VZCZCXRO4900
PP RUEHHM
DE RUEHHI #0572/01 1360902
ZNR UUUUU ZZH
P 150902Z MAY 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7835
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2604
INFO RUEHHM/AMCONSUL HO CHI MINH 4728
RUEHBK/AMEMBASSY BANGKOK 6348
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000572 
 
DEPT FOR EAP/MLS, EB/IFD, USAID/ANE, USAID EGAT/EG 
BANGKOK PASS TO RDM/A 
USTR FOR BISBEE 
SINGAPORE FOR TREASURY SBAKER 
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: MOF AND SBV DISCUSS PLAN TO FIGHT INFLATION 
 
REF:  A) Hanoi 377 ("PM Declares War On Inflation"); 
 
B) Hanoi 530 (PM Minister Floats Inflation Measures) 
 
¶1.  (U) Summary:  The Ambassador met with State Bank of Vietnam 
(SBV) Governor Nguyen Van Giau and Finance Vice Minister Tran Xuan 
Ha on May 14 to discuss Vietnam's current macro-economic situation, 
including implementation of the Prime Minister's seven-point plan to 
fight inflation (Reftels).  Separately, both confirmed that the 
Government of Vietnam's (GVN) top priority is controlling inflation. 
 The Ministry of Finance (MOF) and the SBV are in the process of 
making recommendations to the Prime Minister on credit growth, 
banking, and limiting the expansion of state-owned enterprises. 
Vice Minister Ha also assured the Ambassador that the MOF plans to 
consult with industry before implementing the special consumption 
tax.  End Summary. 
 
GOVERNOR GIAU ON BANKING 
------------------------ 
 
¶2.  (U) During his meeting with the Ambassador on May 14, SBV 
Governor Giau cited the drop in inflation from 2.9 percent in March 
to 2.2 percent in April as evidence that inflation is "under 
control."  He acknowledged that liquidity and credit growth in the 
banking sector must be controlled, while cautioning that the credit 
system was not well developed so its "stability must be maintained." 
 Giau clarified that the SBV was focusing on newly established banks 
with limited expertise and capacity.  (Comment:  These banks have 
been borrowing money on the inter-bank market, traditionally a short 
term money source, and lending the money out for long-term property 
loans, leading to a "maturity mismatch."   As a result, the SBV 
recently announced plans to inject liquidity into these banks at an 
interest rate of 7.5 percent.) 
 
¶3.  (U) The Governor did not see a need to merge some of these newer 
banks into more experienced institutions, and said only that they 
have asked the banks to "follow the law" and operate within their 
capacity.  When pressed, he admitted that credit growth had been too 
high but that the GVN would "take measures" to control the issue. 
He said he was scheduled to meet with the PM on May 15 and that the 
measures would be made public following that meeting.  He mentioned 
that two new joint stock banks would be licensed in the near future, 
stating that these would "significantly impact the credit 
situation." 
 
CONTROLLING EXPENDITURES 
------------------------ 
 
¶4.  (U) On the fiscal side of the PM's plan, the Governor said that 
Vietnam's provincial governments have received instructions to 
revise their budget and expenditure plans.  The provinces will 
report those revisions to the Ministry of Planning and Investment 
(MPI) in May, and MPI will then report that information to the PM. 
He added that the central government ministries were also working on 
similar revisions to their budgets. 
 
¶5.  (U) MOF Vice Minister Ha addressed the issue of rapid expansion 
by State-Owned Enterprises (SOEs).  He admitted that some of the 
SOEs had grown too rapidly, often expanding into businesses outside 
of their core area of expertise, especially into areas such as 
banking, securities, and insurance.  He said these areas were very 
specialized, and carried a significant risk for SOEs lacking 
relevant experience.  As a result, Ha said, the MOF had submitted a 
proposal to the PM that would limit non-core expansion of the SOEs 
to 30 percent of their capital (which is supplied by the GVN when 
the entity is formed).  He stated that the MOF was "hoping that the 
GVN would approve the recommendation and give instructions to the 
SOEs to implement it" in the near future. 
 
SPECIAL CONSUMPTION TAX 
----------------------- 
 
¶6.  (U) At MOF, the Ambassador raised the GVN proposal to revise its 
special consumption tax regime, especially affecting the liquor and 
automotive industries.  The Ambassador urged Ha to consult with the 
private sector during its decision making process, cautioning that 
changes under consideration were substantial and that some 
businesses, especially auto manufacturers, would need lead time to 
make changes to their business plans.  Ha assured the Ambassador 
that the MOF would consider the needs of stakeholders, including 
local and foreign businesses. 
 
¶7.  (SBU) The MOF shared the proposed special consumption tax regime 
with Embassy Hanoi on May 16.  Proposed taxes on beer and spirits 
 
HANOI 00000572  002 OF 002 
 
 
are double what the industry had proposed.   Local automakers have 
decried the proposed special consumption tax regime, which would 
double the taxes on many popular models, including locally-assembled 
ones.  Some, like Ford, particularly fear GVN attempts to rush in 
the new taxes, and have asked the MOF to assure them that any new 
regime would not come into effect until 2010.  Embassy Hanoi has met 
with the liquor industry and Ford, and will meet with GM, to develop 
a strategy to promote a more business-friendly tax regime. 
 
¶8. Comment:  The PM's message that fighting inflation is the top 
priority of the GVN has clearly gotten through to the MOF and SBV. 
Unfortunately, the SBV Governor seems more concerned with bailing 
out new banks who have engaged in risky borrowing rather than 
creating a framework for the banking system that would prevent this 
situation.  Hopefully, the unspecified "measures" being proposed to 
the PM may address this issue.  Post will continue to follow the 
issue and report septel.  End comment. 
 
MICHALAK