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Cablegate: Vietnam's 2007 Economy: High Economic Growth, Record

VZCZCXRO2267
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHHI #0193/01 0510931
ZNR UUUUU ZZH
R 200931Z FEB 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 7199
INFO RUEHHM/AMCONSUL HO CHI MINH 4315
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHZS/ASEAN REGIONAL FORUM COLLECTIVE

UNCLAS SECTION 01 OF 02 HANOI 000193

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV VM
SUBJECT: VIETNAM'S 2007 ECONOMY: HIGH ECONOMIC GROWTH, RECORD
FOREIGN DIRECT INVESTMENT, HIGH INFLATION

REF: 07 Hanoi 1729, 07 Hanoi 2013

HANOI 00000193 001.2 OF 002


1. (U) Summary: Vietnam's Gross Domestic Product (GDP) grew 8.5
percent in 2007, the highest economic growth rate in the last ten
years. 2007 was also a record year for Vietnam's foreign direct
investment (FDI) since the country opened its economy with USD 20.3
billion new and additional commitments. Exports continued to be
strong with USD 48.4 billion, up 21.5 percent from the 2006 level.
Imports continued to outpace exports, however, resulting in a record
trade deficit of USD 12.4 billion. Inflation surged with the
December 2007 Consumer Price Index (CPI) rising 12.63 percent
compared to December 2006. End Summary.

HIGHEST GDP GROWTH RATE IN THE LAST TEN YEARS
---------------------------------------------

2. (U) The General Statistics Office (GSO) of Vietnam recently
released its 2007 economic figures, which continue to demonstrate
the positive results of economic reform. Vietnam achieved an 8.5
percent GDP growth rate in 2007, following the previous year's
impressive growth rate of 8.2 percent. Total GDP was VND 1,143,442
billion, or approximately USD 71.5 billion. The country continued
its economic restructuring, with the industry and construction
sector being the biggest contributor to the GDP growth rate (4.3
percent), followed by the services sector (3.5 percent) and
agriculture-forestry-aquaculture (0.6 percent).

INDUSTRY AND CONSTRUCTION SECTORS
---------------------------------

3. (U) The industry and construction sectors sustained a high growth
rate of 10.6 percent. The industries with the highest growth rates
included automobile assembly (52.8 percent), air conditioners (51.9
percent), electrical engines (24.3 percent) and motor bikes (23.9
percent). The local private sector, which remains the biggest
revenue generator, grew 21% from 2006 and accounted for 37 percent
of total industrial output. The growth was largely attributable to
the increased number of new private domestic companies, a sector
which benefited from the new Enterprise Law and GVN promotion. The
state sector grew 10.3 percent (half the rate of the private
sector). The year witnessed a continued reduction of the number of
state-owned enterprises (SOEs), especially SOEs under
municipal/provincial management.

SERVICES SECTOR
---------------

4. (U) The services sector achieved 8.7 percent growth, slightly
higher than its 8.3 percent growth in 2006. The biggest
contributors to the high growth rate of the services sector were the
traditional service industries, such as hotels and restaurants which
were up 12.7 percent, and the collective group of transportation,
post and telecommunications, and tourism services, up 10.4 percent.
The rapidly expanding banking, insurance and financial services
sector also reported high growth rate of 8.8 percent.

AGRICULTURE, FORESTRY, AND FISHERY SECTORS
------------------------------------------

5. (U) The growth rate of the agriculture, forestry, and fishery
sectors stood at 3.4 percent. Agriculture production in 2007
suffered from several severe typhoons and disease break-outs. An
outbreak of blue ear disease affected the pork industry, while the
return of avian influenza in some provinces continued to suppress
both demand and supply for poultry products. High animal feed cost,
disease, and lack of food safety and hygiene controls will be
continuing challenges in Vietnam's agriculture and animal husbandry
industry.

GROWTH DRIVER: DOMESTIC CONSUMPTION
-----------------------------------

6. (U) Domestic consumption continued to be a major growth engine in
2007. Total retail sales and services revenue (about USD 45
billion) rose 23.3 percent over the 2006 level, reflecting a
burgeoning consumer economy. Many foreign direct investors now cite
the attractiveness of the local market when discussing their plans
to manufacture in Vietnam. Domestic consumption will likely
continue to expand through 2008, as salary levels rise and FDI
increases. The pay raise program for civil servants (effective from
January 2008 but discussed and announced in November/December 2007)
may also act as a demand stimulator. The Government of Vietnam
(GVN)'s salary reform plan, which is aimed at narrowing the wage gap
between foreign and domestic enterprises by 2010 through annual
increases of minimum salary for civil servants, will likely

HANOI 00000193 002.2 OF 002


reinforce the current higher consumption trend.

GROWTH DRIVER: FDI
------------------

7. (U) Part of Vietnam's high GDP growth stemmed from a high level
of FDI, which reached USD 17.8 billion in new registered capital,
more than double that of 2006 (USD 7.6 billion). In addition, USD
2.5 billion was added to 379 existing projects, making up a total of
USD 20.3 billion FDI committed to Vietnam in 2007, a record level
since the country began the "doi moi" or economic renovation process
in 1986. Foreign invested enterprises (FIEs) posted total revenue of
USD 39.6 billion (up 35 percent year-on-year), earned USD 19.8
billion from exports (up 36 percent), and paid USD 1.6 billion in
taxes (23 percent increase over 2006).

STRONG EXPORTS BUT EXPANDED TRADE DEFICIT
-----------------------------------------
8. (U) The country earned USD 48.4 billion from exports, up 21.5
percent over 2006. In addition to the four traditional key export
categories (crude oil, textile and garment, footwear, and aquatic
products), wood products and electronics/computers emerged as
Vietnam's new major export earners with export values reaching USD
2.4 billion and USD 2.2 billion respectively.

9. (U) Vietnam's imports in 2007 soared by 35.5 percent to USD 60.8
billion. As imports continued to outpace exports, the country's
trade deficit expanded to USD 12.4 billion, equivalent to 26 percent
of its exports or approximately 17 percent of its GDP. The United
States continues to be Vietnam's largest export market, accounting
for 21 percent of Vietnam's total exports in 2007.

HIGH INFLATION: NEW CHALLENGE
-----------------------------

10. (U) The CPI in December 2007 increased by 12.6 percent compared
to that in December 2006 (reftels), the highest level in the last
ten years. Prices of all goods and services in the price basket
went up, but food (up 21.2 percent) was the major driver of the
rising CPI, followed by prices for houses and building materials (up
17.1 percent). Prices of other goods and services rose by 1.7 to
7.3 percent. GSO attributes this inflation to supply side factors,
noting that Vietnam is still sourcing many materials for industrial
production (steel and garment manufacturing in particular). It also
points to rising fuel and non-fuel commodity prices in the world
market as having a direct impact on the prices of imported
materials.

11. (SBU) Comment: Vietnam's trade deficit is not new. The
country relies heavily on imports of intermediate inputs for some of
its export production (garments in particular). Moreover, demand
for imports of capital goods remains strong and is expected to
continue to grow for this developing country. Still, the deficit
could grow even more if there is an economic slowdown in its major
export markets. In that vein, the local IMF representative recently
cited financing of the trade deficit as a concern. He explained
that though FDI commitments to Vietnam were impressive, disbursement
remained weak (only USD 4.6 billion in 2007), meaning that the trade
deficit must have been financed by shorter term portfolio
investment. Financing the deficit could become a more serious issue
were these inward portfolio flows to slow down. The IMF does not
believe that the trade deficit has drawn adequate attention from the
GVN. End comment.

MICHALAK

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