VZCZCXRO8386
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0045/01 0160409
ZNR UUUUU ZZH
P 160409Z JAN 09
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 9020
INFO RUEHHM/AMCONSUL HO CHI MINH 5484
RUEHGP/AMEMBASSY SINGAPORE 2735
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 000045 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS MBROWN; F/EAP JMARTIN; F/EAP NHIGGINS 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
USTR FOR DBISBEE 
 
E.O. 12958: N/A 
TAGS: EINV ECON VM ETRD
 
SUBJECT:  VIETNAM - RESPONDING TO THE GLOBAL FINANCIAL CRISIS; 
ASSESSING THE IMPLICATIONS FOR U.S. BILATERAL ASSISTANCE 
 
Ref:   STATE 00134905 
A) Hanoi 37 ("VN's Economy 2008) 
B) HCMC 11 ("Falling U.S. Consumer Demand Prompts...") 
C) Hanoi 1399 ("Further Effects of Global Financial...") 
D) Hanoi 18 ("PM Announces Plan to Combat...") 
E) Hanoi 1196 ("VN's SMEs Thirsty for Capital") 
F) Hanoi 1316 ("VN Shifts Focus to Maintaining Growth") 
G) Hanoi 1349 ("VN's 2008 Consultative Group Meeting") 
H) Hanoi 1206 ("GVN Cuts Rates on Fears of Slowdown") 
 
HANOI 00000045  001.2 OF 003 
 
 
 
¶1.  Summary:  This cable is in response to STATE 00134905.  As 
previously reported, the global economic downturn is already having 
effects in Vietnam and will continue to do so until there is an 
improvement in key export and credit markets.  The GVN's ability to 
forecast and respond to economic instability is rudimentary and the 
current situation highlights the need for bilateral capacity 
building and assistance in those areas.  The reasons for increased 
bilateral assistance to Vietnam are wider than the economic 
downturn, however, and are more closely examined in Hanoi septel, 
"Bilateral Assistance: Our Window of Opportunity in Vietnam".  End 
Summary. 
 
IMPACTS OF THE DOWNTURN 
----------------------- 
 
¶2.  General Real Economy Impacts:  There is evidence that real 
economic activity is slowing in key sectors and that unemployment is 
increasing (reftels A, B).  Unemployment in urban areas was 4.65 
percent for 2008. That figure will rise for 2009.  The GVN releases 
year-end unemployment figures only, so anecdotal and sectoral 
reports of unemployment are the best short term measure (reftel B). 
The GVN is in the process of implementing unemployment insurance 
(septel) but the system will not be capable of making payments for 
at least one year.  Vietnam is a significant exporter of 
agricultural products and food security does not pose a substantial 
threat to the population.  The GVN is currently discussing a 1 to 6 
billion dollar stimulus package (reftel C) and the Prime Minister 
has recently released a five point plan for coping with the economic 
downturn (reftel D).  Anecdotally, the broad economic downturn has 
led to an increase in petty crime in major cities, but the financial 
crisis has not created social unrest to date, and it is unlikely 
that widespread unrest as a result of the global economic downturn 
will occur.  Smaller-scale, localized protests or strikes are likely 
as such activities had been increasing in Vietnam even prior to the 
global downturn. 
 
¶3. Trade and Investment Impacts:  Vietnam's principal export 
commodities, such as rice, coffee and pepper have been slowing since 
mid-summer.  Crude oil exports have been variable but are down on an 
annualized basis.  Imports of critical production inputs such as 
steel, fertilizer, fuel and insecticide are also down.  Major 
importers and exporters, especially State owned enterprises, are 
generally able to get credit.  The GVN has directed the State owned 
commercial banks to ensure that exporters have sufficient capital to 
conduct business.  Small and medium enterprises, however, which 
constitute a large part of the supply chain and account for 30 to 40 
of GDP, face continuing challenges with access to credit (reftel E). 
 The GVN does not calculate the amount of remittances made by 
overseas workers but total remittances in 2008 amounted to USD 8 
billion dollars.  Local analysts predict the amount of total 
remittances will fall in 2009, with some speculating that it may go 
as low as USD 4 billion.  Vietnam had approximately 85,000 workers 
abroad in 2008 and hopes to increase that number to 90,000 in 2009. 
Some major FDI projects planned for implementation in 2009 will 
likely be delayed.  Local economists and analysts predict that 
implemented FDI will decrease from about USD 11.5 billion in 2008 to 
between USD 6 to 9 billion in 2009 (Reftel A and HCMC septel), which 
may lead to a weaker current account.  The GVN optimistically 
estimates that implemented FDI will remain at USD 11 to 12 billion 
in 2009. 
 
