VZCZCXRO2414
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #1234/01 3230938
ZNR UUUUU ZZH
R 190937Z NOV 09
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 0445
INFO ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHHM/AMCONSUL HO CHI MINH CITY 0191

UNCLAS SECTION 01 OF 03 AMEMBASSY HANOI 001234 
 
SENSITIVE 
SIPDIS 
STATE PASS USTR FOR DBISBEE 
 
E.O. 12958: N/A 
TAGS: ECON EINT ETRD KTDB VM
SUBJECT: VIETNAM APPROVES SECOND STIMULUS PACKAGE 
 
¶1. (SBU) Summary.  Vietnam has approved a second stimulus package 
that extends and modifies elements of the existing package into 
¶2010.  This decision was hotly debated, with some economists and 
National Assembly (NA) members arguing that the danger of resurgent 
inflation outweighed any need for additional growth.  Proponents 
discounted the inflation risk and argued that the announced package 
is largely psychological, with a value much smaller than the prior 
stimulus.  Additional stimulus, however, risks putting increased 
pressure on the local currency.  This step suggests that internal 
political pressures to reach GDP growth targets continue to be 
stronger than concerns for price stability.  End summary. 
 
 
 
The Rationale for Stimulus 
 
 
 
¶2. (U) After much debate, on October 30 the GVN announced that it 
would extend its stimulus plan into 2010 to ensure the steady 
recovery of the economy.  This decision was premised on several 
assumptions:  (1) the recovery of the world economy will be slow 
and uncertain; (2) domestic enterprises need a soft landing from 
the interest subsidies provided under the earlier stimulus; (3) the 
consumer price index (CPI) increase in 2010 is unlikely to exceed 
10%; and (4) continued stimulus will not further significantly 
burden the budget as only 70 percent of previously budgeted 
stimulus funds have been disbursed. 
 
 
 
The Stimulus Package 
 
 
 
¶3. (U) The size and details of this second stimulus are not 
completely clear, but will likely be much smaller than the first 
package.  The first package included four components: subsidized 
lending, public investment, tax breaks and social spending. 
Subsidized lending for short-term working capital, because of its 
immediate impact, was seen as the core of the first package and 
will be continued through the first quarter of 2010.  However, the 
GVN will reduce the interest rate subsidy from 4 percent to 2 
percent.  Interest rate subsidies provided for medium- and 
long-term credit will also be extended at the reduced subsidy. 
However, in response to calls for stricter supervision of the 
second package, this extension will focus on medium- and long-term 
credit for infrastructure investment, particularly in agriculture, 
labor-intensive industries, export-oriented enterprises and small 
and medium enterprises. 
 
 
 
¶4. (U)  Following the initial announcement, more recent statements 
have been vague about the scope and duration of the extension of 
the lending subsidies beyond the first quarter of 2010, stating 
only that the State Bank of Vietnam and the Ministry of Industry 
and Trade will consider and make recommendations later on 
continuing the subsidies.  The second stimulus will not extend 
further tax reductions and exemptions, including corporate income 
tax, value added tax and personal income tax.  Deferring of 
corporate income tax, however, will be permitted for an additional 
three months beyond the end of this year. 
 
 
 
Stimulus Dissent from the National Assembly 
 
 
 
¶5. (U) Despite expectations to the contrary, the second stimulus 
package was not sent for NA review prior to its announcement. 
Following the announcement, on November 2, Dinh Van Nha, Vice 
Chairman of the Budget and Finance Committee of the NA, told 
journalists that the second stimulus would not be implemented until 
it gets NA approval.  In a press interview on November 4, Nguyen 
Duc Kien, Vice Chairman of the National Assembly said that, "we 
should not launch a second stimulus at this point of time," and 
that, "the National Assembly has not been informed of the source of 
funding."  In addition, both the Finance and Economic and Budget 
Committees of the NA recommended stopping subsidized lending as 
scheduled on December 31.  While the GVN has made assurances that 
it can finance additional stimulus, funding was not included in the 
new budget recently approved by the National Assembly.  Despite the 
 
HANOI 00001234  002 OF 003 
 
 
NA's statements, it is likely that the package will go forward. 
 
