices may have on the national Vietnam

1.6 The study’s content

This study was demonstrated in five chapters as listed below: Chapter 1: Introduction

Chapter 2: Literature review

Chapter 3: Empirical Study

Chapter 4: Analysis results and discussion

Chapter 5: Solutions and conclusion

CHAPTER 2: LITERATURE REVIEW

2.1 Current Situation

2.1.1 Overview of the government’s budget and Vietnam current situation

2.1.1.1 Definition

As stipulated in the Law on State Budget 2015, government’s budget is defined

as all the revenue and expenditure of the Government which had been projected The budget would be used in a certain period of time and under the regulation and planning of certain authorized state’s department in order to ensure well performance of the government in their own functions and responsibilities In simplicity, government budget contains system of the economic relationships between the government and the social entities in the form of value, generated during the formation of the state, distributing and using the biggest concentrated monetary fund of the state to ensure ability of affordable for the financial for one state all functions of the state work perfectly

The function of government’s budget is the act of redistributing financial resources It is shown in both revenues and expenditures of the state Government’s budget is tightly associated with state ownership and always carries common interests and public interests It also has common characteristics of other monetary funds However, the difference of the government’s budget is a concentrated monetary fund of the state and it is divided into many smaller funds with specific functions and then used for certain planned purposes Moreover, revenues and expenditures of Government’s budget are following mostly in indirect obligation principle

Government’s budget occurs balance position when the relation between revenues and expenditures of the government’s budget becomes balanced in a period of time (usually estimated a year) This definition of the balance government’s budget is initiated by the objective needs of allocating and regulating revenues and expenditures of government’s budget in the movement of financial

resources It is also the economic process where the state has applied measures to regulate finance to control and regulate the distribution of social financial source

In terms of its nature, government’s budget is the balance between financial resources that the state gathered to the government’s budget in a year, and the allocated resources, used to satisfy the needs of the government in that year Generally, government’s budget balance reflexes the relation between revenues and expenditures of government’s budget in a fiscal year and the suitability in the mechanism of revenues and expenditures of government’s budget, to implement the objectives of develop economy-society in macro scale as well as in each area and section From the point of view of the government’s budget management, its balance is the balance of distributing and transferring resources between different budget levels, thanks to which the authorities carried out their functions and duties assigned

The relation between revenues and expenditures of government’s budget in a fiscal year is shown in the following situations:

(i) Government’s budget balance: the revenues mobilize just sufficient to cover expenditures

(ii) Government’s budget surplus: revenues are greater than expenditures The state has recalled more resources than or has not built a reasonable expenditure plan equivalent to the revenues or economy grows so well that extraordinary budget increases and the state can allocate the surplus for the next following years

Government’s budget overspending (loss): it means that expenditures of government’s budget are greater than its revenues In this case, government revenues do not meet the expenditure needs The reason for that may come from the situation that the state cannot schedule the expenditure needs suitable with its capacity; unreasonable expenditures and investments causes waste; due to loss of budget revenues; but it can also be due to the degraded economy period or affected

by natural disasters or war

2.1.1.2 Factors affecting government budget

To analyze the factors can have influence on government budget, it is necessary

to come up with the most basic formula (Mankiw, 2007):

Secondly, in terms of content, government’s revenues budget contain the distribution relationships under the value form arising in the process which State uses its power to focus on partly national financial part to form the centralized monetary fund of the State

Finally, a further important feature of government’s revenues budget is that it ties to the current economic situation and the movement of the value categories such as prices, interest rates, income For example, when prices rise then revenues fall as the result; Income increases leads to revenue increase; exchange rate

increases then revenue increases; interest rates increase (investment decreases) revenues would fall consequently The movements of those categories have the impacts on the increase or the decrease of the revenue level, put demand on enhancing the regulatory role of the tools in government’s revenues budget

Revenue in government’s budget balance is the planned receivables of State in order to balance the budget These amounts include taxes, fees, State income, receivables from selling or leasing property owned by the State and other receivables

Taxes are partly compulsory mobilization forms of personal income, the corporation income for State to ensure the spending needs of State Taxes are compulsory contribution amount, not repayment directly

