VZCZCXRO9200
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0881/01 2120901
ZNR UUUUU ZZH
P 300901Z JUL 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8204
INFO RUEHHM/AMCONSUL HO CHI MINH 4961
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 HANOI 000881 
 
SENSITIVE 
SIPDIS 
 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
USTR FOR DBISBEE 
STATE FOR EEB/IFD 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECPS ECON EAGR ETRD VM
SUBJECT:  GVN HAS TOUGH ECONOMIC CHOICES AHEAD 
 
Ref:  A) Hanoi 634 
  B) Hanoi 774 
 
HANOI 00000881  001.2 OF 003 
 
 
¶1.  (SBU) Summary: Treasury Deputy Assistant Secretary Robert 
Dohner, in meetings with Vietnamese government officials on July 2 
and 3, conveyed that Vietnam's prospects are still strongly positive 
but appropriate policy choices over the next few months would be 
critical to achieving a more stable macroeconomic situation. 
Officials consistently responded that inflation is the government's 
highest priority, and agreed with DAS Dohner on the need for fiscal 
tightening (to cool Vietnam's overheating economy) and for improved 
communications with markets. 
 
¶2. (SBU) There was less agreement (and in some cases lack of 
consensus within the government) on the extent of risks to the 
banking system; the need to increase interest rates to retain 
deposits in the banking system; the advisability of administrative 
measures targeted at reducing imports; and the need to ensure 
continuous trading and market clearing in the market for U.S. 
dollars. 
 
¶3. (SBU) Finally, there appears to be some reconsideration (but no 
consensus) within the Vietnamese government of the advisability of 
granting banking licenses to state-owned industrial companies.  End 
summary. 
 
Larger Problems May Surface in Banking System 
--------------------------------------------- 
 
¶4.  (SBU) DAS Dohner discussed banking system risks in separate 
meetings on July 2 and 3 in Hanoi with the State Bank of Vietnam 
(SBV) Deputy Governor for Bank Supervision, Nguyen Van Binh, and the 
Office of the Government's (OOG) Banking and Finance Department 
Director, Pham Van Phuong.  Both OOG and SBV said that the banking 
system is "under control" and that the banking system has "survived 
the most difficult period."  Binh reported that liquidity problems 
are confined to small joint stock commercial banks (JSCBs), which 
comprise only 5-6 percent of banking system assets, and that "state 
owned commercial banks and the larger JSCBs (comprising more than 90 
percent of banking assets) are all safe and sound."  [Comment: The 
SBV is providing "liquidity support" to a number of small private 
banks, about 12 -20 in total, and is holding them under close 
supervision.]  Binh highlighted that the latest data from January 
showed non-performing loans (NPLs) in "the safe range" of 3.5 
percent of total loans, a slight increase from 2 percent at the end 
of last year.  A contact at the World Bank predicts, however, that 
NPLs will take another big jump before the end of the year. 
[Comment: NPLs are a backward looking measure. It usually takes 6 
months to 1 year from the onset of a crisis for the NPL ratio to 
show a significant increase.] 
 
¶5.  (SBU) Dohner expressed concern about potential future problems 
in the banking sector, noting Vietnam's rapid credit growth amidst 
weak risk management and aggressive lending to the stock and real 
estate asset bubbles.  [Comment: According to GVN calculations, in 
2007 credit outstanding grew by 50 percent overall, and by over 90 
percent for private sector banks.  In the first quarter of 2008, 
overall credit grew approximately 15 percent compared to end of 
2007.]  Dohner urged officials to "get ready" and develop a response 
plan for bank failures that includes swift resolution of insolvent 
banks and protection for depositors. 
 
¶6.  (SBU) OOG's Phuong stated development of such a plan is 
underway, which was later confirmed by the World Bank 
representative.  Phoung noted that small banks are receiving 
liquidity support because the GVN fears that any bank failure, no 
matter how minor, could cause a loss of confidence in the entire 
banking system.  He explained that the "government has directed the 
SBV to support liquidity in the interbank market."  He cited 
specific efforts to loosen criteria for participation in the 
interbank market including lowering the minimum value for negotiated 
paper and raising SBV's limits on short-term borrowing. 
 
