This record is a partial extract of the original cable. The full text of the original cable is not available.

170747Z Nov 04

UNCLAS SECTION 01 OF 04 HANOI 003097 
 
SIPDIS 
 
STATE PASS USTR FOR EBRYAN 
TREASURY FOR OASIA 
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VM FINREF
SUBJECT: VIETNAM ECONOMY IN THE FIRST HALF OF 2004 -  STABLE 
GROWTH WITH MILD INFLATIONARY PRESSURE 
 
REF: HANOI 1918 
 
¶1. SUMMARY: The Vietnamese economy grew steadily at an 
annual rate of seven percent in the first six months of 
¶2004. Nonetheless, the economy is facing increasing 
inflation primarily resulting from external supply factors. 
Boosted by higher oil prices, export performance remained 
strong with growth of 20 percent.  Foreign direct investment 
has started a modest recovery after a two-year slowdown. 
The government response to inflation has ranged from raising 
the reserve ratio in banks to ordering government agencies 
to keep prices rises down.  The former is a hopeful sign of 
a shift to more market-oriented policies while the latter is 
more a centralized planning approach.  Other policies such 
as higher tariffs and taxes on automobiles have led to a 
sharp drop in sales for the fledgling auto market.  The 
government may be getting some things right, but it is 
avoiding the hard issues such as financial sector and state- 
owned enterprise (SOE) reform while continuing to protect 
its services sectors.  This is preventing foreign investment 
by cutting-edge firms that could bring better services at 
lower costs and create jobs.  The question, as one foreign 
expert put it, is not how bad will inflation be this year, 
but whether Vietnam is growing at its potential. END 
SUMMARY. 
 
GENERAL ECONOMIC PERFORMANCE 
---------------------------- 
 
¶2. According to government estimates, Vietnam's Gross 
Domestic Product (GDP) grew by 7 percent in the first six 
months of 2004. This growth rate, at the same level compared 
to the first half of 2003, is behind the 7.5 - 8 percent 
target set by the National Assembly. 
 
¶3. The growth rate of the agriculture, forestry and fishery 
sector rose by only 2 percent. Agriculture grew at 1.6 
percent, the slowest rate of growth since 2000.  This slow 
growth is due primarily to unfavorable weather conditions 
and avian flu.  The northern region experienced a prolonged 
cold spell followed by a drought at the beginning of the 
winter-spring crop, and the southern central region 
experienced heavy rains.  Avian flu also spread to many 
cities and provinces earlier in the year leading to massive 
culling of poultry stocks.  Poultry farmers lost over 38 
millions birds, 15 percent of the total stock. 
 
¶4. The industry and construction sector grew by 10 percent, 
the same rate as in the first six months of 2003. Foreign 
invested enterprises and the domestic private sector were 
the primary contributors to the higher growth rates with 
growth of 14.7 percent and 21.8 percent respectively. 
Within the sector, the mining industry achieved the highest 
rate of growth at 15 percent, while other industries have 
experienced a slowdown. The construction industry, buffeted 
by rising steel prices in the first quarter, only grew at 
7.3 percent compared to 10.6 percent for the same period 
last year. 
 
¶5. The Consumer Price Index (CPI) has risen since December 
2003 and has reached 7.2 percent in June 2004. This increase 
in CPI in the first half of 2004 was mainly driven by rising 
prices for food and foodstuff, which account for 47.9 
percent of the price basket. The prices of food and 
foodstuff rose 13.2 percent, followed by pharmaceuticals and 
medical services (6.6 percent), and housing and building 
materials (4.8 percent). Rising world oil prices contributed 
slightly to the rising CPI, as transportation services 
account for 10.1 percent of the price basket. 
 
¶6. In an effort to curb the increase of the CPI the State 
Bank of Vietnam (SBV) raised the compulsory reserve ratio to 
control credit growth and limit money supply. The IMF 
welcomed this step. The CPI continued rising in the third 
quarter but at a slower pace as a direct result of a more 
gradual rise in food prices.  The CPI has increased 8.6 
percent in the first nine months of 2004. The IMF forecast 
that annual inflation for 2004 would be around 9.5 percent, 
assuming no further supply shocks or other major changes for 
the rest of the year. (See Reftel for more on Vietnam's 
inflation situation).  More recently the GVN has instructed 
agencies to limit price increases. 
 
¶7. The Vietnamese Dong depreciated only 2 percent against 
the U.S. Dollar in the first half of the year.  Two trends 
were apparent.  There was a rise in USD remittances from 
overseas.  There was also a shift in personal savings from 
USD to VND in the local banking system in pursuit of higher 
interest rates.  Dong deposit rates range from 7.5-8.5 
percent per annum versus 1.9 to 2.1 percent for dollars held 
locally.  Some State Bank officials urged Vietnamese to keep 
their personal savings in Dong, apparently arguing that this 
would give a higher income, despite the fact that real 
income would be negative.  These factors do not explain the 
limited depreciation of the Dong as much as the narrow band 
that limits daily fluctuation of the Dong (under three 
percent from the previous day's close) does. 
 