The fees are receivables prescribed by the State to serve the State administration

as required or prescribed by law Collected fees are used to offset the arising expenses when handling affairs of the management department directly or indirectly Fee is to serve the fee payers on the implementation of the number of administrative procedures and to encourage, contributing to government’s budget Fee is collected by the State in order to offset part of expenditures of The Government's Budget that is used for: the construction, procurement, maintenance and management of national assets; sponsoring organizations and individual business activities, public activities such as transportation Fee is identified as an indemnity and mandatory payment when an individual or organization is entitled to have benefits or use a public service provided by the State, so fee is directly refunded

Other revenues help balance the budget, also known as compensated revenue for budget deficits In the State Budget Deficit, the government should have offset solution for that deficit, because it is impossible to prolong the state budget imbalance Revenues compensate for budget deficits, which is essential loan to compensate, including domestic loans and foreign loans Domestic loan is

conducted through the issuance of bonds, government bonds to mobilize idle money

of the community Foreign loan is conducted in borrowing foreign or receiving foreign support, international non-financial institutions

Expenditure in government’s budget balance is the planned payable of State in order to balance the budget and accomplish State’s functions and responsibilities These amounts include expenditures on development investment, recurrent expenditure, repayment of debt and provision of aids, and transfer to financial reserve fund

Development investment expenses can be understood as distribution procession and use the budget to build up or improve the infrastructure, social-economic, stimulate production in order to create a stable environment to develop macroeconomics and the whole society

The recurrent expenditure was the item in which assures to meet the financial demand of government in their functions and duties It contains stable features, and can be classified as consumption of the government

Repayment of debt and provisions of aids are the fund to make payment back to others who lend or support the government in the past It aims to offset government’s obligation in debt (from domestic or foreign investors)

The financial reserve fund is the government’s fund with the purposes of advance payment for financial need of government when the projection cannot cover the year expenditure; performing activities to prevent or remedial disaster

2.1.1.2.2 Factors affecting revenues budget and classification revenues budget

A crucial issue in government policy determines the field of encouragement and proper and reasonable encouragement level That not only affects State Budget revenue but strongly impacts on the process of economic and social developments The level of encouragement is influenced by many factors of economic, political

and social situation in the country Firstly, state budget revenues were considered to

be included:

(i) GDP: a factor that objectively determines the encouragement of the State Budget, so when to assign the budget mobilization, State should consider this criteria

(ii) Revenues from the sale or lease the resources and assets under State

ownership (iii) Revenues from debt and non-refundable aid of foreign governments, organizations and individuals, from voluntary contributions of organizations and individuals domestically and internationally

(iv) Aid from another level of government (intergovernmental aid): in the United States, federal grants may be considered non-tax revenue to the receiving states, and equalization payments

(v) Loans, or other borrowing, from the international monetary fund or

other government also

(vi) Revenue (including interest or profit) from investment funds

(vii) Revenues from liquidation of state’s properties

(viii) Rents, concessions, and royalties collected by the state when it contracts out the right to profit from some good or service to a private corporation An example is contracts for resource extraction between government and an individual or an organization (for extracting natural resources as minerals, timber, petroleum and gas, or marine resources) collected privately under license from state-owned areas

(ix) Fines collected and assets forfeitures as a penalty Examples include parking fines, court costs levied on criminal offenders

(x) Fees in which citizen have to paid in the granting or issuance of permits or licenses Examples include vehicle registration of plate permits, vehicle registration, building fees, driver's licenses fee, hunting and fishing licenses, fees for professional license, fees for granting visas

or passports, and land grading (which causes silt), and sometimes for

increasing storm water runoff, destroying local vegetation, and down trees User fees collected in exchange for the use of many public services and facilities Tolls charged for the use of toll roads is an example Donations and voluntary contributions to the state

cutting-(xi) Capital receipts

(xii) Other revenues: Non-tax Revenue (from economics) such as revenue from fines, confiscation and forfeiture of assets, etc

The classification of State Budget revenues has practically significant in the analysis, evaluation and management of State Budget revenues There are two common classifications:

Classified according to the economic content:

(i) Regular revenues often have nature of mandatory, including taxes, fees and charges for specific forms prescribed by law