Direction of Interest Rates Being Debated 
----------------------------------------- 
 
¶7.  (SBU) In separate meetings with SBV's Binh, OOG officials, and 
Ministry of Planning and Investment (MPI) Deputy Director-General of 
National Economic Issues, Dr. Nguyen Phu Ha, DAS Dohner emphasized 
the importance of ensuring that bank deposits offer positive real 
rates of return to avoid withdrawals from banks to invest in gold or 
other durable goods. [Comment: Banks are experiencing difficult 
liquidity problems as depositors have been withdrawing funds from 
 
HANOI 00000881  002.2 OF 003 
 
 
the banking system over the past several months.  Interest rates 
have not been allowed to rise in line with inflation, thus offering 
depositors only negative real rates of return.  Vietnamese have been 
placing their funds in alternative assets, notably gold.  Gold 
imports increased 140 percent in first quarter 2008 compared to 
first quarter 2007(Reftel A and B).] 
 
¶8.  MPI's Ha noted that debate on interest rates is ongoing within 
the GVN - manufacturers and exporters are pressing for lower 
interest rates, depositors for higher interest rates, and the 
government is seeking to "harmonize all, fight inflation, and have 
high growth." 
 
¶9.  (SBU) At a lunch with local representatives of foreign banks, 
one observed that JSCBs are lobbying against further increases in 
short-term interest rates and hinted that JSCBs are a powerful 
lobbying group as many of their CEOs are former SOCB officials.  A 
representative from GE Money, which just won a license to start a 
consumer finance business in Vietnam, expressed concern that the 
Vietnamese would institutionalize caps on lending rates which would 
"head off consumer lending before it even gets started." 
 
ForEx Market for U.S. Dollars Still Dysfunctional 
--------------------------------------------- ---- 
 
¶10.  (SBU) To SBV's Binh and OOG officials, Dohner emphasized the 
importance of having active trading in foreign exchange markets and 
expressed concerns about rationing of foreign exchange to reduce 
imports deemed non-critical.  [Comment:  In the week prior to DAS 
Dohner's visit, the SBV issued regulations forbidding two-way 
trading of dong and U.S. dollars through third currencies.  This 
effectively froze the trading of U.S. dollars in the official 
market, and the SBV directed sales of its foreign exchange towards 
governmental priorities, e.g., oil imports and state-owned 
enterprises (SOEs).  Reftel B] 
 
¶11. (SBU) OOG's Phuong explained that reducing imports -- to reduce 
the trade deficit -- was one of three targets that had been outlined 
at a recent government meeting on addressing inflation.  [Comment: 
The other two targets are monetary and fiscal tightening.]  Dohner 
argued that the government would achieve its goal of reducing 
imports by slowing economic growth and taking appropriate policy 
measures that convince the public that the dong would not rapidly 
lose value. 
 
¶12. (SBU) Separately, a local banker observed to DAS Dohner at a 
bankers' lunch that "Vietnamese want gold, oil, anything except 
dong.  They are afraid of devaluation and so are moving money out of 
the dong." 
 
GVN Struggles to Tighten Fiscal Spending 
----------------------------------------- 
 
¶13.  (SBU) DAS Dohner noted that monetary policy cannot take the 
full brunt of reducing inflation, and urged that fiscal tightening 
must also be employed.  He emphasized that in order to boost 
investor and public confidence the GVN needs to "demonstrate it can 
control expenditures."  Officials were in strong agreement. 
Ministry of Finance (MOF) Vice Minister Ha discussed in detail their 
plan for fulfilling the Prime Minister's directive on cutting 
non-salary operational budget spending by 10 percent (which MOF 
expects will reduce spending by 20 trillion dong or approximately 
1.8 percent of GDP.) 
 
