VZCZCXRO0266
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1196/01 2950847
ZNR UUUUU ZZH
P 210847Z OCT 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8640
INFO RUEHHM/AMCONSUL HO CHI MINH 5231
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 001196 
 
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: VIETNAM'S SMEs THIRSTY FOR CAPITAL 
 
Ref:  Hanoi 377 
 
HANOI 00001196  001.2 OF 002 
 
 
¶1. Summary: Tight monetary policy has limited access to credit for 
Vietnam's small and medium enterprises (SMEs).  SMEs are feeling the 
pinch, with many complaining that bank lending has dried up 
completely.  The GVN is aware of the issue and is taking steps to 
improve access to credit, including loosening liquidity and 
directing the state owned commercial banks to improve SME lending. 
The GVN is also reexamining its failed SME credit guaranty program. 
End Summary. 
 
TIGHT MONETARY POLICY CUTS LENDING 
---------------------------------- 
 
¶2.  (U) As previously reported, Vietnam has struggled with inflation 
in 2008.  Although recent numbers show improvement, year-on-year 
inflation is still at 27.9 percent as of September 2008.  The PM has 
identified controlling inflation as the GVN's top priority for 2008 
(reftel).  To achieve this goal, the GVN, via the State Bank of 
Vietnam (SBV), has adopted a tight monetary policy focused on 
reducing the money supply.  Earlier this year, the SBV also 
announced a credit growth rate target of 30 percent for the banking 
sector, down from at least 53 percent in 2007. (Note:  Although the 
SBV reports average credit growth of 53% for 2007, many banks 
privately admit to credit growth of 90 to well over 100 percent last 
year.) 
 
 
¶3.  (SBU) In an effort to comply with the SBV's credit growth 
numbers and in response to tightened liquidity, commercial banks in 
Vietnam have had to tighten their lending portfolios.  As a result, 
businesses in general have had difficulty getting credit for either 
ongoing business or expansion.  Only 10.5 percent out of 282 
surveyed enterprises had their financing needs met in the first six 
months of 2008, according to a survey conducted by the Vietnam 
Chamber of Commerce and Industry (VCCI)'s Institute of Enterprises 
Development.  At the same time, the GVN, in an effort to sustain 
economic growth, has directed banks to lend their limited funds to 
certain commodity and export-related industries.  Many economists 
and analysts also believe that too much of the available capital has 
been funneled into Vietnam's powerful state owned enterprises 
(SOEs). 
 
SMEs STRUGGLE FOR FINANCING 
------ -------------------- 
 
¶4.  (SBU) In this credit environment, Small and Medium Enterprises' 
(SMEs) access to credit has become more challenging.  A 
representative of the SMEs Association in HCMC told us that "it's 
very difficult. It's difficult for SMEs to get bank loans for both 
capital goods financing and working capital."  For SMEs, banks tend 
to require collateral and/or a credit guarantee to consider 
providing a loan.  With a tightened credit policy in place, banks 
are inclined to provide credit to large, well established, reputable 
firms or companies with whom they have a special relationship. 
Even if they can get credit, the cost of borrowing is a heavy burden 
on the SMEs.  Lending rates rose from 12-13 percent per annum in 
2007 to up to 20-21 percent this year, making the cost of capital 
out of reach for some small businesses. 
 
 
¶5.  (SBU) From the banks' viewpoint, it is difficult to lend to SMEs 
even when liquidity is ample.  "These enterprises do not know how to 
borrow, how to make a business plan, their collateral is not 
sufficient, and their financial statements, if any, are not 
transparent," according to an executive vice president at Techcom 
Bank, a large commercial bank with a stated interest in lending to 
SMEs.  Bankers also cite other constraints in lending, including the 
current high cost of capital, lack of SME credit guaranty, and the 
extreme difficulty of repossessing collateral if a borrower 
defaults. 
 
¶6. (SBU) The GVN is aware that SMEs are struggling.  Following a 
series of negative press reports citing SME complaints about credit, 
the SBV released a study that painted a mixed picture about SMEs. 
According to the report, total outstanding loans provided to SMEs by 
July 31, 2008 reached VND 299,472 billion ($18,717 million), 
accounting for 27.3 percent of total outstanding loans in the 
economy, an increase of 16.65 percent compared to December 31, 2007. 
 The report also stated that 23 percent of the SMEs which have 
"borrowing relationships" with banks are doing well, 73.2 percent 
are average performers, 3.8 percent face difficulties, and only 1.42 
percent are at risk of bankruptcy. 
 
