VZCZCXRO5181
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0262/01 0790653
ZNR UUUUU ZZH
P 200653Z MAR 09 ZDK
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 9363
INFO RUEHHM/AMCONSUL HO CHI MINH 5700
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 000262 
 
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: VIETNAM'S BUDGET SQUEEZE 
 
REF:  Hanoi 138 ("GVN Rolls Out Stimulus Package") 
 
HANOI 00000262  001.4 OF 002 
 
 
¶1. (SBU) Summary:  In light of the global economic downturn, the GVN 
is in the process of revising its 2009 budget to reflect decreasing 
revenues and increasing expenditures.  Although the budget deficit 
is not yet public, the GVN plans to finance the shortfall through 
increased bond issuances and additional ODA support.  Given the 
GVN's history of failed bond issuances and the lack of clarity on 
how much will be needed, concern remains that the GVN is not 
adequately preparing to meet its financing needs.  Its ability to 
implement additional economic stimulus will also be limited.  End 
summary. 
 
 
Deficit is Growing, But By How Much? 
----------------------------------- 
 
¶2. (SBU) During a March 9-13 visit to Hanoi and Ho Chi Minh, 
Singapore-based Treasury Attache and Econoffs discussed the budget 
situation with Government of Vietnam (GVN) officials, think tank 
economists, and private bankers.  Ministry of Finance (MoF) budget 
officials said that the original 2009 budget carried significant 
financing requirements of approximately VND 52 trillion, or $3 
billion (2.9% of GDP by Vietnamese standards or 4.8% of GDP by 
international standards - reftel).  The 2009 budget was made in 
October, 2008, using what now look like optimistic assumptions of 
6.5% GDP growth, trade growth of 13%, inflation of 15% and oil at 
$60 per barrel. 
 
¶3.  (SBU) MoF officials admitted that 30% of their revenue comes 
from a percentage tax on oil exports, which will immediately fall as 
the price of oil falls.  Roughly another 30% of revenue comes from 
taxes on trade, and was already expected to fall as WTO commitments 
were implemented, but now has been doubly hurt by the decrease in 
trade due to the global slowdown.  Some costs of Vietnam's stimulus 
plan, including delaying the introduction of the new personal income 
tax, lowering the corporate tax rate and cutting the value-added tax 
rates for some items will affect revenues adversely but the precise 
figures are not yet known (Reftel).   The MoF is working on a 
revised 2009 budget for approval by the GVN this month and 
submission to the National Assembly in May, but off-the-cuff figures 
in the press project a $5.3 billion budget shortfall.  The IMF 
estimates that the deficit will increase to over 8% of GDP by 
international standards if current conditions hold. 
 
So How to Pay the Bills? 
------------------------ 
 
¶4. (SBU) It is difficult to predict what effect the stimulus package 
will have on economic growth and therefore revenue given the 
complexity of the Vietnamese tax system.  The Acting Country 
Director of the World Bank notes that roughly 9% of GDP is held in 
various government bank accounts by the provincial governments as a 
way to self-insure against changes in budget allocations.  He 
believes that urging the provinces to spend these funds could help 
stimulate the economy.  (Comment:  Provinces are not likely to 
comply with this suggestion during economically difficult times, 
when budget revenues are already unpredictable.) 
 
¶5. (SBU) As for other revenue options, MoF budget officials 
suggested that the GVN could raise the fuel tax (which was lowered 
to 0% last year during the height of inflation and rocketing global 
oil prices) but does not have current plans to do so.  MoF is not 
able to tap any privatization proceeds or dividends from "equitized" 
(partially privatized) companies, as these items now accrue to the 
State Capital Investment Corporation (SCIC), not to the budget, and 
SCIC has not made any transfers to the budget.  MoF is, however, 
considering a postponement of the 20% increase in government 
salaries scheduled for April. 
 