(ii) Casual revenues include revenues from economic activities of the State, such as activities of collecting, selling or leasing state-owned property and other charges mentioned above

Classified according to the mobilizing capital requirements on the State Budget:

(i) Revenue in the State Budget balance includes revenues not collected regularly and frequently

(ii) Revenue compensates for the State Budget deficits: The State Budget revenues cannot meet the demand for spending and the State have to borrow more, including domestic loans from the population classes, the economic - social organizations, foreign loans

2.1.1.2.3 Government Expenses

Over the years, the role of the state budget in Vietnam have demonstrated in helping the state form market relations and contribute to control inflation, appropriate interest rates in order to create healthy national finances, ensure the stability and development of the economy Besides, the state budget still faces the

existence as the inappropriately use, the weaknesses in the management of revenue and expenditure shows us the view more insightful about the status of state budget deficit and its impact to the economic activity which is extremely large

Therefore, the following factors were considered to have impacts on the government expenditure:

(i) Politics and foreign policy of the State

(ii) Government policy to control the macroeconomic by fiscal or monetary policy

(iii) Final consumption expenditure

(iv) Infrastructure and investment

(v) Transfer payment

2.1.1.3 Current situation of Vietnam’s government budget

In 2015, budget revenue had affected because the world crude oil price fell sharply from 100 USD to 56.2 USD per barrel (An T, 2016) as well as the government carried out tax reduction and tax break policies According to a data compiled, the total budget revenue in 2015 reached 996,870 billion dong - increased 13.58% (119,773 billion dong) compared to the first estimate and 85,770 billion dong and greater than the revenue in the report to the Parliamentary 69,370 billion dong In the same year, the total government budget spending was estimated to 1,262,870 billion dong (An T, 2016) – reached 10.1% higher compared to the estimate

In terms of government revenue, according to final data by the General Statistics office from 01/01/2014 to 31/12/2014, the domestic revenue was 90.81%; oil revenue was 85.13%; the budget balance revenue from export activities was 89.01% compared to the estimation In the area of domestic revenue, revenue from state-owned enterprises was 98,16%; revenue from foreign investment enterprises (excluding crude oil) was 90.15%;personal income tax was 99.04%; charges and fees was 64.41% compared to the estimation

Figure 1: Budget revenue from 2005 to 2014

(Source: General Statistics Office)

In the period 2005-2014, total government budget revenue increased in absolute numbers, the average growth rate was 16.61% per year However, the percentage of GDP in revenue budget quite stable over the years; the average rate was 23.27% in the period 2005-2014:

Figure 2: Proportion of GDP in Government’s Budget

558158,0 721804,0734883,0

828348,0

877697

Total Government Revenue from 2005 - 2014

Total Government Revenue (Billion dong)

The growth rate of domestic revenue increased over the years with considerable speed In the period 2005 - 2014, the domestic revenue reached 67.62% of total government revenue It meant that the government further focused on the intrinsic strength of the domestic economy

Figure 3: Government’s revenue from domestic

(Source: General Statistics Office annual report)

.Regarding to the government expenditure, in recent years, government budget spending was rising at high speed (2010: 15.25%; 2011: 15.36%, 2012: 10.72%, 2014: 5.06%)

Table 1: Government budget spending over the years (billion USD)

(Source: Ministry of Finance annual report)

As the result, the overspending of the government in 2015 was 256,000 billion dong, made up 6.1% of GDP

Due to the publication of government budget was announced data to 2014,

hence, this study report only analyze the figures from the past till 2014

119826,0

145404,0 174298,0

229786,0 269656,0

353388,0 443731,0 477106,0 567403 593560

Revenue from domestic (billion dong)

Revenue from domestic (billion dong)

Table 2: Governments’ budget spending for development investment and

(Source: Ministry of Finance annual report)

In the period from 2007 to 2011, recurrent spending budget increased with a steady speed in recent years (from 23.26% in 2007 to 29.20% in 2011) However, this growth rate had been sharply decreased in 2012 and 2013, at 16.71% and 2.72% respectively Growth rate of investment spending also experienced the same trend It can be seen from the above table that the growth rate of recurrent spending budget is greater than the growth rate of spending budget for development on average

