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Cablegate: Inflation a Concern but Not Out of Control

VZCZCXRO3986
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #1813 2920951
ZNR UUUUU ZZH
R 190951Z OCT 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 6544
INFO RUEHHM/AMCONSUL HO CHI MINH 3828
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS HANOI 001813

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR DBISBEE
SINGAPORE FOR SUSAN BAKER

E.O. 12958: N/A
TAGS: ECON EFIN PGOV VM
SUBJECT: INFLATION A CONCERN BUT NOT OUT OF CONTROL

REF: A) HANOI 1729

B) RANGOON 901

1. (SBU) Summary: While people are not happy about higher prices,
including double-digit percentage increases of some food staples,
there has been little commotion in Vietnam in response to rising
inflation. The strength of economic growth has mitigated the impact
of inflation, while incomes continue to rise and demand for skilled
labor remains intense. End summary.

2. (U) Inflation in Vietnam grew by 7.53% in the first nine months
of the year, and in September, it measured 8.8% year-on-year,
according to the government of Vietnam's (GVN) General Statistics
Office (GSO). The rise of food prices has been even higher, at
14.90% in September. According to the GSO, prices were up across a
broad range of goods and services, including housing and
construction materials (9.95%), medicines and health care (4.65%),
and household goods and appliances (6.37%).

NO THREAT OF PRICE SPIKES FROM SUBSIDY REMOVALS
--------------------------------------------- --

3. (U) The Vietnamese government still maintains price controls on
some goods or keeps their prices artificially low through subsidies,
but these are limited. By law, the GVN reserves for itself the
right to introduce subsidies or price controls on such as rice,
coffee and construction materials. Currently, however, the only
direct subsidies are on lubricants and diesel (currently at 39% of
the price). Like diesel, gasoline is subject to price controls but
unlike it, it is not subsidized. The state-owned retailers have
asked the GVN to raise the cap on gasoline prices because they are
selling at an 11% loss (the GVN revises the price caps about every
two months according to movements in world prices). In addition to
diesel and gasoline, there are price controls in effect on
electricity, local transportation, mail, water, telecommunications
and newspapers.

4. (U) In August, the GVN reduced the tariffs on 18 commodities and
on fuel by as much as 30% in an attempt to bring down inflation (ref
A). The measures had mixed results, reducing increases in many
categories but failing to make much of a dent on food prices.

REACTION TO INFLATION HAS BEEN MANAGEABLE
-----------------------------------------

5. (SBU) Although Vietnamese consumers and the press have decried
the price increases (with The Vietnam Investment Review calling the
CPI growth "a runaway train" on its latest issue), the public
response has been manageable. Consumer confidence remains high, and
spending in the first nine months of 2007 was $32.3 billion compared
with $36 billion in the whole of 2006, according to figures released
in October by the Vietnam Association of Small and Medium
Enterprises.

6. (U) Real GDP growth is over 8% this year and economists expect
high growth to continue, driven mainly by industrial expansion,
consumer spending and fixed investment. Incomes are also rising.
While labor demand in the second quarter of this year surged 42% on
the previous quarter, labor supply rose a mere 30%, prompting
increasing salaries, according to Vietnam's largest job website
VietnamWorks.com. Moreover, in a September 2007 report, the Asian
Development Bank predicted that inflation in Vietnam would actually
fall in 2008 (to about 6.8%).

COMMENT
-------

7. (SBU) Although inflation is at the highest rate in three years,
no one expects consumers or monks to take to the streets in protest.
In Burma, for instance, public transportation went up by 100-300%
and fuel by 60-100% in August (Ref B), while in Vietnam these
indicators remained in single digits (transportation up by 3.44%,
and fuel by 7.2%, according to GSO). UNDP figures show that Burma
has averaged 26.8% inflation for the last six years, whereas
Vietnam's has been 5.05%. Still, the GVN is concerned about any
issues, including inflation, which could negatively affect economic
growth. Continuing to implement market-oriented economic reforms,
including in its monetary policy apparatus, is the best way to
maintain Vietnam's economic development.

ALOISI

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