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Cablegate: Imf Speaks On Vietnam's Macroeconomic Policy

VZCZCXRO5882
PP RUEHHM
DE RUEHHI #0072/01 0180957
ZNR UUUUU ZZH
P 180957Z JAN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7029
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2479
INFO RUEHHM/AMCONSUL HO CHI MINH 4169
RUEHBK/AMEMBASSY BANGKOK 6149
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000072

SIPDIS

DEPT FOR EAP/MLS, EB/IFD, USAID/ANE, USAID EGAT/EG
BANGKOK PASS TO RDM/A
DEPT PASS USTR FOR D BISBEE
SINGAPORE FOR TREASURY S BAKER
TREASURY FOR SCHUN
DEPT PLEASE PASS FED RESERVE SAN FRANCISCO FOR A MAYEDA

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EAID ECON PREL VM
SUBJECT: IMF Speaks on Vietnam's Macroeconomic Policy

1. (SBU) Summary: The IMF Country Director for Vietnam gave a
briefing on Vietnam's macroeconomic performance for the second half
of 2007. The IMF concluded that economic growth and performance was
and will continue to be strong, but that certain macroeconomic
policies are contributing to inflation and overheating. Vietnam
needs more exchange rate and interest rate flexibility, and should
tighten banking supervision in order to control credit growth. The
Country Director does not believe that inflation will be a threat to
political stability. End summary.

2. (SBU) The IMF Country Director, Benedict Bingham, gave a
briefing to multilateral development banks and diplomats in
mid-January to discuss the results of the IMF's bi-annual
discussions with Vietnam, which were conducted in early December.
The discussions narrowly focused on macro-economic issues and were
conducted primarily with the State Bank of Vietnam (SBV). Bingham
asked that the material be kept within government circles and not
disseminated to the press.


Performance Is Strong, Maybe Too Strong
---------------------------------------

3. (SBU) The IMF delegation concluded that Vietnam's economic
performance for the latter half of 2007 continued to be robust, with
growth at approximately 8.5%. Export growth was and continues to be
solid and FDI is rising rapidly. The IMF complimented the GVN's
fiscal management capabilities. The delegation did, however, see
some signs of overheating in the second half of the year, including
inflation (which was 10% at the close of November, 12% at the end of
December) and a widening current account deficit that is
increasingly financed by short-term inflows instead of FDI and ODA.
The IMF view is that the overheating has been caused primarily by
rapid credit growth and heavy-handed management of the foreign
exchange rate to keep it from appreciating. There is also some
evidence that an increase in public sector borrowing, mostly by
state-owned enterprises (SOEs), was also a factor in the
overheating.

Monetary Policy Imports Inflation
---------------------------------

4. (SBU) The IMF further concluded that the GVN policy of keeping
the dong pegged to the dollar has led to depreciation against other
currencies in the area and amongst trading partners, leading to the
import of inflation into the domestic market. As capital inflows
increased in 2006 and 2007, the SBV was forced to intervene on a
substantial scale, while its capacity to sterilize was limited. The
resulting surge in liquidity fueled credit growth.

Advice to the SBV
-----------------

5. (SBU) The IMF delegation recommended that Vietnamese authorities
tighten monetary conditions to contain the rapid credit growth. The
primary challenge for the SBV is to reorganize its monetary policy
tools so that it is better able to respond to changes in the
economy. The IMF recommends that the SBV should: 1) gain control of
the short term interest rate and then increase that rate, and 2)
make the exchange rate more responsive to market pressures. The IMF
team focused its efforts on the SBV and reports that the SBV is
aware of these issues and agreed with the IMF recommendations.

6. (SBU) The IMF acknowledges that the SBV controls neither the
dong's valuation nor interest rates, but believes that the SBV
should try to gain more control over these rates in an effort to
control inflation. Bingham said that this debate needs to take
place across the entire GVN, and that development banks and
embassies need to carry these messages to other ministries outside
the SBV.

Better Banking Supervision Needed
---------------------------------

7. (SBU) The IMF noted that rapid credit growth was creating demand
which may lead to vulnerabilities in the banking sector. The
smaller banks were expanding credit at 70-80%, which, combined with
rapid expansion of bank infrastructure (new branches with less
experienced managers), might lead to a decline in the quality of
lending. The IMF encouraged the SBV to focus on supervision of
banks whose lending activities had become problematic, so that
"targeted intervention" was possible. The banking system needs to

HANOI 00000072 002 OF 002


be "deepened" rather than "widened" - in other words, greater
experience, but fewer banks. The SBV was also aware of this issue.

Inflation Not a Threat to Political Stability
---------------------------------------------

8. (SBU) Asked if inflation might impact political stability,
Bingham answered plainly "No." He recognized that it had become an
issue in other countries, but did not see a similar situation
arising here in Vietnam.

9. (SBU) Comment: The Ambassador hosted a dinner for a number of
economists (including Bingham) and business people shortly after the
IMF briefing. One of the topics of conversation was the Prime
Minister's recent public rebuke of the SBV governor for failing to
keep inflation down. Bingham and others did not interpret the
attack as being directed against the new governor's performance
because he has only been in office for a few months and is an old
friend of the PM. Instead, they thought the PM used the scolding to
provide political cover for initiating a change in monetary policy.
There is evidence Vietnam is indeed heeding the IMF's advice as the
SBV just announced on January 17 that it would be requiring urban
banks to raise their reserve requirements in order to control
inflation. The quandary for the PM is that a tighter monetary
policy might well come at the expense of economic growth, at least
in the short term. End comment.

MICHALAK

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