The recurrent spending proportion in total government budget was fluctuated from 2007 to 2014, 59.10% in average According to an estimate data from Ministry

of Finance, this figure in 2016 will reach a high level at 64.72% Therefore, in the future, regular spending budget is required to be operated at a stable and moderate level Meanwhile, the ratio of budget for development investment in total government budget decreased gradually from recent years because the demand of regular spending increased, along with a better involvement of investment funds from the residential and public sector in the total social investment capital The

percentage of government budget for development investment in total GDP is relatively stable with the average of 8.69% Through the years, this ratio is bigger than the rate of government budget deficit The principle of balancing the government budget is stipulated in Article 7.2 of the Law on government budgets 2015: "in case of overspending, the budget deficit must be smaller than the budget for development investment, then, balance the budget revenue and spending "

According to the 2015 State budget law, revenues and expenditure assignments

of each level of government are obviously allocated in compliance with a rule: the central budget holds crucial revenues and responsible for main expenditure assignments; As time passes, local budget expanded with autonomy in exploiting revenues to carry out administrative expenses, offer public services for social-economic development in localities This creates a basic foundation helping localities proactively balance the budget

Figure 4: Expenditure decentralization of the central budget and local budget

(Source: Ministry of Finance annual report)

Expenditure decentralization of the central

budget and local budget

Local Budget Central Budget Trillion

dong

Table 3: Expenditure decentralization of the central budget and local budget

(Source: Ministry of Finance)

To implement the decentralized expenditure assignments, structure of assigned revenues is divided into three groups: 100% revenues of the central budget; 100%

of the revenues of local budget; revenues are allocated in % between the central and local budget

The divided proportion of revenues between central budget with the provincial budget shall be decided by the Government This proportion is applied to all allocated revenues and separately determined for each province by the formula stipulated in the Circulars 59/2003/TT-BTC:

Percentage (%) = (A – B)/C Whereas:

A is total local budget expenditure (excluding: additional expenditure for level budgets and expenditures from additional targeted resources from the central budget, capital expenditure from mobilizing resources under paragraph 3 of Article

lower-8 of the Law on Government Budget, spending from voluntary contributions and expenditures from aids, expenditures from foreign loans, spending from transferring

to the next year's budget);

B is total local revenue gained 100% (excluding additional revenues from higher-level budget, the previous-year surplus revenue, revenue mobilization under paragraph 3 of Article 8 of the Law on State Budget, revenue from voluntary contributions, aids, revenue transferred budget from the previous year;

C: total revenues are divided between the central budget with the provincial budget

After identifying the division percentage, it will be stable for about 3-5 years In case of this ratio is greater than 100%, the local will enjoy all the revenue allocated

in percentage, the deficit will be additional If the ratio is 100%, it means that the province is self-balancing If this percentage is less than 100%, the central budget will lessen revenues arises on these provinces

Thus, the central budget must implement balance of the provincial budget, or actually it must subsidy provinces not able to ensure the local budget expenditure greater than the total revenues gained 100% and the divided revenues According to statistics, in the period of 1996 - 2003, there were over 60 provinces - but only 5 provinces are able to balance the budget, the remaining 55 central provinces need to

be provided additional budget Moving on to the period of 2004 up until now, along with policies promoting decentralization in the management of the government budget, localities have more autonomy, some taxes previously are under the central budget revenues by 100%, currently converted into revenues divided by the ratio between the central and local budget, such as entire special tax of goods and services in the country According to 2013 data, there are more than ten provinces

did not need to receive subsidizing from the central budget

2.1.1.4 State budget deficit

Budget deficit rate in the recent time

In 2009, in order to prevent economic downturn, maintain economic growth at a reasonable level and ensure social security, the government has used a stimulus package of about 145,000 billion dong (equivalent to 8 billion USD) The National

Assembly agreed to increase from 4.82% of GDP budget deficit to below 6.9% It is estimated that the State budget deficit by 6.9% of GDP in 2009, from 87,300 billion

to 115,900 billion, an increase of 28,600 billion higher than the estimated data Increasing the state budget deficit is entirely used for investment and development

in accordance with the provisions of the Budget Law, the National Assembly allows implementing centralization for mobilizing the central budget expenditure for works and projects stimulating economy

