VZCZCXRO4128
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #0682/01 2040159
ZNR UUUUU ZZH
P 230159Z JUL 09
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 9922
INFO RUEHHM/AMCONSUL HO CHI MINH 6022
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000682 
 
SENSITIVE 
SIPDIS 
 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV KTDB VM
 
SUBJECT:  GVN TO CONTINUE ECONOMIC STIMULUS AS INFLATION CONCERNS 
MOUNT 
 
HANOI 00000682  001.2 OF 002 
 
 
¶1. (SBU) Summary: Vietnamese financial officials told visiting 
Treasury Department Director of South & Southeast Asia Malachy 
Nugent on July 15 that the government's economic stimulus plan had 
helped buffer the impact of the global downturn.  They said the GVN 
for now had decided to continue its stimulus package until the end 
of the quarter given continuing uncertainty about the global 
economy.  However, it recognized that the stimulus had created 
growing inflationary and currency risks.  Funding of the government 
deficit remained a concern.  The IMF Representative said he doubted 
actual stimulus spending would reach announced levels but expressed 
concern that recent credit growth could increase NPL's over the 
medium term.  End summary. 
 
SBV: Stimulus Successful, Inflation a Concern 
-------------------------------------------- 
 
¶2. (SBU) State Bank of Vietnam (SBV) Vice Governor Nguyen Van Binh 
briefed Nugent on Vietnam's struggle with inflation last year and 
the subsequent impact of the global slowdown on Vietnam's export 
demand and output levels.  Binh lauded the effectiveness of the 
GVN's stimulus package and highlighted its contribution to the 
improvement in second quarter GDP.  He asserted that the interest 
rate subsidy had been critical to increasing credit growth from 
negative figures during the first several months of this year to 17 
percent growth by the end of the first half.  He did, however, note 
that the SBV is closely monitoring the impact of the stimulus on 
inflation and the negative pressure it has put on the Vietnamese 
dong.  He said the GVN plans to gradually reduce the stimulus 
program when there is evidence the Vietnamese economy is returning 
to its natural growth path.  Monetary policy would be "flexible but 
prudent."  He foresaw a budget deficit this year of about 5 percent 
of GDP and said there were positive signs the GVN would not have to 
use all of the announced $8 billion stimulus package. 
 
¶3. (SBU) In response to Nugent's inquiry about the impact of recent 
credit growth on the volume of Non-Performing Loans (NPLs)in the 
banking system, Binh expressed confidence in the underwriting 
standards of the State banks as well as the prudence and caution 
exercised by the growing number of commercial banks.  He noted that 
the SBV tracks NPLs very closely, adding that they were 2.85% for 
the first half of 2009 with worse case scenario predictions of 4.0% 
for the entire year.  Binh cited the GVN's experience during the 
Asian financial crisis, when it successfully managed significant 
NPLs and bank closures despite a lack of formalized procedures. 
However, he admitted that "legal structures and procedures are 
lacking."  He said pending financial legislation would help address 
these weaknesses and permit the government to legally take over 
failed institutions. 
 
¶4. (SBU) Nugent concluded the meeting by providing a brief U.S. 
macroeconomic update and reiterated Treasury's commitment to assist 
the continued development of Vietnam's financial institutions.  Binh 
responded that the SBV welcomed additional technical assistance on 
anti-money laundering, the development of its capital markets and 
banking activities, as well as additional human resource training. 
 
MOF: Funding the Rising Deficit is Problematic 
--------------------------------------------- - 
 
¶5. (SBU) Ministry of Finance Banking and Financial Institutions 
Deputy Director Nguyen Ngoc Anh provided a brief summary of current 
economic conditions and hailed the success of the GVN's stimulus 
plan at buffering the impact of the global downturn.  He said the 
GVN had heard the concerns expressed about a revival of inflation 
and had debated internally whether to begin dialing back the 
stimulus program.  It had decided to maintain the program until the 
end of the current quarter given significant uncertainty about the 
global economic outlook. 
 
