VZCZCXRO9883
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHHI #0377/01 0920938
ZNR UUUUU ZZH
R 010938Z APR 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 7526
INFO RUEHHM/AMCONSUL HO CHI MINH 4528
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION

UNCLAS SECTION 01 OF 02 HANOI 000377 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
USTR FOR BISBEE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV VM
SUBJECT: PM DECLARES WAR ON INFLATION, WB STILL OPTIMISTIC ON 
ECONOMIC OUTLOOK 
 
REF: A) Hanoi 206 ("Frozen Assets"); 
B) 07 HANOI 1929 ("Authorities Scramble To Stay Above Water"); 
      C) Hanoi 193 ("Vietnam's 2007 Economy"); 
      D) 07 Hanoi 1729 ("Vietnam's Inflationary Conundrum"); 
      E) 07 Hanoi 2013 (Inflation Hit 10 Percent) 
 
HANOI 00000377  001.2 OF 002 
 
 
¶1.  (U) Summary:  With inflation in Vietnam hitting 19.4 percent 
year-on-year for March, the Prime Minister has very publicly made 
lowering inflation on of his top priorities, and has just released a 
seven-point plan to ease inflationary pressures.  Despite the 
domestic macroeconomic challenges and the current global economic 
slowdown, the World Bank is optimistic that Vietnam will continue to 
attract significant foreign investment in 2008.  End summary. 
 
¶2.  (U) Vietnam's General Statistics Office reported on March 25 
that inflation has reached 19.4 percent year-on-year for March, up 
from 15.7 percent in February.  The news prompted a flurry of action 
by the Government of Vietnam (GVN), including the release of a 
seven-point plan to fight inflation and the statement on March 31 
that fighting inflation was now one of the GVN's top priorities, 
placed above meeting the nation's economic growth targets for 2008. 
The World Bank also met with the Prime Minister to share its views 
on Vietnam's macro-economic situation and to recommend a course of 
action. 
 
PRIME MINISTER'S SEVEN-POINT PLAN 
 
¶3.  (U) On March 28, perhaps in an effort to prepare the public for 
some economic belt tightening, the Prime Minister (PM) revised the 
estimate for 2008 economic growth from 9 down to 7.5 percent.  A few 
days later, on March 31, the PM released his seven-point plan to 
fight inflation, calling for coordinated efforts by all agencies at 
all levels and noting that the plan would "exact a price" on the 
country's economic growth.  The first measure will be to further 
tighten monetary policy to reduce money supply and credit growth, 
but without restricting legitimate foreign exchange available for 
production and export activities.  The second measure will be to cut 
down on State Budget expenditures and to control "investments of 
State Owned Enterprises (SOEs)".  (Note:  This second clause is 
perhaps the most critical, as SOEs have been borrowing heavily from 
commercial banks in 2007 and early 2008.) 
 
¶4.  (U) The third measure will focus on the development of 
agriculture and industry to "reverse the adverse consequences of 
inclement weather and disease on food supplies" (REFS A, B).  The 
Plan notes that food "production development is key to increasing 
supply for in-country use and export."  (Note:  A significant 
portion of Vietnam's inflation is driven by rising food prices.) 
 
¶5. Similarly, the fourth measure looks to find a balance between the 
supply and demand of goods to increase exports and reduce the trade 
deficit.  The plan specifies that the GVN will not increase fuel and 
petrol prices before June 2008 and caps rice exports at four million 
tons.  This measure also holds that the GVN will apply a "flexible 
exchange rate with an appropriate trading band...without impacting 
exports."  Finally, in classic GVN-speak, the plan asks businesses 
to "increase exports and control imports to balance trade."  To that 
end, PM Dung said that import tariffs for non-essential goods would 
be raised in a manner consistent with Vietnam's WTO and other 
bilateral commitments.  (Note:  Vietnam's trade deficit more than 
tripled in the first quarter of 2008, reaching $7.37 billion.  It is 
not clear how the last part of this measure will be implemented in 
the short term, as Vietnam's exports are still heavily dependent on 
imported materials and machinery.) 
 
