VZCZCXRO0984
RR RUEHCHI RUEHHM RUEHNH
DE RUEHHI #0248/01 0601021
ZNR UUUUU ZZH
R 291021Z FEB 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 7315
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHHM/AMCONSUL HO CHI MINH 4382
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 HANOI 000248 
 
SIPDIS 
 
STATE FOR EAP/MTS/PMPS 
STATE PASS USTR FOR JJENSEN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VM
SUBJECT: SBV TRIES TO SLOW CREDIT GROWTH TO FIGHT INFLATION 
 
 
HANOI 00000248  001.2 OF 003 
 
 
REFTEL:  A) 07 HANOI 1729 
    B) 07 HANOI 2013 
         C) HANOI 193 
  D) HANOI 210 
 
¶1. (SBU) Summary:  One of the main ways that the GNV is trying to 
tackle the dramatic spike in inflation is by slowing the growth in 
bank lending.  Vietnamese bank lending has been growing at a 
double-digit pace since 1994, with a larger share of the loan growth 
coming from joint-stock commercial banks and being given to private 
enterprises.  In an effort to curb lending growth, the GVN so far 
this year has hiked the official policy interest rates, increased 
the required reserve ratio, limited bank loans for security-related 
purchases, and most recently, announced its intention to require 
larger banks and credit institutions to buy mandatory one-year 
treasury bills.   Notwithstanding these efforts, many analysts 
expect credit growth to continue the acceleration begun in 2007 into 
this year.  End Summary. 
 
Credit growth re-accelerated in 2007 
------------------------------------ 
 
¶2. (U) Vietnam's banks have been expanding their loan books at a 
double-digit pace since 1994.  Prior to the Asian financial crisis, 
credit in Vietnam grew at about 20 percent per year.  Credit growth 
peaked in 1999 at 55.3 percent as infrastructure and investment 
spending took off but moderated thereafter on concerns of too rapid 
credit growth.  From 2004 till 2006, for example, the pace of loan 
growth slowed from 41.7 percent to 25.4 percent as the SBV raised 
interest rates to fight a sharp increase in inflation and credit 
growth.  However, credit growth resumed its high growth in 2007, 
with some analysts estimating credit growth of around 40 percent. 
Expectations of continuing strong economic growth this year has led 
Vietnamese banks and financial analysts to project similar credit 
growth rate in 2008. 
 
Figure: Vietnam's Loan Growth By Type of Borrower 
--------------------------------------------- ---- 
(VND billion) 
 
     Total Growth  Loans to State  Growth Loans to     Growth 
Year Loan   (%)    Enterprises    (%)    Other Sectors (%) 
---- -----  ------ -------------- ------ ------------- ------ 
 
1994 33345  n.a.   21004          n.a.   12341         n.a. 
 
1995 42277  26.8   24079          14.6   18198         47.5 
 
1996 50751  20.0   26810          11.3   23941         31.6 
 
1997 62201  22.6   31222          16.5   30979         29.4 
 
1998 72597  16.7   38076          22.0   34521         11.4 
 
1999 112730 55.3   54335          42.7   58395         69.2 
 
2000 155720 38.1   69918          28.7   85802         46.9 
 
2001 189103 21.4   79745          14.1   109358        27.5 
 
2002 231078 22.2   89500          12.2   141578        29.5 
 
2003 296737 28.4   105400         17.8   191337        35.1 
 
2004 420335 41.7   142900         35.6   277435        45.0 
 
2005 553106 31.6   181306         26.9   371800        34.0 
 
2006 693800 25.4   218547         20.5   475253        27.8 
 
Source: CEIC Data Company Ltd. 
 
¶3. (U) Prior to 1999, the bulk of loans were to state enterprises. 
This is not surprising given that lending decision was 
state-directed rather than commercially-based. This lopsided lending 
changed from 1999 onwards as the government reportedly began to 
withdraw its involvement in the lending decisions of state-owned 
commercial banks (SOCBs), leading to the private sector gaining a 
higher share in bank lending than state enterprises.  The share of 
loans going to the private sector was 68.5 percent in 2006 compared 
to less than 50 percent in the 1990s.  Deutsche Bank analysts 
believe the key segments of credit growth opportunity are private 
companies, SMEs and consumers and that the historic dependence on 
SOE borrowing will continue to diminish. 
 
Private banks catching up with SOCBs 
 
HANOI 00000248  002.2 OF 003 
 
 
------------------------------------ 
 
¶4. (U) Vietnam's SOCBs are individually and collectively quite 
large, accounting for almost two thirds of loans outstanding (see 
figure 2).  Many are growing their loans quite rapidly in an effort 
to enhance their potential profitability, particularly prior to 
equitization and listing of their shares.  For example, in a recent 
FINATT trip to Vietnam, Vietcombank said that its loans grew by 49 
percent in 2007 as compared to 39 percent in 2006 and the industry 
average of 40 percent in 2007. 
 