Figure 5: Brief State budget over years

(Source Ministry of Finance annual report)

Balance (Billion dong)

Figure 6: Percentage of Deficit/ GDP

(Source Ministry of Finance annual report)

According to the limit level issued by the National Assembly in annual Resolution on Government budget estimates, the allowed maximum budget deficit

is 5% of GDP/year But in fact, this regulation cannot impose discipline for expenditure The budget deficit of Vietnam in the past few years has exceeded 5% The problem is really with national financial background, if the budget deficit exceeds 5% on GDP for a long time, it would be dangerous If not maintaining a healthy fiscal balance, not reducing the budget deficit to a healthy level, then it will certainly put pressure on operating the macro economy In the Resolution number 99/2015/QH13, the National Assembly had set the limit line of deficit in 2016 would be 4.95% to control the deficit situation

Causes of the budget deficit

Subjective causes of the budget deficit are indicated in policy of actively accepting the budget deficit when estimating to increase human resources for constructions of infrastructure, and when the observation of the government budget has tried to control this number for contributing to the economic growth Subjective reasons are also reflected in policy of exploiting inadequate revenues; policy of

allocating and using human resources and balancing between unreasonable expenses leading to losses and waste

Low quality of public investment: the quality of public investment is a key indicator of the government’s success in gaining reform People or groups with political power often take advantage of public investment projects for personal gain and become rich illegally When public investment become an object of predatory behaviors, on the one hand, objectives of the investment project is not done, simultaneously massive costs will be imposed on the economy and society In fact Vietnam is riddled a considerable portion of their resources due to waste and corruption

While spending public infrastructure is not given proper emphasis, too much fund is spent on projects and capital-intensive imports, but not contributed adequately to economic growth Also on large state enterprises for the purpose of speculation took a considerable fund

A low investment efficiency shown in the ICOR rising According to Thanh N

2015, ICOR is increased rapidly: in 2007 it was 5.2; 2008 was 6.6 and 2009 was over 8 Vietnam’s ICOR is at a high level not only compared to other emerging countries in Asia, but is still high compared with other East Asian countries Typically, in the next period from 2011 to 2014, Vietnamese’s ICOR was 6.92 while Indonesia was 3.86, Philippines was 4, Malaysia was 5.1, and Laos was only 4.2 For developing countries, ICOR recommended by international financial organizations such as was at 3 times (Dieu N, 2009), this investment is effective and thus economy will have a sustainable development If compared with other countries in the region, Vietnam's ICOR is almost double It means that the efficiency of use of funds is lower than half of other countries compared

The influence of international integration led to tax reductions When Vietnam joins the WTO, the revenues from import tax of the government budget will decrease due to the commitments of tariff reduction Under WTO accession

commitments, Vietnam would cut import tariffs by 22% compared with current tax levels, would do within 5 years from joining the WTO

The commodity prices on the world (especially prices of energy commodities, fertilizers, clinker, preventive and curative medicines and steel billets) will increasing continuously at high speeds that affect the overspending of government’s budget on the perspectives: export commodities will have higher prices Since then, the government’s revenue from foreign trade increases but the goods with the increasing prices is the important inputs that we have to import the large quantities,

as a result, the production costs of the enterprises increase, reducing the taxable income of almost all enterprises, hence, the government’s revenue budget from corporate income tax will decrease

2.1.2 Overview of oil prices

2.1.2.1 Definition

According to introduction from announcement knowledge of Vietnam Petroleum Association, crude Oil Price is known as the spot price of a barrel of oil The most common oils classifications are Brent Blend, West Texas Intermediate (WTI) and Dubai whose crude oil comes from Like other economic variables, the prices of the crude oil dependent on several factors that affect the demand and supply of the crude oil Higher prices of crude oil affect the cost of home heating oil, gasoline, electric power generation and manufacturing directly

The chemical composition of the oil is separated by fractional distillation process The products derived from the oil filter including kerosene, benzene, gasoline, paraffin wax, asphalt, etc