Bonds - .007 Percent? 
--------------------- 
 
¶6. (SBU) The GVN's usual method of financing, debt issuance, also 
appears to be its favored solution now, but is not without 
complications.  The GVN is seeking the National Assembly's approval 
to issue an extra VND 11.5 trillion ($676 million) in bonds, which 
would bring the total debt issuances scheduled for 2009 to VND 55 
trillion ($3.2 billion).  The new head of the External Finance and 
Debt Management Department at the MoF, Nguyen Thanh Do, highlighted 
the need for more domestic debt issuances this year but lamented the 
failure of their 2008 fund raising efforts.  Due to lack of 
realistic pricing expectations, the GVN only raised about half of 
 
HANOI 00000262  002.2 OF 002 
 
 
their target in the domestic bond market in 2008.  For example, he 
said, when interest rates were at 17-18%, the GVN (specifically the 
MoF's Banks/Non-Banks Department, which sets borrowing policies) 
capped the offers they would accept at 9.5%. 
 
¶7. (SBU) Dr. Do was hopeful that this year the rate cap will be 
replaced with an auction system, to reflect more market based 
pricing.  An ex-MoF official at an influential think tank also 
argued that the GVN needs to be more realistic about the cost of 
raising funds and move to an auction mechanism for bonds.  He said 
that he expected 60-70% of the deficit to be domestically funded, 
partially via bonds denominated in dollars, and 30-40% to be 
external debt at concessional rates. 
 
¶8. (SBU) The concept of dollar-denominated bonds continues to be 
controversial.  Dr. Do expressed concerns about the short run impact 
on foreign exchange liquidity and the medium term impact on 
dollarization that the proposed domestic dollar bond would cause. 
He said that officials had been swayed by a State Bank of Vietnam 
(SBV) report that the domestic banks had surplus dollar liquidity of 
around $2 billion.   They have had exploratory discussions with four 
large state-owned commercial banks (SOCBs), who have indicated that 
they could buy $300 to $400 million each. 
 
¶9. (SBU) While Dr. Do said these were indications of interest, not 
concrete offers, it seems likely that the SOCBs will each be 
allocated a portion of the funds.  Dr. Do believed the offering 
would be priced by auction, and that the MoF will sell the foreign 
exchange proceeds to the SBV to increase its foreign exchange 
reserves.  The SBV will then use these reserves to improve 
liquidity.  (Note: Moving the dollars around on-shore from the SOCBs 
to the SBV will not increase total dollar liquidity in the system, 
but other sources have told us that the SOCBs are being told to pay 
for the bonds by liquidating off-shore accounts held in dollars, 
which if true, could help increase foreign exchange reserves at the 
SBV.) 
 
¶10. (SBU) Staffers at the SBV's Monetary Policy and Forecasting 
divisions were also concerned about the idea of a U.S. dollar 
domestic bond because excessive dollarization of the domestic 
economy undermines their ability to manage monetary policy and 
increases the risk for the financial system.  The staffers contended 
that dollar liquidity in the banking system had improved, although 
private bankers in HCMC scoffed at the idea that they could freely 
trade the currency within the band set by the SBV.   Bankers agreed 
that liquidity had improved somewhat, but dismissed the idea that 
the market was functioning freely or that the SBV was defending the 
band effectively. 
 
ODA To The Rescue? 
----------------- 
 
¶11. (SBU) The GVN realizes that it will not be able to cover its 
entire budget shortfall through bond issuances.  Dr. Do thought the 
ADB would be able to increase its loans to Vietnam this year by $300 
million and that the World Bank could increase its budget support 
funding to Vietnam by around $1 billion through regular processes, 
using normal commercial terms.  The World Bank confirmed that it 
could frontload some of its $1.5 billion in authorized lending for 
the next three years to increase budget support by about $1 billion 
in 2009.  ADB says it is discussing the possibility of a joint loan 
package with the World Bank that would total $1 to 1.5 billion of 
direct budget support. 
 
Comment 
------- 
 
¶12. (SBU) Until a revised budget is released, it is difficult to 
know exactly how much of a shortfall the GVN will have this year. 
Theoretically, $1.5 billion in extra ODA plus $3.2 billion in bond 
issuances might allow the GVN to eke by, but that assumes it can 
actually issue bonds successfully.  Given MoF opposition to offering 
market rates and the global aversion to risk during the economic 
downturn, such success is highly unlikely.  These budget constraints 
will also limit the GVN's ability to add additional stimulus should 
the current package prove ineffective or should the economy 
deteriorate further. 
 
¶13. (U) This cable was coordinated with Con Gen HCMC. 
 
MICHALAK