¶8. Overseas remittances by Vietnamese residents and 
Vietnamese workers have been rising steadily. A State Bank 
official estimated that total remittance to Vietnam may 
reach USD 3 billion this year, surpassing the record figure 
USD 2.5 billion in 2003.  The IMF estimates that an 
additional USD 3-4 billion enters the country through 
informal channels. 
 
FOREIGN DIRECT INVESTMENT 
------------------------ 
 
¶9. In the first six months of 2004, 280 foreign direct 
investment (FDI) projects were licensed with a total 
investment capital of USD 806.6 million. The number of new 
projects stood at the same level compared to the same period 
last year, but the registered capital increased by 13.6 
percent, with the increase in average registered capital per 
project from USD 2.5 million in 2003 to USD 2.88 million in 
the first half of 2004.  New projects continued to 
concentrate in the industry and construction sector with 
71.8 percent of new projects (201 projects), and 59.5 
percent of the total registered capital (USD 479.6 million). 
 
¶10.    The  southern  region  remains  the  most  attractive 
location  to foreign investors with 199 projects  worth  USD 
454.7  million,  accounting for 71.1 percent  of  the  total 
number  of  new  projects  and 56.4  percent  of  the  total 
registered capital. 
 
¶11.  Among foreign investors, Taiwan, with 65 projects worth 
USD 231 million, accounts for 28.6 percent of the total 
registered capital and was the largest foreign investor in 
the first six months 2004.  Taiwan is followed by Canada, 
South Korea, Malaysia, and Japan.  Due to a large investment 
project this year (USD 147 million) Canada, ranked in the 
top ten foreign investors.   Since the GVN continues to 
include only direct U.S. investment and ignore U.S. 
investment through third country subsidiaries in its 
official statistics, the total for the United States appears 
lower than it really is. 
 
¶12.   Although  Vietnam's investment  climate  has  improved 
considerably, there are still many issues to be ironed  out. 
The  investment  evaluation  and  licensing  process  is  in 
practice lengthier than stipulated. Site clearance and  land 
lease procedures often delay project deployment. Regulations 
on foreign investment are sometimes vague and inconsistent. 
¶13. The GVN has stated publicly that it recognizes the 
importance of foreign investment to economic growth and is 
aware of increasing competition in the region for foreign 
investment. In seeking to boost foreign investment levels 
from the recent slump, the GVN is working to formulate an 
adequate common legal framework for both foreign and 
domestic investors. The GVN has also pledged to facilitate 
foreign investment in essential areas such as real estate, 
financial services, aviation, marine transportation, legal 
services, telecommunications and trade. 
 
TRADE 
----- 
 
¶14. Exports continued to be strong in the first half of 
2004, generating USD 11.8 billion and maintaining steady 
growth at 20 percent compared to the same period last year. 
 
Top ten export products in 1H/2004 
Name                          Value    Percent of 
                           (USD mil)  total exports 
 
1 Crude Oil                2,501      21.2 
2 Textile & Garment        1,996      16.9 
3 Footwear                 1,290      10.9 
4 Aquatic products         982        8.3 
5 Rice                     506        4.2 
6 Wooden products          492        4.2 
7 Electronic products, 
    computers              405        3.4 
8 Coffee                   360        3.0 
9 Handicraft Rubber        194        1.6 
10Power conduit & cable    168        1.4 
 
Source: General Statistics Office 
 
¶15. Crude oil was the main contributor to export growth, 
earning USD 2.5 billion and recording a 29.3 percent growth. 
This was the combined result of increases in both export 
volume and oil prices. Other significant contributors to 
export growth included: footwear, rice, wooden products, 
coffee and power cables. 
 
¶16. Textile and garment exports generated nearly USD 2 
billion in the first half of 2004, a 7.8 percent increase 
compared to the same period in 2003. Also in the first half 
of 2004, textile exports to the European Union, Canada and 
Japan surged dramatically (53.8 percent, 17.9 percent and 
10.2 percent respectively) offsetting the reduction of these 
exports to other markets such as the United States, ASEAN, 
and South Korea. (Note:  The U.S.-Vietnam Bilateral Textile 
Agreement took effect in May 2003, capping growth of 
Vietnamese textile and garment exports to the United States. 
End Note.) 
 
¶17. Traditional key export commodities such as rice, coffee 
and coal have gone up significantly as a direct result of 
recovered or rising prices. Rice exports were down by 3.3 
percent in volume but up 14.5 percent in value thanks to 
improved quality and higher prices. (Note: the price of rice 
went up by USD 35 per ton compared to the same period last 
year.  End Note.)  Coal and coffee exports also increased 
sharply in both quantity and value (48.8 percent and 59.9 
percent respectively for coal, 52.5 percent and 46 percent 
respectively for coffee). These helped maintain high export 
growth. This year wooden products are emerging as Vietnam's 
new major export, earning nearly USD 500 million in income 
in the first six months. 
 