¶6.  (U) The fifth measure asks GVN and provincial offices to cut ten 
percent of their administration expenses, and calls for private 
sector businesses to do the same.  Citizens are encouraged to save 
fuel and energy in their daily activities.  Measure six notes that 
"market management should be further supervised" to avoid 
speculation and smuggling, especially in key goods such as petrol, 
cement, steel, medicine and food.  Finally, measure seven indicates 
that the GVN will implement social welfare policies and increase 
salaries and allowances to help citizens cope with rising prices. 
 
WORLD BANK OFFERS ITS OWN SOLUTIONS 
 
¶7.  (U) The World Bank (WB) conducted a roundtable on Vietnam's 
macroeconomic situation with the Prime Minister on March 20, and 
then made its points public in a forum on April 1.  In his 
presentation, Lead Economist for Vietnam Martin Rama noted that 
inflation, a growing current account deficit, and the real estate 
bubble all indicate that Vietnam's economy is overheating.  Rama 
made clear that it would be difficult to maintain Vietnam's 
 
HANOI 00000377  002.2 OF 002 
 
 
"impossible trinity" of controlling interest and exchange rates in 
the face of rising capital inflows (REF C-E) and offered some 
concrete steps to ease inflationary pressures. 
 
¶8.  (U) Rather than lending caps on banks to cool the real estate 
market, the WB feels that an earlier introduction of the planned 
property tax would be advisable, perhaps combined with a tax on 
short-term capital gains from land.  A property tax would reduce 
speculation without creating distortions in the market like those 
seen as a result of the securities cap implemented in 2007.  Rama 
noted that such a tax might also make government bonds more 
attractive to investors, thereby allowing the State Bank of 
Vietnam's (SBV) "sterilization" of currency inflows more to be more 
effective.  (Note:  The property tax is not scheduled to be rolled 
out until 2009, but the mere mention of it in the press last fall 
caused a brief but noticeable drop in property prices.) 
 
¶9.  (U) The WB also advised Vietnam to adopt a more modern 
management style for funds held by state agencies, specifically 
those held by Vietnam Social Security (VSS).  VSS has approximately 
$4 billion in pension funds, and is accumulating at a rate of one 
billion a year.  The WB suggests that VSS purchase bonds on the 
domestic market, rather than forcing the SBV to mop up liquidity 
through compulsory bond purchases.  Rama cautioned SOE's against 
questionable investments, noting their role in credit growth. 
Finally, the WB advised the GVN to de-link from the U.S. dollar, and 
recommended instead that it reference a "basket" of currencies which 
would help it respond to regional inflationary pressures. 
 
WORLD BANK POSITIVE ON VIETNAM'S FUTURE 
 
¶10.  (U) Despite the macroeconomic challenges, the WB believes 
significant foreign investment in Vietnam will continue through 2008 
and sees a "low probability" of capital flight.  The WB is 
forecasting between 7.5 and 8 percent GDP growth for Vietnam in 
2008, and between a 10.1 and 10.8 percent increase in FDI.  The Bank 
does not expect VN to be amongst the most "directly affected" by the 
global slowdown, and instead believes that VN will gain market share 
as it is not a margin producer like some countries.   Rama noted 
that low dollar interest rates will likely create a liquidity surge 
which could result in an influx of short-term capital for Vietnam 
and stressed that better tracking of capital flows is needed. 
 
POLITICAL ANGLE - THE PRIME MINISTER SPEAKS 
 
¶11.  (U) Prime Minister Dung returned from an extended overseas trip 
last month to a nation seriously rattled by inflation, which 
continued to increase rapidly even after the early February Tet 
holiday, when prices traditionally spike.  This, combined with 
continuing problems in the equity markets and unsettling 
fluctuations in the currency's value against the dollar, catapulted 
economic issues to the top of the government's agenda.  Dung's 
advisers have told us that he understands that he must be seen as in 
control and taking action, and the very public March 31 rollout of 
the "plan" is definitely part of an effort to influence popular 
psychology.  The U.S. economic slowdown is cited as influencing 
Vietnam's current situation, but, to its credit, the GVN is not 
sugar coating its domestic economic problems.  The GVN knows that 
its legitimacy rests to a large degree on its economic performance, 
and is appropriately concerned that a further deepening of current 
problems could undermine its support. 
 
 
MICHALAK