Scientific problem There have been many empirical studies on the determinants of inflation in Vietnam. These studies cover different time spans. However, most of them were conducted for the period before 2005. Therefore, this paper fills a time gap. Moreover, the study also utilizes a longer time span, which will give a more precise insight into the issue.
Moreover, recent events such as the joining WTO of Vietnam in 2007, the global financial crisis 2007-2008, sharp fluctuation in the world oil and gold price, and the exchange rate problem have posed the demand for further study on inflation in the new context.
2. Research questions Main question: What are the determinants of inflation in Vietnam over the period 1995-2010?
Sub-questions: What are the short-run determinants of inflation in Vietnam over the period 1995-2010?
What are the long-run determinants of inflation in Vietnam over the period 1995-2010?
3. Literature Theory Demand-pull inflation Demand-pull inflation happens when the level of aggregate demand grows faster than the underlying level of supply.
Aggregate demand is made up of all spending in the economy.
AD = C I G (X-M)
C stands for consumer expenditure.
I stands for investment.
G stands for the government expenditure.
X and M respectively stand for exports and imports.
Figure 1: demand-pull inflation
Demand-pull inflation may begin with any factor that increases aggregate demand. Consumers may spend more, perhaps because interest rates have fallen, taxes have been cut or simply because there is a greater level of consumer confidence. Firms may invest more with expectation of future profit. The government may spend more on infrastructure, health, education, defence, etc. It may also be a boom in export overseas.
Cost-push inflation Cost-push inflation is an inflation that results from an initial increase in costs.
There are two main sources of increased costs
An increase in wage rate
An increase in the price of raw materials, such as oil.
Figure 2: Cost-push inflation
Monetarist view Monetarists believe the most significant factor influencing inflation or deflation is how fast the money supply grows or shrinks. They emphasize the role of monetary policy better than fiscal policy in controlling inflation. According to the famous monetarist economist Milton Friedman, “Inflation is always and everywhere a monetary phenomenon.”
This theory begins with the equation of exchange:
MV = PQ
M is the nominal quantity of money.
V is the velocity of money in final expenditures;
P is the general price level;
Q is an index of the real value of final expenditures;
Monetarists assume that V is unaffected by monetary policy (at least in the long run), and Q is determined in the long run by the productive capacity of the economy. Under these assumptions, the primary driver of P is changes in M. In other words increases in the money supply would lead to inflation. The message is simple; control the money supply to control inflation.
Figure 3: Relationship among money supply, quantity of money, value of money and price level.
Empirical study There have been many empirical studies on inflation in Vietnam. In the most recent research “Macroeconomic Determinants of Vietnam’s Inflation 2000-2010: Evidence and Analysis”, Nguyen Thi Thu Hang and Nguyen Duc Thanh have developed a hybrid model of inflation determinants that comprise both the structural approach and the monetarist approach as well as employed Vector Error Correction Model (VECM) econometric technique to come to the following results
(1) Public’s memory and expectation play a crucial role in shaping the current inflation. Memory about a period of high inflation in the past seems only to begin to fade away after 6 months of consistently low and stable inflation.
(2) The speed of adjustment of the foreign exchange market and the money market to disturbances is very low or even near zero.
(3) Stimulating the real economy through increasing productivity and output growth has better impact on controlling inflation in the longer run than monetary and nonmonetary measures.
(4) In contrast to previous study results, the model found considerable role of exchange rate, a devaluation in particular, on increasing pressures on inflation.
4. Conceptual framework Inflation = f(GDP, previous inflation, exchange rate, interest rate, money supply, credit, world oil price, world rice price, cumulative budget deficits, wage rate)
Price level Aggregate demand 1. Interest rate
5. Budget deficit
Aggregate supply 1. Wage rate
2. World oil price
3. World rice price
4. Exchange rate
Expectation 1. Previous year inflation
Data Monthly secondary data covering the period from January 1995 to December 2010 are used for this study. These data are collected from the General Statistics Office (GSO), State Bank of Vietnam (SBV), Ministry of Finance (MOF), International Monetary Fund (IMF), and World Bank (WB)
Variables Sources CPI monthly inflation data are collected from GSO. The index is rebased to January 1995
Money supply (M2) International financial statistics (IFS), IMF statistics data base
Interest rate monthly data on lending rates from SBV
Exchange rate daily official exchange rates (VND/USD) are collected from SBV. Monthly official exchange rates are calculated by taking the average of the daily official exchange rates within each month.