HANOI 00001196  002.2 OF 002 
 
 
 
¶7. (SBU) The real situation, however, seems more difficult.  An 
official at the SME Association in Hanoi told us that she was aware 
of the report but that "(she) has not heard from our members about 
easier access to banks loans".  According to another member of the 
SME Association, while many banks claim interest in SME lending, 
they are not following through with real action or "putting their 
money where their mouth is." 
 
¶8.  (SBU) Vietnam's current tight monetary policy could bankrupt 20 
percent of the country's small to medium sized enterprises (SMEs), 
according to Dr. Cao Sy Khiem, Chairman of Vietnam's SME Association 
and former Governor of the SBV.  Khiem told P?u Tu T`i Chnh 
(Financial Investment) that another 60 percent of SMEs are facing 
difficulties while just 20 percent are unaffected.  This expert 
suggests the GVN should help SMEs by extending corporate tax 
deadlines, reforming Vietnam's tax systems and customs, and setting 
up credit guarantee and insurance facilities for the SMEs. 
 
 
THE GVN RESPONDS 
---------------- 
 
¶9. (U) The GVN has taken some steps to ease access to credit.  On 
October 20, the SBV raised the interest rate paid on banks' 
compulsory reserves to 10 percent from 5 percent and lowered the 
base rate from 14 to 13 percent. It also allowed banks to use the 
SBV compulsory bills to participate in refinancing transactions 
(such as borrowing, discounting or open market operations) with the 
SBV. These moves were designed to enhance liquidity in the system 
and to enable banks to cut lending rates. 
 
¶10. (SBU) Many state owned commercial banks, likely at the behest of 
the GVN, have also announced financing programs for SMEs.  The Bank 
for Investment and Development of Vietnam (BIDV) announced VND 33 
trillion ($1.9 billion) loans for SMEs during 2008-2010, which will 
be used to help restructure debts of SMEs. It planned to disburse 
VND 3 trillion ($178 million) in 2008, VND 10 trillion ($594 
million) in 2009, and VND 20 trillion ($1.2 billion) in 2010.  BIDV 
expects to have outstanding SME loans of VND 100 trillion ($5.9 
billion) by 2010, which will account for 50% of the bank's total 
outstanding loans. The Industrial and Commercial Bank has allocated 
VND 10 trillion ($594 million) for its SME lending portfolio. 
Lastly, Vietcombank has set aside VND 3 trillion ($178 million) to 
support SMEs and says that its target is to have 25 percent of its 
lending portfolio in SMEs. 
 
 
¶11.  (SBU) The GVN is also making attempts to resuscitate its SME 
credit guaranty program.  While the program has been on the books 
for about ten years, it is not yet functional due to structural 
issues.  The fund(s), while overseen by Ministry of Finance (MOF), 
are supposed to be established, managed and financed by each 
individual province.  To date, only ten such funds have been 
established, with the vast majority of provinces not able or willing 
to participate in the program.  Concerned ministries, the SME 
Association, and local banks agree that most provinces lack the 
financial and human resources to comply with the program's 
requirements.  The PM has now tasked MOF with fixing the program, 
even if it means centralizing the fund. 
 
¶12.  (SBU) Comment:  SMEs employ a significant number of Vietnamese 
workers and account for 30 to 40 percent of GDP so the GVN is right 
to be concerned about their welfare.  The GVN knows that 
bankruptcies would have a devastating effect on employment numbers 
and is trying to bolster this vulnerable part of the economy. 
Unfortunately, too much attention and capital has been directed to 
the large, inefficient SOEs that function as the GVN's political 
patronage machine.  The PM's newfound interest in the SME credit 
guaranty program is a positive indicator that the SMEs are finally 
being heard.  Not coincidentally, MOF is now welcoming our 
Treasury's SME credit guaranty technical assistance program, which 
is well placed to address the fund's problems.  End comment. 
 
¶13. (U) This cable was coordinated with Con Gen HCMC. 
 
MICHALAK