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Cablegate: Gvn's Petrol Price Liberalization - a Short-Lived

VZCZCXRO2944
RR RUEHHM
DE RUEHHI #1475/01 2291729
ZNR UUUUU ZZH
R 171729Z AUG 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 6123
INFO RUEHHM/AMCONSUL HO CHI MINH 3552
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGP/AMEMBASSY SINGAPORE 2426

UNCLAS SECTION 01 OF 03 HANOI 001475

SIPDIS

STATE FOR EAP/MLS AND EEB/OMBA
STATE PASS USTR DAVI BISBEE
SINGAPORE FOR SUSAN BAKER

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EPET ETRD ENRG VM
SUBJECT: GVN'S PETROL PRICE LIBERALIZATION - A SHORT-LIVED
EXPERIMENT?


(U) This cable is sensitive but unclassified. Not for Internet.

1. (SBU) Summary: A May 1 Government of Vietnam (GVN) regulation on
oil and petrol management allows enterprises greater autonomy in
setting retail petrol prices. The GVN made it clear, however, that
this autonomy only extended so far - with Hanoi reserving the right
to step in if petrol price increases threatened wider price
stability. Enterprises have to "seek permission" from the GVN for
all price increases. On May 7, Vietnamese petroleum enterprises
uniformly raised gasoline prices seven percent per liter. In early
August, however, concerns over inflation prompted the GVN to cut
import tariffs, a move in part prompted by higher fuel prices. On
August 16, the GVN mandated that retailers reduce the gasoline price
by about four percent (USD 0.03) per liter to help curb inflation.
Although GVN officials claim this move is only temporary, Hanoi's
August 16 direct price intervention, and safeguards in the new
regulation show that the GVN is not willing to relinquish completely
its involvement in Vietnam's petroleum market any time soon. End
Summary.

PETROL PRICES RISE
------------------

2. (U) Under Decree 55, the new regulation on oil and petrol
management that came into effect on May 1, oil and petroleum trading
enterprises in Vietnam now have increased rights to determine retail
petrol prices. Despite this apparent loosening of government price
controls, the GVN has reserved the right to intervene if petrol
price increases threaten wider price stability. In an April 20
press conference, one day after the Ministry of Trade (MOT) and
Ministry of Finance (MOF) met with the 11 authorized - and
state-owned - petrol distributors to discuss implementation of the
new decree, then-Trade Minister Truong Dinh Tuyen clarified publicly
that the government will allow enterprises to set their retail
prices, but only in a manner that will not cause "severe impact" on
production costs and prices of products required for "daily life."


3. (SBU) A Ministry of Trade contact confirmed that during the April
19 meeting, participants discussed ways to implement the decree and
provided "guidelines" for doing business in oil and petroleum
products. These principles include: 1) avoiding upheaval and
unnecessary increases in prices of other products; 2) controlling
oil and petroleum product prices to keep the CPI at a lower rate
than the GDP growth rate; and, 3) guaranteeing stable contributions
to the State budget. Furthermore, as the decree stipulated, the
retailers must inform the two ministries prior to enacting any price
increases, with the ministries reserving the right to advise
enterprises to "reconsider their intention, if necessary," our
contact reported.

4. (U) Less than one week after receiving the new authority to
determine prices, on May 7, Vietnamese petroleum retailers uniformly
raised the gasoline price by USD 0.05 (seven percent) per liter.
News reports indicate that petroleum enterprises originally planned
a gas rate hike of USD 0.06 per liter, but settled on USD 0.05 for
the initial foray into "market pricing," following "consultations"
with the MOT and the MOF. Retail petrol prices remained at this
level, approximately USD 0.74 per liter, from May 7 until early
August.

Move Elicits Mixed Reviews
--------------------------

5. (U) The new decree, which aimed to reduce pressure on the GVN
over oil and petrol subsidies, and to allow domestic prices to align
more closely with global prices, drew a mixed reaction. Not
surprisingly, oil enterprises applauded the move to increase their
leverage over pricing schemes, but some experts worry that it is
"too early" to give businesses the power to determine prices on
their own. These experts fear that businesses could "join hands" to
fix prices and this would hurt consumers. Head of the Central
Institute for Economic Management Vo Tri Thanh publicly condemned
the decree, saying that macro-regulation was still necessary over
such an important commodity, particularly in light of Vietnam's
under-developed distribution system and the lack of competitiveness
in the retail petrol market. (Note: Of the 11 state-owned petroleum
distributors, the top three --Petrolimex with 60-65 percent market
share, Saigon Petro with 15-20 percent market share and Petec with
13 percent market share -- control the vast majority of the market.
End note.)