Figure 2: Lending market share by type of bank 
--------------------------------------------- - 
(%) 
                  1994  2000  2001  2002  2003  2004  2005  2006 
 
SOCBs             82.8  73.3  75.8  75.9  72.4  75.0  69.0  63.5 
Other Banks -     17.2  26.7  24.2  24.1  27.6  25.0  31.0  36.5 
(JSCBs,FBBs & 
JV Banks) 
 
Source: CEIC Data Company, Ltd. 
 
 
¶5. (U)  Joint-stock commercial banks (JSCBs), foreign bank branches 
and joint venture banks (FBB and JV Banks) - are relative newcomers, 
but their share of bank loans has increased from a fifth to more 
than a third since 1994. Lending by these banks has grown by leaps 
and bounds.  Looking ahead, this trend is likely to continue as 
these banks push aggressively to build up their franchises in 
Vietnam. 
 
Figure 3: Lending by SOCBs versus Other Banks 
--------------------------------------------- ---- 
(VND billion) 
 
     Total   Lending by   Growth  Lending by   Growth 
Year Loan    State Banks  (%)     Other Banks  (%) 
---- -----   -----------  ------  -----------  ------ 
 
2001 189103  143355         25.5   45748         10.2 
 
2002 231078  175489         22.4   55589         21.5 
 
2003 296737  214800         22.4   81937         47.4 
 
2004 420335  315335         46.8   105000        28.1 
 
2005 553106  381406         21.0   171700        63.5 
 
2006 693800  440500         15.5   253300        47.5 
 
Source: CEIC Data Company, Ltd. 
 
 
Policy Response by the Government 
--------------------------------- 
 
¶6.  (SBU) In response to increasing inflationary pressures and to 
curb excessive credit expansion, the State Bank of Vietnam (SBV) has 
been raising the three official interest rates-- the prime, discount 
and refinancing rates--in Vietnam since 2007.  The SBV's most recent 
action came in early February when it lifted the prime, discount and 
refinancing rates to 8.75 percent, 6.0 percent and 7.5 percent 
respectively.  In theory, these rates would be the policy rate, the 
rate the banks can borrow from the central bank and the rate that 
banks can borrow for collateralized loans, respectively.  According 
to the IMF Resident Representative, however, none of these rates are 
"operational" for monetary policy purposes:  instead, the SBV 
carries out its monetary policy by buying and selling SBV bills, 
which have yields well above all of the "official" rates mentioned 
above.  Thus, while the increases in these official rates provide a 
signal to the market, they are not actually used to price any 
transactions between the financial institutions and the central 
bank. 
 
¶7. (U) The SBV also raised the reserve requirement ratio by an 
additional one percent to 11 percent in February - after doubling 
them from 5 percent to 10 percent in the summer of 2007. 
 
¶8. (U) Lastly, and most recently, the SBV announced its intention to 
require banks and credit institutions with more than VND1 trillion 
of deposit to buy mandatory treasury bills with the interest rate of 
7.8 percent by March 17 (Reftel D).  Analysts say this move should 
withdraw VND20.3 trillion (US$1.26 billion) from the market.  Even 
in advance of this sale, some companies, including banks, are 
 
HANOI 00000248  003.2 OF 003 
 
 
reporting that they are having difficulty acquiring dong from the 
SBV. 
 
¶9. (U) In addition to these monetary tools, the SBV has announced 
changes to banks' lending policy for the purchase of shares. 
Previously, banks were limited to lending no more than 3 percent of 
all their lending for shares.  Commercial bankers told FINATT that 
this policy failed to contain credit growth, especially to the stock 
market, as banks sought to increase their total lending in order to 
have more to lend for shares.  To remedy this situation, the SBV 
announced in February that banks can make securities-related loans 
equivalent to 15-20 percent of their chartered capital.  HSBC 
analysts calculated that this will cut the maximum 
securities-related lending from VND6.5 trillion to VND4.6 trillion. 
There are now fears that banks will try to get around this new rule 
by raising their chartered capital, which would create more capacity 
to increase overall loans, frustrating the SBV's macro-economic goal 
of slowing credit growth. 
 
¶10. (SBU) Comment:  It is natural for credit growth to expand 
strongly amid robust economic growth and an under-penetrated 
financial market.  The very rapid growth at the smaller private 
banks is worrisome, however, not only contributing to inflation, but 
also building up potentially bad debts that will have to be 
addressed in the future.  Given the banks' ingenious efforts to get 
around the rules set by the SBV so far, SBV will have to vastly 
improve its inspection, supervision and enforcement of prudential 
lending rules to guard against inappropriate levels of lending 
growth.  While the SBV is saying the right things, institutional 
weaknesses are likely to hamper its ability to fight inflation 
solely by slowing loan growth.  End Comment. 
 
MICHALAK