VZCZCXRO8963
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1095/01 2670341
ZNR UUUUU ZZH
P 230341Z SEP 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8512
INFO RUEHHM/AMCONSUL HO CHI MINH 5142
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 02 HANOI 001095 
 
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:  IMF SAYS GVN ECONOMY NOT OUT OF THE WOODS 
 
HANOI 00001095  001.2 OF 002 
 
 
¶1.  (SBU) Summary:  An IMF team concluded its twelve-day assessment 
of Vietnam's macroeconomic situation and briefed the Hanoi donor 
community on September 16, 2008.  While a number of economic 
indicators including the current account balance have improved, core 
inflation remains high and the banking system is under stress from 
non-performing loans.  The team encouraged the Government of Vietnam 
(GVN) to retain a tight monetary and fiscal policy and improve its 
capacity to track and report economic data.  The assessment came 
prior to the most recent round of U.S. financial turmoil, so as the 
team concluded its briefing the GVN was scrambling to deal with the 
new wave of macroeconomic uncertainty.  Another IMF team will return 
in December for Article IV consultations.  End Summary. 
 
Current State of the Economy 
---------------------------- 
 
¶2.  (SBU) Following a twelve-day evaluation, the IMF team tasked 
with assessing Vietnam's macroeconomic situation reported to the 
donor community on September 16. The team began by outlining recent 
improvements in a number of economic indicators.  The current 
account balance has improved and is hovering at around 13.5 percent 
of GDP, down from as high as 20 percent in 2Q08.  The team leader 
noted that the Vietnamese dong (VND) has stabilized and is now 
trading in the middle of the trading range without government 
intervention.  (Note:  An article in the Vietnamese press that same 
day indicated that the State Bank of Vietnam has started to 
intervene again, raising the average interbank exchange rate to 
VND16,512/US$1 and buying dollars.)  The trade deficit, though still 
significant, is trending down from its peak in March and April of 
this year. 
 
¶3.  (SBU) The team cautioned that while overall inflation has 
peaked, core inflation (overall inflation minus food, fuel and 
administratively controlled prices) has not.  The team attributes 
this to second-round effects of the initial inflation spurt, as 
workers receive wage increases and prices are raised 
correspondingly.  The IMF Resident Representative noted that while 
recent surveys put wage increases at around 18-20 percent, anecdotal 
evidence provides a number closer to 30 percent.  (Note:  The GVN is 
already planning a civil service pay increase and a 15 percent 
increase in pensions, effective October 1, and a change to the 
minimum wage law set for January 1, 2009.)  The team was also unable 
to determine if overall government spending is declining; while it 
appears that was the case for the first half of 2008, GVN 
projections for the second half of the year show a significant 
increase in expenditures.  It was not clear whether this was the 
actual intent of the GVN or just the result of weak forecasting 
skills at the Ministry of Finance. 
 
¶4.  (SBU) The team also noted the continued strains on the banking 
system, where data is extremely scarce.  High credit growth in 2007 
combined with heavy investment in the now-declining property market 
means that there will likely be a significant jump in non-performing 
loans by the end of this year.  The Resident Representative added 
that depositors will not return to the banks until inflationary 
expectations are brought down by sustained GVN commitment to tight 
monetary and fiscal policy.  (Note:  The current interest rate cap 
of 21 percent has deposit rates at around 18 percent, still under 
year-on-year inflation of 28 percent, so people are reluctant to 
place their assets in the banking system.)  The IMF team did receive 
assurance from the SBV that the base rate will remain stable through 
¶2008.  (Note:  Recent statements in the press by mid-level SBV 
officials indicate, however, that the base rate and/or reserve 
requirements may be adjusted following the release of September or 
third quarter inflation figures. Our contacts at the SBV claim this 
is not that case and that the tight liquidity situation will be 
maintained through the end of the year.) 
 
Outlook Improving, but Inflation Persists 
----------------------------------------- 
 
¶5.  (SBU) Assuming there is no change in interest rates and fiscal 
policy, the IMF believes that the economic situation in Vietnam will 
improve, but only gradually.  The team forecasts GDP growth of 6 
percent in 2008 and 2009 and overall inflation at 15 percent in 
¶2009.  Core inflation (which excludes fuel, food, and 
administratively controlled prices), however, will stay above 20 
percent in 2009 as food and fuel prices will fall by more than other 
prices.  The current account deficit will decrease to around 10.5 
percent of GDP and reserves will rise modestly as long as there is 
not a significant decrease in FDI and remittances. 
 
IMF Recommends Continued Tightening, More Transparency 
 
HANOI 00001095  002.2 OF 002 
 
 
--------------------------------------------- --------- 
 
¶6.  (SBU) The team also made a number of recommendations to GVN 
policy makers.  Along with controlling inflation expectations, the 
IMF feels that the base rate should be raised by 2 percent.  The 
team also recommended that the GVN contain fiscal spending and 
reduce the budget deficit in 2009.  They noted that the recent 
elimination of fuel subsidies will help in this regard.  Spending by 
state owned enterprises (SOEs) should continue to be tightly 
supervised, and the equitization process accelerated.  Bank 
supervision should be improved and legal reform implemented to 
strengthen the independence of the SBV.  Finally, the team 
recommended that data provisioning and communications be improved, 
but also noted that the SBV will be launching and English language 
website and recently began supplying the IMF with updated 
macroeconomic data (available on the IMF Resident Representative web 
site, http://www.imf.org/external/country/VNM/rr/in dex.htm). 
 
¶7.  (SBU) Comment:  The GVN is facing real pressure, from both 
internal sources such as pro-growth ministries like the Ministry of 
Planning and Investment and external sources such as businesses who 
want easier access to credit, to shift from an anti-inflationary 
policy to a policy that supports rapid economic growth.  In 
addition, Vietnam still faces risks from a global slowdown, as its 
balance of payments is heavily dependent on FDI and exports.  The 
newly-empowered State Bank of Vietnam (SBV) will have to stand firm 
in its commitment to a tighter monetary policy in the face of mixed 
messages about fiscal policy from the Ministry of Finance.  End 
Comment. 
 
MICHALAK