2.1.2.2 Impact of oil prices fluctuation on the economy

As far as this research concerned, the low oil price has both positive and negative impact on the government budget

At first, this study will research the impact of oil price on other economic variables Oil price is one of the most important variables in an economy In general evaluation, it can be seen clearly impacts, the most visible of the reduction in oil prices for the economic actors in Vietnam is a redistribution of income Revenue from crude oil exports dropped reduces government revenue, profit oil and mining companies also fell However, the cost of petroleum imports fell kinds biggest benefit for enterprises in the field of transport as this is the sector most consume more gasoline, other sectors such as fertilizer production , plastic, exploitation of natural resources, fisheries, metallurgy also benefit when fuel accounts for 20-30%

of input costs in these sectors Reduced freight rates also reduce input costs for most sectors In particular, gasoline prices also helped reduce household spending for travel and daily double benefit as prices of consumer goods fell Thus, for the economy, spending and investment by the Government and be offset by reduced spending and increased investment by the private sector and citizens

However, the long-term shift in the region benefit from the Government to the region in general and businesses in particular, private enterprises will bring a positive impact to the economy when the private sector is an area with ICOR lowest

in 3 regions (3.63 times for the period 2011-2015), contributing to reduced overall ICOR economy from 6.9 times to 5.2 times in the 2006-2010 period 2011-2015 Along with the performance of the company improved domestic revenue for the state budget from the tax increase will contribute to reducing the negative impact of reduced revenues from crude oil exports to the state budget A falling in oil price

had a positive impact on consumer and business activity In that, thanks to lower oil

prices, people save transportation costs, thereby increasing consumer economy As the announcement of oil prices, from early 2015 until June 1/2016, gasoline prices fell 1.540 per litter (-8.75%); 5520 reduced diesel per litter (-33.2%) As a result, consumer spending in the economy had been improved and the total retail revenue

of goods and consumer services revenue increased On the business side, lower oil prices reduce input costs, thereby increasing profitability for increased spending, business reinvestment

Secondly, oil priced can control inflation at low and stable rate In 2015, oil prices have plummeted direct impact to traffic groups and groups of utility, fuel and building material In addition, the reduction in fuel prices and indirect impact of food groups, food, eating outside the home (the largest group weights in the CPI basket of goods (39.93%) as the data compiled from General Statistic Office 2015, contributing to stability of this group fluctuations even at peak times, holidays Average CPI rose only 0.63% in 2015 compared to the same period of 2014

However, the same volume of exports and imports of crude oil and gasoline all kinds of 2015, a comparison between the actual value and the value in 2015 calculated according to average prices in 2014, the decrease in oil prices in 2015 compared to 2014 has made the reduction of export revenues more than the imports

to reduce the gap approximately 446 million Thus, it can be estimated that lower oil prices bring more adverse effects for the economy overall Net decline of revenues from exports than import expenditure reduction affect aggregate demand and growth compared to the ability of the economy Moreover, it is obviously that the lower the world crude oil price, the fewer exporters can earn In fact, oil price contributes a part in the total of government revenue budget by affecting the oil revenue from exporting crude oil Vietnam is a country who exports crude oil to create receivable for government revenue budget Therefore, lower the revenue from oil for the government It is a serious issue if oil price fluctuates because when revenue from oil plays a major proportion in government revenue, a sharply decrease in oil prices would damage the government budget In this instance, Vietnamese government had controlled the percentage contribution of oil in budget over the years In specially, the revenue from oil gradually decreases:

Table 4: Oil revenue in Total Government Revenue (%)

Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(Source Ministry of Finance annual report)

As can be seen from the table, the percentage of revenue from oil was sharply decreased from 29% in 2005 to 11% in 2014 Another positive side of downward oil price is that, the input production cost would also decrease, create opportunities for businesses and then increases the revenue from domestic business and also stimulate the economic development

Moreover, according to the article of Institute for Economic Research and Policy in 2016, when the oil price volatiles in the range from USD 20-60 per barrel (average price of oil in 2016), revenue from crude oil (including export taxes, environmental fees, taxes business income, mining fee) will be affected seriously If the average crude oil prices fell to $ 1 from the oil revenues will fall nearly 1,400 billion respectively Similarly, the budget is also affected from imported gas prices

go down Estimates indicate that the budget will be reduced by approximately 760 billion dollars corresponding to each of the crude oil price fell