Cumulative budget deficit MOF
Wage rate World oil price America’s Energy Information
World rice price International Rice Research Institute (IRRI)
5. Research method The study uses quantitative method to identify the determinants of inflation in Vietnam. The study includes the following steps
Unit root testing: The first step is to check the set of data series whether they are stationary. Augmented Dickey-Fuller (ADF) test is used to derive the accurate conclusion on unit roots of the variables. The number of lags in ADF test is selected based on Akaike Information Criterion (AIC) and Schawarz Information Criterion (SIC).
Cointegration analysis: Johansen cointegration test is used to check for long run relationships among variables of the model.
Vector error correction model (VECM): VECM is used to study the short-run dynamics of the series. The VECM is a restricted form of VAR that incorporates co-integration restrictions. This specification restricts the behavior of co-integrating variables to converge to their long-run equilibrium. Furthermore, this specification allows for a wide range of short-term dynamics. VECM is used to test the determinants of monthly percentage change in domestic inflation.
Vegetable Oil Has Two Major Markets Economics Essay
Vegetable oil consumption has rapidly increased in the last decade. Global per capita consumption has reached from 13 kilograms in 2001 to 16.4 kilograms in 2011. Population growth is one of the reasons of the rise. Rabobank states that economic growth and urbanizations of developing countries have strong impact on consumption.
‘Urbanization plays important role in changing diets. The availability of supermarkets and convenience stores with cold chains and the multitude of restaurants and low cost fast food options result in higher meat and vegetable oil consumption among urban populations.”
Another driver of the market is growing vegetable oil consumption in biodiesel industry. OECD – FAO projects that share of vegetable oil consumption used for world biodiesel production wll increase from 12% in 2009-11 to 16% in 2021.
Although Rapeseed and Soybean Oil are expected to continue to be major feedstocks, Palm Oil is projected to more than double in the next 10 years and to reach 9 percent of global palm oil production by 2021. OECD – FAO projects that food use will account for 27 percent and biodiesel demand for 73 percent in developed countries. In contrast with developed world, food demand is expected to continue to drive consumption in developing countries. ”Although the average per capita intake of vegetable oil is set to rise by about 2 kg to 18 kg per year. Starting from a relatively small base, demand from the biodiesel industry is expected to almost double in the developing world, with growth in absolute terms not far behind that projected in developed countries”
Four major Vegetable Oils have been researched in the graduation project: Palm Oil, Soy Oil, Sunflower Oil and Rapeseed Oil.
What makes Vegetable Oils as potential products for expanding Kolmar’s business?:
Growing market: Researches / reports show that especially Vegetable Oil demand will continue to grow in near and long term. Demand for vegetable oils for food and biofiuel use is expected to increase by an additional 23 million tons by 2016. Rabobank believes that supply will struggle to keep up with demand due to constraints relating to land, yields and weather. Meanwhile, the global stocks to use ratio for vegetable oils is at its lowest level in 38 years.
Agricultural commodities may have different trading concept than Oil, Petrochemicals. Entering veg oil business could be first step to penetrate agricultural commodity market.
Kolmar is multinational trading company as it operates in major countries of world. It has sufficient financial and managerial / human resources strenght to do business worldwide in agricultural commodity markets as well.
Spreading risk: Company may spread its business risk by entering different markets. The world economic outlook has been changed after financial crises and economic recession since 2008. Various economic challenges have been emerged in most markets, especially in Oil and Petrochemicals markets. Companies seek to manage diversed uncertainties in global scale because of decreasing growth ratios and demand. Many challenges are ahead for companies’ growth and also risk management in future; therefore the new business area would support to spread out the risk of the companies. Every commodity market has its own risk structure; however, every new market brings new opportunities when the risk is measured well. As a matter of fact, Kolmar has sufficient experience in penetrating new markets in its business history and the company showed its success on covering new commodities. This perspective is very much in parallel with its ‘calculated risk’ business approach.
