VZCZCXRO5882
PP RUEHHM
DE RUEHHI #0072/01 0180957
ZNR UUUUU ZZH
P 180957Z JAN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7029
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2479
INFO RUEHHM/AMCONSUL HO CHI MINH 4169
RUEHBK/AMEMBASSY BANGKOK 6149
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000072 
 
SIPDIS 
 
DEPT FOR EAP/MLS, EB/IFD, USAID/ANE, USAID EGAT/EG 
BANGKOK PASS TO RDM/A 
DEPT PASS USTR FOR D BISBEE 
SINGAPORE FOR TREASURY S BAKER 
TREASURY FOR SCHUN 
DEPT PLEASE PASS FED RESERVE SAN FRANCISCO FOR A MAYEDA 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECON PREL VM
SUBJECT: IMF Speaks on Vietnam's Macroeconomic Policy 
 
¶1.  (SBU) Summary:  The IMF Country Director for Vietnam gave a 
briefing on Vietnam's macroeconomic performance for the second half 
of 2007.  The IMF concluded that economic growth and performance was 
and will continue to be strong, but that certain macroeconomic 
policies are contributing to inflation and overheating.  Vietnam 
needs more exchange rate and interest rate flexibility, and should 
tighten banking supervision in order to control credit growth.  The 
Country Director does not believe that inflation will be a threat to 
political stability.  End summary. 
 
¶2.  (SBU) The IMF Country Director, Benedict Bingham, gave a 
briefing to multilateral development banks and diplomats in 
mid-January to discuss the results of the IMF's bi-annual 
discussions with Vietnam, which were conducted in early December. 
The discussions narrowly focused on macro-economic issues and were 
conducted primarily with the State Bank of Vietnam (SBV).  Bingham 
asked that the material be kept within government circles and not 
disseminated to the press. 
 
 
Performance Is Strong, Maybe Too Strong 
--------------------------------------- 
 
¶3.  (SBU) The IMF delegation concluded that Vietnam's economic 
performance for the latter half of 2007 continued to be robust, with 
growth at approximately 8.5%.  Export growth was and continues to be 
solid and FDI is rising rapidly.  The IMF complimented the GVN's 
fiscal management capabilities.  The delegation did, however, see 
some signs of overheating in the second half of the year, including 
inflation (which was 10% at the close of November, 12% at the end of 
December) and a widening current account deficit that is 
increasingly financed by short-term inflows instead of FDI and ODA. 
The IMF view is that the overheating has been caused primarily by 
rapid credit growth and heavy-handed management of the foreign 
exchange rate to keep it from appreciating.  There is also some 
evidence that an increase in public sector borrowing, mostly by 
state-owned enterprises (SOEs), was also a factor in the 
overheating. 
 
Monetary Policy Imports Inflation 
--------------------------------- 
 
¶4.  (SBU) The IMF further concluded that the GVN policy of keeping 
the dong pegged to the dollar has led to depreciation against other 
currencies in the area and amongst trading partners, leading to the 
import of inflation into the domestic market.  As capital inflows 
increased in 2006 and 2007, the SBV was forced to intervene on a 
substantial scale, while its capacity to sterilize was limited. The 
resulting surge in liquidity fueled credit growth. 
 
Advice to the SBV 
----------------- 
 
¶5.  (SBU) The IMF delegation recommended that Vietnamese authorities 
tighten monetary conditions to contain the rapid credit growth.  The 
primary challenge for the SBV is to reorganize its monetary policy 
tools so that it is better able to respond to changes in the 
economy.  The IMF recommends that the SBV should: 1) gain control of 
the short term interest rate and then increase that rate, and 2) 
make the exchange rate more responsive to market pressures.  The IMF 
team focused its efforts on the SBV and reports that the SBV is 
aware of these issues and agreed with the IMF recommendations. 
 
¶6.  (SBU) The IMF acknowledges that the SBV controls neither the 
dong's valuation nor interest rates, but believes that the SBV 
should try to gain more control over these rates in an effort to 
control inflation.  Bingham said that this debate needs to take 
place across the entire GVN, and that development banks and 
embassies need to carry these messages to other ministries outside 
the SBV. 
 
Better Banking Supervision Needed 
--------------------------------- 
 
¶7.  (SBU) The IMF noted that rapid credit growth was creating demand 
which may lead to vulnerabilities in the banking sector.  The 
smaller banks were expanding credit at 70-80%, which, combined with 
rapid expansion of bank infrastructure (new branches with less 
experienced managers), might lead to a decline in the quality of 
lending.  The IMF encouraged the SBV to focus on supervision of 
banks whose lending activities had become problematic, so that 
"targeted intervention" was possible.  The banking system needs to 
 
HANOI 00000072  002 OF 002 
 
 
be "deepened" rather than "widened" - in other words, greater 
experience, but fewer banks.  The SBV was also aware of this issue. 
 
Inflation Not a Threat to Political Stability 
--------------------------------------------- 
 
¶8.  (SBU) Asked if inflation might impact political stability, 
Bingham answered plainly "No."  He recognized that it had become an 
issue in other countries, but did not see a similar situation 
arising here in Vietnam. 
 
¶9.  (SBU) Comment:  The Ambassador hosted a dinner for a number of 
economists (including Bingham) and business people shortly after the 
IMF briefing.  One of the topics of conversation was the Prime 
Minister's recent public rebuke of the SBV governor for failing to 
keep inflation down.  Bingham and others did not interpret the 
attack as being directed against the new governor's performance 
because he has only been in office for a few months and is an old 
friend of the PM.  Instead, they thought the PM used the scolding to 
provide political cover for initiating a change in monetary policy. 
There is evidence Vietnam is indeed heeding the IMF's advice as the 
SBV just announced on January 17 that it would be requiring urban 
banks to raise their reserve requirements in order to control 
inflation.  The quandary for the PM is that a tighter monetary 
policy might well come at the expense of economic growth, at least 
in the short term.  End comment. 
 
MICHALAK