VZCZCXRO6511
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0138/01 0500956
ZNR UUUUU ZZH
P 190956Z FEB 09
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 9157
INFO RUEHHM/AMCONSUL HO CHI MINH 5584
RUEHGP/AMEMBASSY SINGAPORE 2750
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 000138 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS MBROWN 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
USTR FOR DBISBEE 
 
E.O. 12958: N/A 
TAGS: EINV ECON VM
SUBJECT: GVN ROLLS OUT STIMULUS PACKAGE 
 
REF: A)  Hanoi 1391 - "Further Effects of the U.S. Financial..." 
 B)  Hanoi 1196 - "VN's SMEs Thirsty for Capital" 
 
HANOI 00000138  001.2 OF 002 
 
¶1. (SBU)  Summary.  The GVN is in the process of implementing its 
stimulus package.  The package consists of three main parts; USD 1 
billion in interest rate subsidies, one-time payments to poor 
families, and reductions in the value-added, corporate and personal 
income taxes.  Additional measures are being announced on an ad-hoc 
basis by various ministries and agencies.  While some are optimistic 
that the plan may help businesses survive the economic downturn, 
others foresee implementation issues and financing concerns.  End 
summary. 
 
¶2.  (U) The GVN is beginning to implement its much-discussed 
stimulus package (reftel A).  The centerpiece of the package is USD 
1 billion in interest rate subsidies, available to all businesses 
except consumer goods importers and securities investors and 
brokers.  Commercial banks will deduct 4 percentage points from 
their ordinary lending rates and then request compensation from the 
GVN for that amount.  It will apply to new loans only and the 
subsidy will be paid for a maximum of eight months.  The program 
technically began on February 1 and will be in place through 
December 31, 2009, but no banks have applied for the subsidy to date 
because implementing directives were not released until last week. 
Banks have begun to announce "set asides" for lending at the 
subsidized rate.  The Bank for Investment and Development (BIDV), a 
state owned commercial bank, says it has up to VND 65-68 trillion 
(USD 3.73-3.91 billion) available, and may make adjustments to loan 
contracts signed before February 1.  Privately-held Asia Commercial 
Bank will lend up to VND 35 trillion (USD 2.01 billion) at the 
subsidized rate. 
 
¶3.  (U) The second part of the package, aimed at Vietnam's poorest 
citizens, provides for one time payments of VND 200,000 per person 
(about USD 11.50), but not to exceed VND 1 million (USD 57) per 
family, to families earning less than VND 1 million (USD 57) per 
year.  The GVN estimates that total cost for this fund will be about 
VND 3,800 billion (USD 217 million).  Most of these payments were 
made during the Tet holiday at the end of January. 
 
¶4. (U) The third part of the package is a 50 percent VAT reduction 
for certain sectors and industries, effective February 1 through 
December 31, 2009.  The reduction is narrowly focused on industrial 
inputs such as coal, basic chemicals, machinery, some types of 
vehicles and related components (such as engines and gear boxes), 
ships and boats, cargo handling, hotel and tourism services.  The 
GVN also enacted a 30 percent reduction in the corporate income tax 
(CIT) on small and medium sized-enterprises (SMEs) and businesses 
operating in some sectors such as agriculture-forestry-fishery, 
textile and garment, footwear and electronics.  The reduction 
applies retroactively for the fourth quarter of 2008 and for all of 
¶2009.  Some other sectors, such as machine manufacturing, building 
materials, construction and installation services, tourism, food and 
fertilizer trading may defer payment of the CIT for nine months. 
Finally, implementation of the new personal income tax has been 
delayed until May. 
 
¶5.  (SBU) In addition to the formally announced initial stimulus 
package, some ministries and agencies are beginning to develop 
complementary initiatives.  Some public investment infrastructure 
projects that were delayed last year as part of the fight against 
inflation will be revitalized in an effort to create jobs and spur 
spending, but no new funds will be allocated from either the budget 
or off-budget accounts.  In a move aimed at stimulating public 
consumption, the SBV issued a circular, effective February 1, that 
allows banks and their retail customers to negotiate borrowing 
interest rates (based on market rates) for consumer credit.  The cap 
on lending rates (150 percent of the SBV's base rate), however, is 
still in place and applies to corporate lending.  The Ministry of 
Finance has also extended the deadline for paying taxes on imported 
materials used in the production of exports by 275 days from the 
date customs procedures are completed.  Finally, Ho Chi Minh City is 
in the process of unveiling its own package, which will likely 
consist of already-planned infrastructure spending re-bundled as a 
"stimulus plan."  Several other southern provinces confirm that they 
are already reprogramming their budgets to put money into the hands 
of businesses and the poor, in addition to any stimulus funds they 
may receive from the central government. 
 
THE DEVIL IS IN THE DETAILS 
--------------------------- 
 
 
HANOI 00000138  002.2 OF 002 
 
 
¶6. (SBU) According to the Director of Macroeconomic Policy at the 
Central Institute for Economic Management (CIEM), a GVN-sponsored 
analysis and forecasting group, the purpose of the interest rate 
subsidy is to allow businesses to continue operations during what 
will likely be a difficult period, thereby preventing layoffs.  He 
doesn't foresee many businesses using the money to expand operations 
or increase investment, and expressed some doubt that commercial 
loans would find many takers even at reduced rates, saying "People 
don't even have business plans for 2009 - they just don't know what 
is coming."  He also expressed doubt about the effectiveness of the 
VAT cut, noting that sector-based reductions are difficult to 
administer and often invite fraud. 
 
¶7. (SBU) Local bankers and businesses are more hopeful about the 
program's ability to spur economic growth.  The head of Vietnam's 
SME Association thinks that the plan has the potential to make a 
meaningful difference for Vietnam's struggling SMEs, which have 
recently struggled with access to capital. (reftel B) Some bankers 
worry, however, that implementation may be challenging.  The SBV 
must still approve each loan, and if it decides that a project 
doesn't meet requirements for a subsidy, lenders are stuck with the 
4 percent loss.  The head of a foreign bank operating in Vietnam 
tells us that there is considerable pressure on banks to make 
riskier loans under the new program, and worries that a portion of 
the funds will find their way back into Vietnam's bubble-prone real 
estate market.  Finally, the interest rate subsidy will only be paid 
for eight months and does not require any structural adjustment by 
borrowers, so if the current downturn lasts into 2010, businesses 
will be no better equipped to cope with difficulty than they are 
now. 
 
COMMENT 
------- 
 
¶8. (SBU) A larger concern is how the stimulus plan will be funded. 
While there may be some funds available in the GVN coffers for the 
interest rate subsidy portion of the plan, there has been no public 
cost estimate, nor a revised state budget, that accounts for the 
revenue side of the package.  The IMF Resident Representative notes 
that the initial budget for 2009 already carried significant 
financing requirements (approximately VND 52 trillion, or USD 3 
billion, which equals 2.9 percent of GDP by international standards 
or 4.8 percent of GDP by Vietnamese standards).  A substantial 
decrease in oil revenues because of declining oil prices combined 
with falling revenues resulting from less economic activity and the 
tax cuts discussed above will result in an even larger deficit.  The 
PM recently issued a directive to the MOF to undertake a 
dollar-denominated domestic bond issuance to help cover this 
shortfall, but it's not yet clear how big (or successful) the 
issuance will be, especially with dollars in short supply on the 
local market.  For its part, MOF has been reluctant to discuss 
details of how the package will be financed, which only creates more 
questions about who is charged with balancing the books. 
 
¶9.  (U)  This cable was coordinated with Con Gen HCMC. 
 
MICHALAK