There is a huge market in worldwide, only four vegetable oils’ have about 70 billion dollars global trade volume, which accounts vast opportunities even compared to the other type of commodities. Although, the market actors are challenged by choosing either growth or profit in general business practice, after examining the potentials with concrete field research and projections, Kolmar may find real opportunity, based on profit, which will eventually bring the growth as well. That is why this study give a great importance to the market indicators below:
If we calculate export turnover of these products:
Palm Oil: October 2012 / September 2013 forecast: 42.600.000 MT
Average Jan – June price, crude, cif Eur. (US-$ / T) price: USD 1097
= USD 46.732.200.000
Soy Oil: October 2012 / September 2013 forecast: 8.900.000 MT
Average Jan – June price, Soya Oil, Argentina, fob (US-$ / T): USD 1170 = USD 10.413.000.000
Sunflower Oil: October 2012 / September 2013 forecast: 6.370.000 MT
Average Jan – June price, Sunflower Oil, fob Black Sea (US-$ / T): 1143
= USD 7.280.910.000
October 2012 / September 2013 forecast: 4.130.000 MT
Average Jan – June price, Rape Oil, Dutch, ex-mill (US-$ / T): 1260
= USD 5.203.800.000
PALM OIL Palm Oil is used both for food and non – food industries. Main traditional uses in food industry are for cooking oil, margarine, confectionary fats â€¦etc. It is used for biodiesel, and manufacturing soaps and detergents, pharmaceutical products and cosmetics. (http://www.palmoilworld.org/applications.html))
Its’ price and also productivity competitiveness compared other vegetable oilseeds have driven up demand. Also, compared to other oilcrops, palm oil milling is relatively independent from byproduct markets: high-value palm kernel oil is traded on a separate market (the market for lauric oils) and palmkernel meal production and trade are relatively small. (Biofuels and Commodity Markets – Palm Oil Focus 1 P. Thoenes 2,3, FAO, Commodities and Trade Division)
Annual growth rate of production was 7.1 percent and decelerated to 4,4 percent in the past four years. (RABOBANK)
Malaysia and Indonesia are two major producer countries. Their total production is 87 percent of world production. Malaysia used to be leader producer of palm oil and Indonesia has taken the leadership early 2006. A major reason for the slowdown in Malaysian growth was limitations on land available for futher development.
Malaysian palm industry is mature than Indonesian palm industry. Expansion on land is limited in Malaysia and it is expected to reach limit in 3-4 years.
Indonesia’s palm production is expected to boost in the next years and there is still area for expansion. Indonesia’s production grew 9 percent in the last four years. Rabobank estimates that Indonesia still has an additional 16 million hectares marked for plantation, however, expansion of new plantation is becoming increasingly difficult due to regulatory constraints and infrastructure bottlenecks.
Important points to consider: Export tax ”war” between Malaysia and Indonesia: Malaysia normally had export tax rate 23 percent on CPO shipments and zero duty on refined palm oil products. In October 2012, Malaysia has decided to change policy as it will set export taxes on crude palm oil on a monthly basis from Jan. 1 to reflect volatility in international prices of the commodity, mirroring an existing duty in top producer Indonesia, who reviews the tax rates and base export prices every month, based on average rates in Kuala Lumpur, Rotterdam and Jakarta.
India Government’s import tax policy on refined products: India is the largest Palm Oil importer and it imports 80 percent of its crude palm oil from Indonesia and the rest from Malaysia after amended export tax regulation. Malaysia’s export tax rate changes may affect the percentage of countries share in favor of Malaysia. Palm oil accounts for 42 percent of total vegetable consumption in India. Demand is highly price elastic in India and Palm oil is the cheapest veg oil. While Indonesia is looking to encourage Palm Oil producers to invest on more refinery capacity, India is trying to protect its domestic refineries by using import tax policies against refined product from Indonesia.
China is net importer of Palm Oil, imports about 6 million tons per year.
SOYBEAN OIL Soybean oil is substitute of Palm Oil. It is used in human foods, biodiesel production and industrial applications. The major consumption area is food such as an ingredient for baked and fried food products or packaged in bottles for sale as cooking oil. (how global trading works’ten) Currently, about 90 percent of global soybean production is crushed into oil and meal; either in the country of origin or once it has reached its export destination.
World’s largest soybean exporters are Argentina and Brazil. Their total share of world soybean oil exports is projected to increase slightly during the coming decade. U.S. is the third – largest soybean oil exporter with 0, 5 million tons.
Rabobank states that growth in soy oil must come from increased soybean production and they expect soy oil production to increase 5 million tons in the next five years.
