VZCZCXRO1870
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1158/01 2830614
ZNR UUUUU ZZH
P 090614Z OCT 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8587
INFO RUEHHM/AMCONSUL HO CHI MINH 5197
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 001158 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS MBROWN 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
USTR FOR DBISBEE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EAID VM
SUBJECT:  Effects of U.S. Financial Crisis on Vietnam 
 
REF: Hanoi 1095 
 
HANOI 00001158  001.2 OF 002 
 
 
¶1. (SBU) Summary:  The short term effects of the U.S. financial 
crisis in Vietnam have been minimal; local banks, while suffering 
from domestic troubles, are not heavily invested in sub-prime debt. 
Longer term questions remain, however, as a global downturn may 
affect exports and both direct and indirect capital flows.  The GVN 
is aware of the downside risks and is evaluating its plans for 2009 
accordingly.  End Summary. 
 
Short Term Effects are Negligible 
--------------------------------- 
 
¶2. (SBU) In the short term, most analysts agree Vietnam will not 
suffer severe adverse consequences as a result of the financial 
crisis in the United States and elsewhere.  Vietnam's fledgling 
banks are not heavily invested in mortgage-backed securities or 
derivatives, nor are they dependent on foreign financing.  As a 
result, the State Bank of Vietnam (SBV) has taken a relaxed stance 
on the immediate effects of the turmoil in the U.S.  On September 
30, SBV Governor Giau told a press conference that "I do not see any 
impact that the U.S. financial crisis would bring to Vietnam's 
banking sector."  Press reports a couple of days later indicated 
that some local banks had withdrawn money from certain foreign banks 
and reinvested the money in "prestigious banks in Hong Kong and 
Singapore," but there have been no "bank runs" or other public 
displays of panic. 
 
¶3. (SBU) As previously reported, some of Vietnam's banks are 
troubled, but those troubles are a result of internal causes such as 
high credit growth, inflation, interest rate caps and poor 
management/supervision, not sub-prime debt exposure (reftel).  The 
collapse or merger of many of the larger U.S. financial institutions 
may mean that banks in Vietnam will have a more difficult time 
finding foreign strategic partners, and foreign banks operating in 
Vietnam (like HSBC) might take a second look at their expansion 
plans. 
 
¶4. (SBU) Global market psychology has affected Vietnam's stock 
market; it has risen and fallen with the rest of the Asian markets 
over the last couple of weeks.  On September 30th, the market 
dropped 4.7 percent, to 456, following news that the bailout plan 
failed in the House, but such a percentage drop is not unusual in 
Vietnam's thin market.  The State Securities Commission (SSC) was 
unfazed, telling the Embassy that they thought the market would be 
"down for four days" but then recover.  The market did better than 
predicted initially, dropping by only .5 percent the following day 
and then rising back up to 460 on October 2.  On October 3 and 6, 
the market was down a total of 8.5 percent and as of October 9, it 
had finally fallen below 400.  Vietnam's stock market had a large 
negative adjustment earlier in the year, however, and the movements 
now are small in comparison. 
 
Risks to Exports and FDI Remain 
------------------------------- 
 
¶5.  (SBU) Analysts and economists agree that the more critical issue 
for Vietnam is the long-term effect of the U.S. financial crisis. 
Vietnam is heavily dependent on exports and foreign direct 
investment (FDI), so a global slowdown could have serious adverse 
affects on its balance of payments.  Exports are the obvious 
downside risk as economic growth slows in Vietnam's major foreign 
markets.  A slowdown in exports will also bring a reduction in 
imports, but it is unlikely that imports will slow as much as 
exports.  The World Bank in Hanoi is currently examining this issue 
to see if it can measure how Vietnam's balance of payments will be 
affected by a drop in exports. 
 