¶6. (SBU) Anh noted that funding the stimulus remains a challenge and 
that the fiscal deficit could reach as high as 7.0% of GDP in 2009. 
Anh noted the successful offering in Vietnam of $230 million of 
dollar denominated bonds but the failure this year of Vietnamese 
dong offerings.  In coordination with the SBV, the MOF has explored 
international issuance and concluded that foreign investors "are 
just not ready" and costs would be too great.  Anh said the GVN 
could in part fund its deficit by using funds already allocated but 
not yet spent.  He said, "We will look in our pockets first before 
we borrow more." 
 
¶7. (SBU) Anh expressed confidence in the health of the Vietnamese 
banking sector.  He said he was not concerned with increased credit 
growth or risks presented by NPLs.  The SBV has been very outspoken 
regarding loan quality and has done extensive auditing of Vietnam's 
financial institutions.  In response to a question, Anh said the 
 
HANOI 00000682  002.2 OF 002 
 
 
latest draft Law on Credit Institutions that contained a lending 
limit for individual commercial bank clients did not discriminate 
against foreign banks.  The MOF believed the requirement was 
necessary given recent experience with the financial crisis and 
concerns about the strength of foreign financial institutions like 
AIG. 
 
Think Tank: Significant SOE Reform Needed 
-------------------------------------- 
 
¶8. (SBU) President Nguyen Quang A of the Institute of Development 
Strategy detailed the changes in economic policy over the last 18 
months and expressed concern that the current overextension of 
credit could lead to significant inflation in 2010 if the economy 
overheats and world commodity prices rebound.  He asserted that 
Vietnam's significant fiscal deficit is not unavoidable as the GVN 
claims, but is, rather, largely a result of inefficient use of 
capital by SOE's.  He noted that there are deep rooted problems in 
the economy and that long term strategies and reforms are needed. 
At the same time, he said that continued rapid growth of the private 
economy would reduce the role and significance of the SOE's over 
time. 
 
NFSC: Banks Remain Healthy 
--------------------------- 
 
¶9. (SBU) National Financial Supervisory Committee Chairman Le Xuan 
Nghia said that the global financial crisis has had little impact on 
Vietnam's financial institutions because they are still 
underdeveloped and not highly integrated into the global market.  He 
stated that depositors remained confident in Vietnam's banks due to 
an implicit 100% guarantee provided by the government and that the 
sector has only felt minor liquidity strain.  Nghia said that bank 
profitability remains strong and that ratios such as capital 
adequacy, NPLs, return on equity, and return on assets are stable 
and not of concern.  Nghia stressed that Vietnam's financial 
supervisors are more conservative than those in other countries and 
focus more on risk management and protection of depositors' 
interests, rather than the interests of shareholders. 
 
IMF: Political Pressures Drives Stimulus 
---------------------------------------- 
 
¶10. (SBU) IMF Country Representative Ben Bingham told Nugent that in 
its stimulus plan the GVN had to provide sufficient stimulus without 
sparking concern among market participants about deficits and local 
currency strength.  The GVN had announced between $8 and $9 billion 
in stimulus, but it remained unlikely the total amount dispersed 
would reach those levels.  There was political pressure to appear 
aggressive in the wake of the global economic downturn.  However, 
current budget constraints were unlikely to permit the levels of 
stimulus discussed. 
 
¶11. (SBU) Bingham said he expected the banking sector to remain 
stable for at least the next six to twelve months.  However, as the 
private banking sector continues to develop and modernize, Vietnam 
will need to develop a more robust regulatory structure.  The few 
audits that are performed are inadequate and there are virtually no 
structures in place to address problem banks.  The IMF believes the 
GVN's estimates of NPLs remain too low and that actual loan 
performance is significantly worse.  Furthermore, Bingham said he 
expected significant credit growth over the last six months will 
have a negative impact on NPLs in the medium term. 
 
¶12. (SBU) Comment.  GVN financial officials appear to have heard the 
recent warning messages from the private sector and IFI's regarding 
growing inflation and currency risks created by the stimulus 
package.  While the GVN has not yet said it will start unwinding its 
expansionary measures, it seems to be taking steps to rein in credit 
growth.  On July 16 SBV Governor Nguyen Van publicly noted 
inflationary dangers, announced that the SBV would monitor bank 
lending more closely, and directed that credit institutions tighten 
lending to real estate and stock investors, as well as to consumers. 
 He stated that lenders should focus instead on extending loans to 
small and medium-sized enterprises to boost production. 
 
¶13.  This message was cleared by Office Director Nugent.