In the scope of this study, it is necessary to investigate the net impact of low oil price on Vietnamese government budget

2.1.2.3 Factor affecting oil price

First factor to be considered is stock market movement and financial crisis events Although oil prices have impact on the stock market as analyzing in previous section, the stock market in reality also affects the oil prices

From 2002-2008, the price of oil from $ 20 per barrel to $ 147 per barrel, but after years of depression, a large amount of capital to withdraw from the market crude oil prices drop sharply 12/2/2009 WTI down to the lowest level, while the $ 33.98 per barrel The direction of crude oil prices is increasingly affected by the financial factors, crude oil is becoming an important choice of investors, reciprocity

of operations between oil prices and stock markets become increasingly significant, stock market rising oil prices will generally raise

Housing bubble coupled with the lack of financial monitoring closely the US led

to the financial crisis broke out in mid-2007 The credit collapse culminated in

10/2008, spreading and pushing the world economy into a severe financial crisis since the Great Depression of 1929 - 1933 At this point, with oil prices up to a record 145 USD per barrel When the world economy grows strongly, the demand for that fuel oil demand increases, as world oil prices increase Conversely, when the world economy into recession, the manufacturing business activity stalled and cuts reduced demand for oil and reduce oil prices

Next cause to be reviewed is the US Dollar currency From 3/2009, the dollar decline makes the oil market continued with the chain reaction When the dollar depreciated, for those investors who own the currency stronger, crude oil prices become cheaper, so they will buy more crude oil, pushing prices up

Since oil is quoted in dollars, a weakening of this currency can force the oil exporters increase their product prices in order to recover the value lost due to the dollar devaluation as export oil As a corollary, the price of oil is believed to reduce the US dollar uptrend against the other major currencies as the euro or the pounds Another important factor need to be taken into consideration is the elasticity of oil in income According to the previous studies of Dahl (1993), Cooper (2003), Hughes and partners (2008), elasticity of demand for crude oil prices is very low This means the change in demand when price changes are very small Meanwhile, a shock will cut the output of oil will sharply raise the oil prices and increased production shocks will make oil prices plummeted vice versa Besides, the rate of spending oil revenues are also factors affecting the volatility of oil prices When this ratio is low, the oil price rise has not affected consumer budgets, so will not affect oil demand and the prices continue to rise However, when the price increased to the extent that the ratio of the total spending of oil income raises too high, demand will fall, reducing the impact of oil prices

There are also many other factors affect the movement of the world oil price such as the natural factors, exchange trading activities, expectation of the market, and the stability of oil supply, etc

Natural factors such as storms, earthquakes, tsunamis and hinder the exploitation

of raw materials as well as the refining process and refining capacity A typical example taken in 2005, Hurricane Katrina broke through on the oil rigs in the Gulf

of Mexico, the output of refineries in the United States fell 4.5 million barrels per day, WTI oil prices up to a level of $ 70.8 per barrel

The exchange trading activities and speculation on the oil market also contributed effects Oil prices are also affected by speculation of commodity traders For example, according to data of WTI in 2008, oil prices reached $ 140 per barrel Many professors predict that the speculators are trying to put prices up and create bubbles in oil prices Until after 2009, oil prices have dropped more than 70% to $ 30 per barrel by the fact that demand does not exist to be able to cause the fever of such oil price

As well as other economic variables, psychological worry about the instability

of oil prices on the global oil is considered the biggest causes giving rise to additional costs, putting pressure of the oil price increase

The concerns over oil supplies as well as the political in the Middle East, the conflict between Turkey and Syria continues to escalate, the Libyan civil war, fears

of a global recession, the weakening of the dollar are the causes of oil price volatility based on the downturn expectation

Petroleum policy of the oil-producing countries could also affect the price of oil

A decision to increase or decrease oil reserves, the embargo against the country's leading oil producers also affects the price of this commodity For example, a super storm Sandy made dramatically slump refineries in some US’s states causing severe supply disruptions This time, the US was forced to use the policy to offset supply shortages after hurricanes and strangling the spike in oil prices by buying 80 million liters of emergency fuel, and open heating oil inventories northeast to pump an extra