 
¶4. Financial Sector Impacts:  After hiking interest rates to reduce 
inflation and control rampant credit growth during the first half of 
2008, the GVN has been reducing interest rates at a rapid pace over 
the last four months (reftels F, H).  The current base rate is 8.5 
percent (making the maximum lending rate 12.75 percent) and further 
reductions are likely.  The larger banks are reportedly very dong 
 
HANOI 00000045  002.2 OF 003 
 
 
liquid but are still lending conservatively.  Demand for new loans 
is reportedly also low.  Dollar supply is tight and dollar lending 
is carefully monitored by the State Bank of Vietnam (SBV) because 
the financial system is heavily dollarized.  Non Performing Loans 
(NPLs), which are not calculated according to international 
standards, are officially at 3.5 percent, but unofficial estimates 
put the real rate at easily 3 to 4 times that amount.  NPLs will 
likely increase in the coming six to 12 months due to a declining 
property market.  The GVN and the SBV have encouraged lenders to 
"restructure" loans that are in default.  The SBV has increased 
dialogue with the banking sector and is enforcing some regulations 
strictly (such as foreign exchange regulations), but still lacks 
adequate enforcement and technical capacity.  This lack of capacity 
extends to bank closures, making bank mergers the default option for 
troubled banks.  Earlier this year, the GVN proposed possible 
mergers for a group of small, troubled joint stock banks, but those 
plans have not materialized and may be increasingly unlikely in 
light of the global financial crisis.  Licenses for new joint stock 
banks are frozen pending release of revised licensing criteria by 
the SBV. 
 
¶5.  Impacts on Government Revenue and Expenditures:  Post is not 
aware of any state plans to curtail investment or other important 
government spending, although some cuts have been contemplated at 
the provincial level.  Indeed, there may be some increase in 
government spending as part of the stimulus package now in 
development.  Import-export tariffs and the special consumption tax 
on imports account for 14.5 percent of total budget revenue and the 
GVN does not foresee a significant decline in those revenues in 
¶2009.  Local economists, however, are predicting a decline in budget 
revenues due to the decline in oil prices and exports/imports. 
Other funding sources, such as donor assistance and bonds, are not 
expected to decline.  The GVN does not finance its budget deficit 
via commercial loans. 
 
¶6. Other Donor and Multilateral Institutions, Plans:  Neither the 
IMF, World Bank nor ADB have entered into discussions with the GVN 
regarding accelerating assistance in response to the global economic 
downturn.  The World Bank will begin discussion with the GVN this 
week about possible partial financing of the GVN's proposed stimulus 
package, but does not expect those discussions to alter the total 
amount of assistance that the Bank will provide to Vietnam in 2009. 
At the recent 2008 Consultative Group Meeting, multilateral and 
bilateral donors pledged a total amount of approximately USD 6 
billion for 2009, compared to USD 5.4 billion last year (reftel G). 
(Japanese ODA of approximately USD 1 billion was suspended pending a 
corruption investigation, but some of that money is already flowing 
and the rest will likely be reinstated during the year - see ref G.) 
 
 
Effects on Bilateral Assistance 
------------------------------- 
 
¶7.  As a result of the above factors, the GVN needs to address 
significant structural issues so that it is better able to predict 
and respond to global economic instability, both now and in the 
future.  The Prime Minister's Office has already asked us to provide 
assistance in macroeconomic analysis and for recommendations as to 
what monetary and fiscal policies could be adopted to deal 
effectively with the current challenges.   This assistance could 
take the form of analytical reports and publications; consultation 
with U.S. experts; training workshops to improve the capacity of the 
Vietnamese Government/policy makers in macro-economic policy 
management, including development of monetary policy framework and 
better coordination among GVN agencies. 
 
¶8.  The United States could also provide assistance via U.S-Vietnam 
economic, financial and trade talks or forums.  Together with 
relevant international organizations and donors, these could help 
the GVN assess the impact of global crisis, develop capacity of 
provincial governments to develop strategies aiming at finding ways 
to integrate financial and economic, social and labor, as well as 
environmental policies in a common sustainable development approach 
for growth and investment.  This type of activity would potentially 
attract foreign and domestic businesses, and leverage resources from 
the private sector. 
 
¶9. Comment:  While Vietnam will certainly suffer from the global 
economic downturn, the reasons for increasing our bilateral 
 
HANOI 00000045  003.2 OF 003 
 
 
assistance here are broader and more compelling than easing the 
effects of the next year or two.  Vietnam is, and will continue to 
be, a key strategic partner in the region and our assistance is 
critical to its transformation.  Post reports more fully on this 
issue in Hanoi septel, "Bilateral Assistance: Our Window of 
Opportunity in Vietnam".  End comment. 
 
¶10. This cable has been coordinated with ConGen HCMC. 
 
MICHALAK