Soy Oil production of Argentina is around 7 million tons per year. However, biodiesel is only produced from Soy Oil in this country. In 2011, 2 million tons Soy Oil has been used for biodiesel production. This caused decreased in exports.
In August 2012, Argentina has increased export tax on biodiesel and export tax rate reached similar levels to vegetable oil. Therefore, Rabobank believes that it may have significant consequences for domestic industry. ”The tax incentive to transform soy oil into biodiesel has been eliminated and thus production in excess of the domestic requirements will depend on the relative export prices of oil versus biodiesel. We expect the growth rates of biodiesel production (and exports) in Argentina to sharply decline as a result of this change”.
The Brazilian biodiesel industry has also been growing sharply at 24 percent per year for the last four years. Currently, Brazil produces 2.4 million tons of biodiesel per year, 77 percent of which is produced from soy oil. USDA says that Brazil’s projected increase in soybean oil export accounts for most of the rest of the global increase in soybean oil trade. Brazil is projected to use more soybean oil for biodiesel production, but the expansion of soybean production into new areas of cultivation is expected to enable the country to increase soybean oil exports.
USA is currently the third largest biodiesel producer in the world with 2,5 million tons estimated in 2012. Soy Oil meets half of the biodiesel production requirement. Increased use of soybean oil for domestic biodiesel production is expected to limit US Soy oil export.
”Although the blending was removed, the RFS2 mandate remains, and sets a 1.28 billion gallon (4.47 million tonne) target for biomass – diesel, which is 96 percent biodiesel. Meeting this target would require production to nearly double in two years, and even assuming that soy oil remains responsible for only half of the production, it implies more than and additional 920 thousand tonnes of soy oil to be used for fuel – a 56 percent increase on amount of soy oil currently used for biodiesel. If this target were to be met, the increase in vegetable oil use will be probably be offset by a reduction in exports , and / or an increase in canola oil imported from Canada for food purposes. Either way, increased US biodiesel production will continue to tighten the world stock situation for vegetable oil”’ (Rabobank veg oil report).
China and India are major consumers of Soy Oil. In China, over 90 percent of China’s vegetable oil consumption is for food purposes. Soy Oil is most widely used vegetable oil in China as it is traditionally a key ingredient used for cooking. Soy Oil currently represents 40 percent of total Chinese vegetable oil consumption and has been growing at a rate of 7 percent per year over the last decade.
USDA projects that India will replace China as the world’s largest soybean oil importer. With a rapid increase in China’s soybean imports for domestic crushing during the coming decade, the country’s soybean oil imports are projected to decline about 50 percent to 0.7 million tons. Thus USDA data states that, as a result China will no longer be the world’s leading soybean oil importer, while some other researches argue that China2s general vegetable oil demand will not decrease in the coming years. (rabobank)
Sunflower Oil Sunflower has one of the shortest growing seasons of the major crops in the world. Early maturing varieties are ready for harvesting 90 to 120 days after planting. Planting takes place during March / April in East Europe and former Soviet Union countries.
Sunflowers are used to produce oil and meal; both are processed from the same sunflower seed varieties. More than 90% of the sunflower seeds produced is processed into edible oil. (buraya kadar o malum pdf dosyasÄ±ndan) Oil is the majority value of sunflower seed and meal is considered a by-product. (o internet sayfasÄ±ndan sunflower oil ile ilgili)
Sun Oil mostly used in food and production is currently concentrated in Europe and the Black Sea region. Russia and Ukraine totally has 50 percent market share in global production. EU has 20 percent and Argentina 9 percent of world production. Those countries, Russia, Ukraine and Argentina are called as “sunflower triangle”.
Any growth in sunflower seed and sunflower oil production is expected from the Black Sea region and eastern European countries, which have the ability to further increase area and yields. Rabobank estimates that sunflower oil production can increase by 3.1 million tonnes in the next five years. However, growth will be uneven, with strong contractions and expansions from one year to the next, given the concentration of production in the Black Sea region, a region with greater weather availability. ???
///////////////// RAPESEED OIL Rabobank raporu: Rapeseeds and soybeans production in China is not sufficient to meet domestic demand while China still produces both products though. Having a large crushing industry for such products, China must depend on importing rapeseeds and soybeans to provide enough soybeans and rapeseeds for its crushing facilities. As China increasingly continues to import those products, rapeseeds started from a much lower base. In addition, for more than a decade soybean production of China show some stagnation at about 15 million tonnes. That is why it is expected that China’s soybeans and rapeseeds production to decline fairly, hence imports are also projected to continue increasing.
