- We think USD/VND will likely rise above the 27,000 levels if the Iran and Middle East conflict is sustained and the Strait of Hormuz remains closed, with Brent oil prices trading around US$100/bbl at the time of our writing: While we do not yet know how the Iran and Middle East conflict will play out from here, it’s important to stress our current base case USD/VND forecast of 26,300 by Mar 2026 and 26,600 by Dec 2026 assumes a de-escalation after March 2026 and implicitly for oil prices to fall towards pre-Iran conflict levels over time. As a sensitivity analysis, we think that if oil prices are sustained at US$100/bbl, USD/VND could end the year at 27,000. In a left tail risk scenario if oil sustains at US$120/bbl coupled with meaningful energy shortages, we think USD/VND at 27,700 or even higher will look achievable. Of course, it is important to stress that there are many shades of grey here including the duration of the crisis, but overall we see these as reasonable given the meaningfully different nature of the crisis. Ultimately, we see Vietnam as less vulnerable relative to the likes of India and the Philippines within an Asia-ex-Japan context, but in a left tail risk scenario of meaningful energy shortages the indirect negative spillover impact to sectors such as manufacturing and global growth will likely weigh on Vietnam as well.
- This time is different in this crisis - it is not just about higher oil prices but a potential looming energy shortage, with Asia and to some extent Vietnam hit by a prolonged Strait of Hormuz closure: While this applies to the rest of Asia as well, the vulnerability specifically in Vietnam’s case comes from its dependence on crude oil imports from the Middle East. 85% of Vietnam’s imports of crude oil comes from the Middle East, and with virtually all of that coming from just one country – Kuwait. This ultimately puts pressure on domestic refineries in Vietnam with meaningful reduction in crude oil feedstock from a Strait of Hormuz closure. Meanwhile, while Vietnam does not depend much on the Middle East directly for refined petroleum imports, it imports virtually all of its refined petroleum needs from Asian refiners such as South Korea, Singapore and Malaysia. The key risk for Vietnam is if regional refiners start to cut their refinery runs moving forward – as would be likely if the Iran conflict prolongs – and this will no doubt spillover to Vietnam as well. All these help to partly explain why Vietnam’s domestic fuel prices have jumped quite sharply (see subsequent section). Vietnam is also dependent on the Middle East for products such as LPG and some petrochemical-related feedstock with close to 80% of propane imports and more than 50% of hydrocarbon gas liquids such as ethylene and polypropylene coming from the Middle East.
- Overall, Vietnam is not as leveraged to the Middle East in terms of direct trade linkages relative to say India within Asia-ex-Japan. Nonetheless, the indirect effects across a range of sectors could also be meaningful for Vietnam beyond the first order impact, and ultimately points to a stagflationary environment of higher inflation and slower growth, with a weaker Vietnam Dong likely a key outcome as well. With possible production and supply chain disruptions negatively impacting energy-intensive sectors such as manufacturing, transportation, travel, and food production, a lengthy Strait of Hormuz closure scenario may well morph into something akin to COVID lockdowns and coupled with sharp increases in commodity prices. For Vietnam’s case in particular, key vulnerabilities include:
- First, higher electricity costs. With 20% of LNG and gas supplies in Asia coming from the Strait of Hormuz, Asian countries may need to switch more towards alternative fuels in the near-term such as coal and diesel in order to keep the lights and switches on. For Vietnam, the dependence on gas for electricity generation is growing but still low as an overall percentage of electricity production, but overall if global coal prices were to rise more generally as countries switch from gas towards coal, this will very likely raise the cost of electricity generation for Vietnam as well.
- Second, fertiliser prices and food costs. Globally 15% of overall fertiliser and closer to 20-30% of urea-based fertilisers are dependent on the Middle East region. Vietnam’s direct dependence on fertiliser imports from the Middle East is quite low at around 3%, but overall higher fertiliser prices and shortages could have some spillover impact to global food prices and hence also inflation, the impact which may only be seen from 2H2026 including for Vietnam.
- Third, travel and transportation. Vietnam’s direct dependence on Middle East tourist arrivals is relatively small. Nonetheless, this number likely understates the possible impact to the travel and transportation sector for Vietnam. With transportation hubs in the Middle East such as Doha and Dubai becoming more important transit points such as between Europe and Asia especially after the Russia-Ukraine war, a prolonged air travel disruption could fundamentally change the economics of air travel in some ways, including for the air transport sector in Vietnam. In addition, air cargo and container freight cost spikes will likely also add further to costs from supply chain disruptions.
- Overall, we estimate that every US$10/bbl increase in oil prices cuts GDP growth in Vietnam by around 0.2pp and raises inflation by around 0.3-0.4pp. These historical sensitivities however likely under-estimates the macro impact to Vietnam, because the specific transmission mechanisms in this crisis may not just be about oil prices, but also includes potential energy shortages, meaningful negative indirect spillovers across sectors over time, coupled with non-linear effects as oil prices rise above certain thresholds for Asia in particular (as mentioned above). Our GDP forecasts for Vietnam is currently 8.2% for 2026, and if oil prices rise above our baseline assumption to average US$100/bbl on a sustained basis, growth will likely come in below 7.5% for instance. Meanwhile, if oil prices were to rise above US$120/bbl on a sustained basis coupled with meaningful energy shortages, we think GDP growth in Vietnam will likely be cut by more than 1% and as such could fall below 7% especially after incorporating the indirect impacts of manufacturing and supply chain disruptions. From an inflation perspective, Vietnam’s government has been taking some steps to shield consumers from the full impact of global oil price increases by intervening through the fuel stabilisation fund. We estimate however that the fund may only last around 15-30 days at the current oil subsidy run-rate, and hence it is likely only a matter of time domestic fuel prices rise if the Strait of Hormuz remains closed. Overall, if oil prices were to be sustained at US$100/bbl, inflation will likely average above the current 2026 inflation target ceiling of 4.5% over time.
- Higher oil and energy prices will weigh on VND from FX perspective. We estimate that every US$10/bbl increase in oil prices reduces Vietnam’s current account surplus by around 0.4% of GDP: As such, if oil prices were to rise towards US$100/bbl, Vietnam’s current account surplus will likely move to around 2% of GDP compared with our baseline forecasts of around 3% of GDP. This coupled with still strong domestic capital outflows, rising inflation expectations, coupled with a stronger Dollar suggests that the pressure is likely to increase for VND to weaken through 2026, including for the reasons mentioned above. So far SBV has been trying to cap the extent of VND weakness with onshore USD/VND already hitting the FX ceiling rates. If the Iran conflict were to be sustained and the Dollar becomes stronger, we think SBV will likely have to raise the ceiling rate over time to allow for more FX weakness.
- From an interest rates perspective, we think higher oil prices will put further upward pressure on VND interbank rates, and also increase the chances of SBV delivering policy rate hikes in 2026. Interest rates in Vietnam were already quite elevated driven by robust credit growth coupled with tight domestic liquidity. We think if oil prices were to average above US$100/bbl, 3-month interbank rates could rise over time towards the 9% handle from current rates of around 7.5%. This will likely put further upward pressure from an FX perspective on the FX forward points to widen, and also for SBV to raise the USD/VND FX ceiling to allow for some currency weakness over time. We have already pencilled in SBV officially delivering one rate hike in 2026, and higher oil prices gives us more confidence around that view.