¶6.  (SBU) Less certain is the financial crisis' effect on FDI. 
Vietnam has been posting very high numbers of committed FDI 
throughout 2008 (over $44 million for 1H 2008), but many analysts 
feel that implemented FDI will take a hit as a result of the U.S. 
financial turmoil.  Pledged investment is calculated from signed 
investment licenses and is a useful indicator of investor sentiment 
and GVN plans for the future.  The amount of FDI disbursed in 2008 
will probably grow to around $8-10 billion at year's end, up from $5 
billion in 2007.  As credit becomes more scarce and risk less 
tolerable, investors in emerging markets like Vietnam may lose their 
financing commitments or simply rethink their business plans.  Local 
economists are already urging the GVN to use investment capital 
efficiently and to select projects carefully, a message that will 
become even more critical if FDI commitments drop significantly. 
 
 
HANOI 00001158  002.2 OF 002 
 
 
 
Slumping FII Flows and Fund Share Prices 
---------------------------------------- 
 
¶7. (SBU) Vietnam financial sector analysts note that U.S. financial 
sector's difficulties present two other reasons for potential 
concern in Vietnam.  First, "hot money" inflows of foreign indirect 
investment (FII) could dry up completely, increasing Vietnam's 
current account deficit and potentially putting pressure on 
Vietnamese dong (VND) exchange rates.  FII inflows are already down 
sharply due to the macroeconomic problems Vietnam has experienced 
this year, as much as 75 to 80 percent according to one fund 
manager.  At the same time, most funds in Vietnam are closed-end, 
meaning that foreign investors are not able to pull their capital 
out except by selling the listed shares.  In a recent Vietstock 
interview, Nguyen Son, Head of the Market Development Department 
under the State Securities Commission, estimated the total value of 
foreign portfolio investment in Vietnam currently at $7-8 billion. 
Most industry professionals estimate that FII flows are still 
slightly positive. 
 
¶8. (SBU) The second follow-on effect affects fund share prices. 
Strapped for cash overseas investors have been selling shares in 
listed funds (e.g., Vinacapital's Vietnam Opportunity Fund -- VOF), 
reducing the difference between the fund's share price and the 
underlying net asset value (NAV) of the fund's holdings, and putting 
pressure on fund managers.  As the funds' share prices drop, some 
funds are buying back their own shares to prevent a situation in 
which the NAV exceeds the market value of the fund's share price. 
If the fund's share price discount to NAV is particularly wide, this 
creates an opportunity for another firm or investor to acquire 
enough shares to take control of the fund, then sell off the assets 
and pocket the difference.  Widening discounts to NAV also makes it 
difficult for the funds to raise new capital (which must be raised 
at the NAV so as to not dilute existing shareholders). 
 
GVN Response 
------------ 
 
¶9.  (SBU) The GVN is aware of the issues it may face as a result of 
a global downturn.  The PM recently tasked various ministries and 
agencies with preparing a report on the possible domestic 
ramifications of the crisis.  He also continues to advocate 
publically for increasing exports and making Vietnam attractive for 
foreign investors as a means of staving off slowing demand from the 
U.S. and Europe.  Communist Party head Nong Duc Manh, while not 
referring directly to the U.S., recently directed the Central 
Committee to evaluate its economic plans for 2009 "in light of the 
international situation." 
 
¶10.  (SBU) Our interlocutors in the GVN are also keenly interested 
in the latest news.  Many of our bilateral meetings begin or end 
with questions about the bailout plan, the debate in Congress, and 
when the U.S. economy might recover.  As Finance Vice Minister Ha 
recently said after receiving an update, "Well, we want to know 
because we will get better when you get better."  Press coverage has 
been extensive but rational and balanced thus far. 
 
Comment 
------- 
 
¶11.  (SBU) Fortunately, the GVN is aware of Vietnam's susceptibility 
to problems in the U.S. and, at least on paper, seems serious about 
proactive solutions.  Some analysts are privately speculating that 
the Communist Party may use our financial crisis as an excuse to 
slow the ongoing reform and equitization process for Vietnam's SOEs, 
but most are focused on the more obvious impacts to the 
macroeconomy.  Post will continue to follow these issues and report 
septel. 
 
¶12. (U) This cable was written in conjunction with Con Gen HCMC. 
 
MICHALAK