*** EU Biodiesel production and consumption has been led by the EU, with an estimated 8 million tonnes of biodiesel production and an additional 2.6 million tonnes of imports in 2011. Most of the biodiesel produced in the EU is made from domestically produced rapeseed oil, although imports of rapeseed and palm oil have also increased sharply due to the inability of domestic production growth to keep pace with demand.
â€¦.. Rapeseed Oil Rapeseed is grown primarily in the EU (32 percent of world production), Canada (where they grow Canola, a different species of the same plant) and China. Global production of rapeseed has grown 5.3 percent per year over the past decade, reaching a peak production of 61 million tonnes worldwide in 2009/10. Almost all rapeseed production is crushed into oil and meal, and the increase in production translated into 6.2 percent annual growth in rapeseed oil production, reaching 23.8 million tonnes in 2011/12.
However, Canada’s performance has been twice that, and the country recently surpassed China as the second largest producer. Growth in the EU has also been strong at 5.1 percent per year. In particular, production grew in Germany, France, Poland and the UK. The future evolution of rapeseed oil production in the EU is closely linked to the evolution of the biodiesel industry and whether biodiesel will continue to be produced from domestic rapeseed oil, or if imports from lower cost competitors will increase.
Rapeseed production has also been growing strongly in Russia and Ukraine. Although starting very low base, production in these two countries has increased ten – fold over the last decade, now producing over a million tonnes each.
In China, on the other hand, rapeseed production has been decreasing in recent years, after peaking in 2009/10. State sponsored subsidies appear to favour grains, such as corn and wheat, relative to rapeseed and other oilseeds, and without a significant change, we expect oilseeds to continue to lose acreage to wheat and other crops.
Production increases in rapeseed in the next five years will come mainly from Canada, but also the EU and Ukraine. For the coming five years, we estimate approximately 2.2 million tonnes of additional rapeseed production.
Rape oil prices show a constant raise up between 2003 and 2008, as it was stagnated between 2008-2010; but prices of rape oil has showed a great increase considered the first half of 2012.
Rapeseed oil production in European continent, as one of the major importers of rapeseed and canola oil has reduced in 2011/2012 compared to 2010/2011 October-September.
On the contrary of Europe’s rapeseed oil production, Canada shows a slight increase in its production in 2011/12 compared to 2010/2011. However projections in the industry researches argue that Canada will catch up an increasing trend in rapeseed oil production in the next five years.
USA does not show much of sharp fluctuations in rapeseed oil producton for the last 5 years, but in 2011/12 production level is lower than the previous period.
MONTHLY DATA: EU-27 Rapeseed Oil Trade with Non-EU Countries (1000 T) MONTHLY DATA: Rapeseed/Canola Oil Exports of Major Countries (1000 T) MONTHLY DATA: Rapeseed/Canola Oil Imports of Major Countries (1000 T) (a)Including mustard oil, if any.
Oecd: In the European Union, rapeseed plantings are expected to remain virtually unchanged from their current level, after increasing about 3 Mha in the past decade under the influence of biofuel utilisation mandates. Nonetheless, significant improvements in yields should lead to a 15% rise in oilseed production, which would enable the European Union to almost meet its biodiesel target. In the rest of the world, production is set to expand by as much as 34% due to traditional producers like Canada and a number o femerging, fast-growing countries, such as Paraguay, Ukraine and the Russian Federation. Overall, global oilseed production is projected to remain fairly concentrated, keeping the world market vulnerable to production shortfalls in major producing areas.
**** At the global level, food consumption and biofuel demand are estimated to account
for, respectively, around 64% and 33% of the increase in total utilisation when compared
to 2009-11. Demand from the biodiesel industry is set to grow less than in the previous
decade when biofuel demand accelerated as policies were put in place. The use of edible
vegetable oil for biodiesel is still expected to expand to 30 Mt, which corresponds to a 76%
increase over the base period and raises the share of vegetable oil consumption used for
world biodiesel production from 12% in 2009-11 to 16% in 2021 (Figure 5.3). Although
rapeseed and soybean oil are projected to remain the main feedstock, the use of palm oil is
expected to more than double over the coming decade, with around 9% of global palm oil
production absorbed by the biofuel industry in 2021.