20 million gallons of fuel Another example is that the commander of US and EU sanctions imposed on Iran's industry has caused supply to fall; OPEC member

countries have not enough time to make up for a shortage of oil to the countries Iran and Libya

2.1.2.4 Current situation of oil market in the world

Since the appearance of oil, the role of oil in life as well as in economic development was assured to be crucial The demand for oil continued to increase in all countries of the world According to EIA data synthesis, an increase in demand for the world's oil is shown in the diagram below:

Figure 7: World crude oil consumption (Thousand barrels per day)

(Source from the data of United States Energy Information Administration)

In the 33-year period from 1980 to 2013 the output of the world's oil consumption increased by 52.39% from 59.52 million barrels per day to 90.70 million barrels in 2013 During that oil demand strongly grow in the period 2003-

2007, the 2003 sales volume of nearly 79.56 million barrels per day and 2007 the number had reached 86.22 million barrels per day, an increase of nearly 8.36% over

industry Currently the US uses a quarter of the world's oil production, half of which is for travel demand, making the US increasingly dependent on oil supplies from abroad In the oil consumption of the world, the demand for oil in the developed countries of the OECD account for large proportion, accounting for more than 61% average oil consumption worldwide In the 10 years from 1997 to 2007 the consumption of oil products in the developed OECD countries increased by more than 5%, more consumption of 46 million barrels per day in 1997 and by 2007 these countries have consumed more than 49 million barrels per day account for over 57% of worldwide consumption These are the industrialized countries, as well

as life income high demand for energy; especially oil used in daily life as well as in the industry has always accounted for a large proportion of the world Although representing less than 20% of the world population, but the industrialized countries account for over 80% of cars in the world With the use of cars so the largest oil consumption is inevitable In including the US is the leading consumer of oil in the world In 2007 the country consumed 20.7 million barrels of oil per day over 50%

of total consumption in developed countries and accounts for more than a quarter of total OECD oil consumption worldwide According to data compiled by the Energy Information agency EIA world countries most oil consumption in 2007 respectively: US 20.68 million barrels per day of water nearly 3 times 2nd China 7.6 million; then to Japan 5 million; Russia 2.82 million; India 2.8 million; Germany 2.45 million; Canada 2.36 million barrels per day Due to the industrial development and high living standards of oil consumption in industrialized countries are much greater than and less-developed countries But oil consumption proportion of non-OECD countries continued to increase during the period 1997-

2007, in 1997 oil consumption in these countries accounted for 36% of total consumption of petroleum worldwide and in 2007 the share of oil consumption in the country has reached nearly 43% Asia is growing strong demand for oil, producing about 11% of the world's crude oil, but consumes more than 20% This deficiency is increasingly larger as the two largest economies of the region are India and China continues to increase demand for oil In 2003, 44.7% of oil consumption

in the region has to import about 10% compared to the mid-80s of last century Along with the process of industrialization and modernization is happening rapidly

in Vietnam and always high GDP growth rate average period 2001- 2008 is 7.46%, the demand for oil is constantly donated In the period 2001-2007 oil consumption

by more than 50% of Vietnam reached 178.5 thousand barrels / day and 270 thousand barrels in 2001 / year in 2007 Vietnam is exporter of crude oil but import almost 100% export petroleum to the increasing demand for oil and oil prices fluctuate constantly as today, it will affect a lot to the national economy and the national budget Therefore need to take measures to reduce the impact of world oil prices on the economy of Vietnam in the coming period

The following table describes the oil price in the world over the period 1989 –

2015

Figure 8: World oil price data in 1989-2015

(Source: Statistic data from WTI)

As can be seen from the chart and from the real milestone, there is a serious crisis in oil prices in the year 2007 – 2008.In 2007, oil prices approached USD 100 per barrel In the context of a serious devaluation of the dollar, many countries with large dollar reserves and OPEC has to take into account ability to shift to using other strong currencies for oil pricing Oil is expensive and the risk of depleted in

WORLD OIL PRICE 1989 - 2015

Crude Oil Prices