¶14. (SBU) On investment spending, MPI's Ha explained that in early 
April the Prime Minister issued a directive for non-critical 
investment projects to be delayed.  However, when asked, ministries 
offered only small projects of little total value as non-critical. 
Instead, now the government plans to maintain the original planned 
amount of overall investment spending, but fund a fewer number of 
projects, as projects costs have increased with inflation. 
 
¶15. (SBU) Discussions with MPI's Ha revealed a lack of clear state 
control over investment spending. She explained that investment 
decisions are decentralized to ministries, provinces and SOEs.  Also 
she explained that despite cutbacks in government funds for 
investment projects (many of which involve SOEs), SOEs can and have 
been borrowing from banks to continue investments. 
 
¶16. (SBU) On utilizing increases in the tax revenues, MPI explained 
that the government will not use additional tax revenue for 
increased expenditure, but instead for covering the deficit.  MOF 
Vice Minister Ha explained that by law additional budget revenues 
 
HANOI 00000881  003.2 OF 003 
 
 
are required to be placed in a reserve or to be used for social 
welfare projects. 
 
Warnings Against Mixing Commerce and Finance 
-------------------------------------------- 
 
¶17.  (SBU) In meetings with MPI's Ha and OOG officials, DAS Dohner 
expressed concern about SOEs' expansion into the financial sector. 
[Comment:  In a May report, Fitch Ratings reported that authorities 
had issued nine additional banking licenses, almost all of which 
were given to state-owned corporate enterprises.  According to a 
private banker, state-owned Vinashin, however, was recently forced 
to step back from an acquisition of a finance company.]  Dohner 
explained that the United States was averse to non-financial 
companies owning banks, and felt that having banks owned by 
industrial companies had worked out badly for the Philippines and 
Indonesia. 
 
¶18.  (SBU) OOG's Phuong responded that the government "is studying 
the issue" and emphasized that Vietnam needs to develop its own 
solution appropriate for its economic needs.  He stated that former 
Federal Reserve Governor Alan Greenspan had provided similar advice 
against mixing industrial and financial conglomerates during his 
meeting with Prime Minister Dung during the PM's trip to Washington 
in June. 
 
GVN Aware of Need for Improved Communication 
-------------------------------------------- 
 
¶19.  (U) Dohner encouraged officials to publish information 
regularly on a publicly available schedule, noting that the demand 
and importance of information is now higher to calm markets.  He 
encouraged them to disclose even disappointing information, as it 
would assure market participants that nothing is being hidden and 
would help prevent rumors. 
 
¶20.  (SBU) Officials were in strong agreement.  MPI's Ha noted that 
Prime Minister Dung had recently instructed all agencies to better 
disclose information to the public.  MOF's Ha noted improved 
information disclosure is necessary as "some investors don't 
understand Vietnam's economy." 
 
¶21.  (SBU) In terms of specific areas where more transparency and 
communication could be helpful, the IMF recently noted that the 
Ministry of Finance should make a revised budget publicly available 
so as to clearly indicate how the Prime Minister's order of a 10 
percent fiscal spending cut will be implemented.  Further, UNDP's 
Chief Vietnam Economist Jonathan Pincus has urged publication of 
SOEs audited accounts, to make transparent their level of spending 
and borrowing. 
 
¶22.  (SBU) Comment:  Government officials, while for months having 
voiced anti-inflation rhetoric, appear to have finally shifted into 
greater action, likely instigated by the financial downturn of 
end-May.  Further monetary and fiscal tightening is likely 
necessary, but risks lay with interest groups, such as 
manufacturers, exporters, and SOEs seeking to keep interest rates 
low and investment spending expansive.  These entities are using the 
slowdown in 2008's second quarter growth to argue for loosening of 
policies. 
 
¶23.  (SBU) Two risks seem to be under-appreciated by officials. 
First, it appears that cutting investment spending will be extremely 
difficult given the decentralized nature of investment decision 
making.  This year will test whether "the government is in charge of 
SOEs, or the other way around," one observer noted.  Second, while 
government officials may be putting on a positive face to bolster 
confidence, they may be overly complacent about risks in the banking 
system.  End Comment. 
 
¶24.  (U) Treasury cleared this cable. 
 
MICHALAK