THE IMPACT OF PRICE INCREASES
-----------------------------

HANOI 00001475 002 OF 003

6. (U) Prices of some goods and services began to rise after
petroleum importers announced their retail price increase.
According to Nguyen Chi Trung, Deputy Head of the Management Board
of the Tran Chanh Chieu Market in Ho Chi Minh City, the price of
fresh and frozen food at wholesale markets in Ho Chi Minh City went
up by two percent; vegetable oil by five percent; cosmetics by three
percent; and pork products by five to twelve percent. Mr. Duong
Kien, Vice Manager of the Business Division of Chuong Duong Beverage
Company, said that his company is considering increasing prices by
five percent. The Hanoi Bus Station confirmed it would not raise
fares for its coaches, and warned consumers not to be cheated by bus
owners capitalizing on the fuel spike to rip off customers. Taxi
firms have not made any public announcements about fee increases,
but analysts expect current transport fees to change soon. Some
taxi companies, including government-owned Hanoi Taxi and Taxi CP,
already have raised fees for the first few kilometers of the trip.

MOF ASSURANCES
--------------

7. (U) In the face of these price increases, Nguyen Tien Thoa, Head
of the Price Control Department at the MOF, assured consumers
earlier this summer that food and foodstuff prices would not see
"big increases" in the future. Despite some liberalization of
petrol prices, the GVN still controls prices of input materials such
as power, coal, diesel and kerosene as well as airfares, railway and
bus transportation fees. Price increases for goods will not exceed
petrol price increases, Mr. Thoa stated.

8. (SBU) As the CPI rose to 6.19 percent in July and approached the
National Assembly-set annual target of 7 percent, however, pressure
mounted for the GVN to take action. Its first step was to issue the
August 3 Decision 69/2007 from the Ministry of Industry and Trade
(formed through the merger of MOT with Ministry of Industry)
reducing import tariffs on a number of consumer goods to ease the
threat of inflation. The MOF clarified that Decision 69's sharp
reduction of import tariffs on food, foodstuff, animal feed and
construction materials would only be temporary, although cuts on
fully-assembled cars, cosmetics, second-hand automobiles and
electromagnetic products are to be permanent. In an August 8
telephone conversation, MOF Taxation Policy Department Senior Expert
Ms. Mai Thi Thu Van confirmed to the Embassy that higher fuel
prices, while only one component, did contribute to the GVN's
decision to reduce import tariffs. Even as details of Decision 69
became public, however, rumors began to circulate that the GVN would
also step in to reduce retail petrol prices.

PETROL PRICES FALL
-------------------------

9. (SBU) On August 13, public buzz over petrol price cuts increased
as press reports circulated that during a weekend cabinet meeting,
Prime Minister Tan Nguyen Dzung approved an MOF proposal to cut
retail petroleum prices by about USD 0.03, or four percent, "to
contain inflation." On August 16 the government confirmed that it
would cut gasoline prices by four percent the same day, in line with
the PM-approved plan. Reports of the move hit Internet press
outlets by mid-morning, with some reporters impugning petrol
retailers for maintaining the elevated prices since May, despite
world oil prices falling over that time period. The retailers
defended their actions by reporting that they continue to incur
losses despite lower international prices. The GVN's August 16
move, however, has forced their hand and prices in Hanoi fell to the
lower, government-mandated rate by mid-afternoon that day.

10. (SBU) On August 16, MOF Price Management Bureau Deputy Director
General Ms. Nguyen Thanh Huong informed EconOff that the GVN
mandated price cuts were justified by a stipulation in the new
decree that retailers could set their prices, "with guidance and
direction from the state." That guidance and direction, she
explained, is compulsory. She pointed to the National
Assembly-approved target of holding CPI growth to under 7 percent
for the year as the reason for instituting both the import tariff
cuts earlier this month and now the mandated petrol price cuts. Ms.
Huong described the fuel price cuts as "temporary," but affirmed
that regardless of changing market conditions and/or fluctuations in
the world oil market, retailers would not be allowed to re-raise
prices until 2008, when it will be clear whether Vietnam is able to
meet its self-imposed 2007 goal of limiting consumer price
increases.

COMMENT
-------

HANOI 00001475 003 OF 003

11. (SBU) In allowing enterprises to determine gasoline prices,
Decree 55 showed positive signs of being an important step in the
direction of a market economy for Vietnam. The decree itself,
however, built in significant limitations authorizing the GVN to
intervene if it deemed necessary. Oil and petrol traders and
distributors, for example, must still report monthly on import
volumes, prices, stocks and profits. The GVN has also put a cap on
the amount of price increases per quarter. These requirements,
coupled with public statements by government officials suggested
from the beginning that the GVN remains cautious about how far and
how fast it should proceed in letting the market decide the price of
gasoline. The August 16 mandate that retailers lower prices at the
pump confirmed that Hanoi continues to have misgivings and shows
that the GVN is not willing to relinquish entirely its involvement
in Vietnam's petroleum market any time soon.

ALOISI

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