 
 
¶6. (SBU) A National Assembly member from Ho Chi Minh City (HCMC) 
who serves on the Finance and Economic Committees told the Consul 
General that, while the first stimulus package may have played a 
role in avoiding an even worse slowdown, it did not reach its 
intended target of small and medium enterprises (SMEs).  Based on a 
review conducted by the NA, he estimated that 80% of all subsidized 
loans went to large SOEs or joint ventures of SOEs.  The majority 
of the remainder went to large private companies, with only about 
two percent of the total reaching SMEs.  He believes that moves to 
extend the subsidy have more to do with propping up SOEs than with 
helping the economy as a whole.  He expressed his fear that the 
true cost of supporting the SOEs will be felt both in inflation in 
the second half of 2010 and in a continuing decline in investment 
effectiveness in Vietnam. 
 
 
 
IMF Opposition to Further Stimulus 
 
 
 
¶7. (SBU) The International Monetary Fund (IMF) had hoped for no 
second stimulus package and was disappointed by this step, citing 
the risks for future inflation.  The IMF had recently recommended 
to the GVN: (1) an orderly exit from the stimulus; (2) early 
monetary tightening; and (3) reassurance of a conservative 
(non-expansionary) fiscal policy.  IMF Resident Representative 
Benedict Bingham told Econoff that he believed this choice was 
primarily a response to the political pressures of the upcoming 
2011 Party Congress, as well as to continuing uncertainties 
regarding global growth.  Bingham also said that the GVN is betting 
on being able to prevent any serious balance of payments problems 
by: (1) increasing exports; (2) increasing FDI inflows; and (3) 
seeking better portfolio (indirect investment) inflows that will 
stick. 
 
 
 
¶8. (SBU) The IMF thinks that the chief risks for future 
macroeconomic instability come from rising inflation and pressure 
on the foreign exchange market.  Bingham noted that the World Bank 
and Asian Development Bank share the IMF's concerns regarding the 
GVN's balance of payments.  Bingham stated, however, that the 
greatest pressure on the local currency is not from the GVN's 
weakening balance of trade or lower remittances, which together 
account for only a $1.9 billion drop in Vietnam's foreign exchange 
reserves, but from the "other" private capital outflows of some 
$3.3 billion during the first half of 2009.  Bingham states that 
this outflow likely resulted from private "portfolio shifts" from 
Vietnamese dong into dollars and gold, resulting from: (1) 
uncertainty, (2) perceptions of a risk of devaluation, and (3) the 
GVN's economic stimulus, particularly the interest rate subsidy, 
increasing the supply of dong, and undermining confidence in the 
currency. 
 
 
 
Private Sector Wants the Psychological Impact of Another Stimulus 
 
 
 
¶9. (SBU) In the Southern Key Economic Zone (SKEZ) including Ho Chi 
Minh City, Binh Duong, Dong Nai and neighboring provinces, most 
foreign-invested company managers say the direct benefits of the 
stimulus package have been directed to the state-owned enterprises 
and the clients of the state-owned commercial banks.  They want a 
stable macroeconomic environment and worry that stimulating growth 
will lead to inflation and other problems associated with a rising 
cost of living, such as the worker wage strikes at manufacturing 
companies in 2008.  In contrast, investment fund managers support a 
second stimulus package that will create additional growth, arguing 
that the proposed package is small and much of the possible 
inflationary pressure would be offset by taxes scheduled to come 
back into effect early next year.  Others in HCMC's private sector 
argue that there is now a capital shortage in Vietnam that 
additional stimulus will help relieve.  Most agreed that because 
the proposed second package is considerably smaller than the first, 
it will primarily have a psychological effect. 
 
HANOI 00001234  003 OF 003 
 
 
¶10. (SBU) Comment.  The political interest in strong GDP growth at 
this point appears to have overcome the economic argument for 
ending economic stimulus.  Concern over the financial health of 
some of Vietnam's largest SOEs, who could be helped by continued 
subsidized interest rates, could have also played a role in the 
decision making process.  At the same time, the reduction of the 
interest rate and the phasing out of tax breaks likely indicates 
that decision-makers are not ignoring inflation concerns and think 
they can control inflation in 2010.  End comment. 
Michalak