¶18. According to analysis by the GVN, exports are 
maintaining a high growth rate for several reasons.  First, 
some products achieved a higher export volume (namely crude 
oil, coal, coffee, tea).  The world economy is recovering 
and the prices of some commodities (e.g.: crude oil, rice, 
coal, rubber) were rising.  Finally, the government of 
Vietnam and concerned agencies were active in expanding 
export markets and promoting exports. 
Top ten import products for 1H/2004 
    Name                       Value    Percent of 
                              (USD mil)          total 
import 
 
1 Machinery & equipment       2,093    14.7 
2 Petroleum products          1,588    11.2 
3 Leather, textiles, garments 1,174    8.3 
4 Steel & iron                1,111    7.8 
5 Cloth                       1,019    7.2 
6    Electronic products, 
  computers and components    549      3.9 
7 Plastic                     496      3.5 
8 Fertilizer                  346      2.4 
9 Automobile                  344      2.4 
10Chemical products           336      2.3 
 
Source: GSO 
 
¶19.  Imports reached USD 14.2 billion, and rose 14.7 percent 
compared  to  last year. The domestic sector spent  USD  9.1 
billion  (64 percent of total import value), up 12.8 percent 
from  last  year,  and foreign invested  enterprises  (FIEs) 
imported USD 5.1 billion (36 percent of total import value), 
up 18.2 percent from last year. 
 
¶20. As a result of rising prices of some products such as 
petroleum, steel, fertilizer and plastic, the import value 
of these products increased considerably even though import 
volumes rose only modestly or even declined. For example, 
petroleum imports grew only 5 percent in volume but rose 
25.6 percent in value due to a 20 percent increase in price, 
while steel and iron decreased 0.7 percent in volume but 
rose 21.3 percent in value due to a 22 percent increase in 
price. 
 
¶21. Machinery and equipment imports dropped 17.6 percent 
compared to the same period last year. The 2003 level was 
particularly high as a result of a surge in imports of 
machinery and equipment for the Southeast Asia (SEA) Games 
XXII. The import of auto parts and kits for local assembly 
decreased in the first half of 2004. A five-fold increase in 
the Special Consumption Tax on autos, from 5 percent to 25 
percent (effective from 1 January 2004) resulted in an over 
20 percent increase in the sales prices of locally assembled 
vehicles, slowing sales. 
 
¶22.  The trade deficit in the first six months of 2004 stood 
at the same level in value compared to the same period in 
¶2003. However, as a percentage of total export income the 
trade deficit was down to 20 percent from 24.3 percent. The 
domestic sector had a trade deficit of USD 3.7 billion while 
foreign invested enterprises (including crude oil exporters) 
reported a trade surplus of USD 1.3 billion.  Excluding 
crude oil the foreign invested sector had a trade deficit of 
USD 1.1 billion. 
Vietnam-US trade for 1999 - 2003 (In USD million) 
                   2001     2002   2003 
 
Exports to US      1,053    2,395  4,555 
(US customs value) 
Imports from US    461      580    1,324 
(US FAS value) 
Trade balance      592      1,815  3,231 
 
Source: US International Trade Commission 
 
¶23. Vietnam's exports to the United States continued to 
grow, generating nearly USD 2.4 billion in the first six 
months of 2004. Major export merchandises with high growth 
included footwear, wooden products (furniture), fruits and 
nuts and garments. However, Vietnam's imports from the 
United States dropped to USD 339 million from USD 670 
million, due mainly to a difference in aircraft sales in 
¶2004. This resulted in Vietnam's widened trade surplus with 
the United States, to over USD 2 billion in the first half 
of 2004.  Excluding aircraft sales, however, U.S. exports to 
Vietnam grew 6 percent in the first of 2004, with strong 
growth in exports of cotton, electrical machinery, plastics, 
wood and paper. 
¶24. COMMENT:  Benefiting from higher export earnings from 
oil and largely insulated from domestic oil price rises, 
Vietnam's steady growth continued.  The local headline is 
and continues to be inflation from external supply shocks in 
the food and foodstuffs that comprise half of the CPI 
basket.  The government response has ranged from raising the 
compulsory reserve ratio in banks to ordering government 
agencies to keep prices rises down.  The former is a hopeful 
sign of a shift to more market-oriented policies while the 
latter is more of a centralized planning approach.  There 
have been rumors that the government may revise the market 
basket to reduce the share of foodstuff and with it 
inflation.  Other policies such as higher tariffs on 
automobile kits for assembly and higher taxes on their 
finished products have caused a sharp drop in sales in the 
fledgling auto market that has already led Toyota to layoffs 
and threatens the investments of major auto makers. 
¶25. While the government may be getting some things right, 
it is avoiding the hard issues such as financial sector and 
SOE reform while continuing to protect its services sectors. 
This is preventing foreign investment by cutting-edge firms 
that could bring better services at lower costs and create 
jobs.  For example, there were no FDI projects in the 
banking and finance sector licensed in the first half of the 
year.  The question, as one foreign expert recently put it, 
is not how bad will inflation be this year, but whether 
Vietnam is growing at its potential.  End Comment. 
MARINE