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Cablegate: Pm Declares War On Inflation, Wb Still Optimistic On

VZCZCXRO9883
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHHI #0377/01 0920938
ZNR UUUUU ZZH
R 010938Z APR 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 7526
INFO RUEHHM/AMCONSUL HO CHI MINH 4528
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION

UNCLAS SECTION 01 OF 02 HANOI 000377

SIPDIS

SENSITIVE
SIPDIS

SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR BISBEE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV VM
SUBJECT: PM DECLARES WAR ON INFLATION, WB STILL OPTIMISTIC ON
ECONOMIC OUTLOOK

REF: A) Hanoi 206 ("Frozen Assets");
B) 07 HANOI 1929 ("Authorities Scramble To Stay Above Water");
C) Hanoi 193 ("Vietnam's 2007 Economy");
D) 07 Hanoi 1729 ("Vietnam's Inflationary Conundrum");
E) 07 Hanoi 2013 (Inflation Hit 10 Percent)

HANOI 00000377 001.2 OF 002


1. (U) Summary: With inflation in Vietnam hitting 19.4 percent
year-on-year for March, the Prime Minister has very publicly made
lowering inflation on of his top priorities, and has just released a
seven-point plan to ease inflationary pressures. Despite the
domestic macroeconomic challenges and the current global economic
slowdown, the World Bank is optimistic that Vietnam will continue to
attract significant foreign investment in 2008. End summary.

2. (U) Vietnam's General Statistics Office reported on March 25
that inflation has reached 19.4 percent year-on-year for March, up
from 15.7 percent in February. The news prompted a flurry of action
by the Government of Vietnam (GVN), including the release of a
seven-point plan to fight inflation and the statement on March 31
that fighting inflation was now one of the GVN's top priorities,
placed above meeting the nation's economic growth targets for 2008.
The World Bank also met with the Prime Minister to share its views
on Vietnam's macro-economic situation and to recommend a course of
action.

PRIME MINISTER'S SEVEN-POINT PLAN

3. (U) On March 28, perhaps in an effort to prepare the public for
some economic belt tightening, the Prime Minister (PM) revised the
estimate for 2008 economic growth from 9 down to 7.5 percent. A few
days later, on March 31, the PM released his seven-point plan to
fight inflation, calling for coordinated efforts by all agencies at
all levels and noting that the plan would "exact a price" on the
country's economic growth. The first measure will be to further
tighten monetary policy to reduce money supply and credit growth,
but without restricting legitimate foreign exchange available for
production and export activities. The second measure will be to cut
down on State Budget expenditures and to control "investments of
State Owned Enterprises (SOEs)". (Note: This second clause is
perhaps the most critical, as SOEs have been borrowing heavily from
commercial banks in 2007 and early 2008.)

4. (U) The third measure will focus on the development of
agriculture and industry to "reverse the adverse consequences of
inclement weather and disease on food supplies" (REFS A, B). The
Plan notes that food "production development is key to increasing
supply for in-country use and export." (Note: A significant
portion of Vietnam's inflation is driven by rising food prices.)

5. Similarly, the fourth measure looks to find a balance between the
supply and demand of goods to increase exports and reduce the trade
deficit. The plan specifies that the GVN will not increase fuel and
petrol prices before June 2008 and caps rice exports at four million
tons. This measure also holds that the GVN will apply a "flexible
exchange rate with an appropriate trading band...without impacting
exports." Finally, in classic GVN-speak, the plan asks businesses
to "increase exports and control imports to balance trade." To that
end, PM Dung said that import tariffs for non-essential goods would
be raised in a manner consistent with Vietnam's WTO and other
bilateral commitments. (Note: Vietnam's trade deficit more than
tripled in the first quarter of 2008, reaching $7.37 billion. It is
not clear how the last part of this measure will be implemented in
the short term, as Vietnam's exports are still heavily dependent on
imported materials and machinery.)

6. (U) The fifth measure asks GVN and provincial offices to cut ten
percent of their administration expenses, and calls for private
sector businesses to do the same. Citizens are encouraged to save
fuel and energy in their daily activities. Measure six notes that
"market management should be further supervised" to avoid
speculation and smuggling, especially in key goods such as petrol,
cement, steel, medicine and food. Finally, measure seven indicates
that the GVN will implement social welfare policies and increase
salaries and allowances to help citizens cope with rising prices.

WORLD BANK OFFERS ITS OWN SOLUTIONS

7. (U) The World Bank (WB) conducted a roundtable on Vietnam's
macroeconomic situation with the Prime Minister on March 20, and
then made its points public in a forum on April 1. In his
presentation, Lead Economist for Vietnam Martin Rama noted that
inflation, a growing current account deficit, and the real estate
bubble all indicate that Vietnam's economy is overheating. Rama
made clear that it would be difficult to maintain Vietnam's

HANOI 00000377 002.2 OF 002


"impossible trinity" of controlling interest and exchange rates in
the face of rising capital inflows (REF C-E) and offered some
concrete steps to ease inflationary pressures.

8. (U) Rather than lending caps on banks to cool the real estate
market, the WB feels that an earlier introduction of the planned
property tax would be advisable, perhaps combined with a tax on
short-term capital gains from land. A property tax would reduce
speculation without creating distortions in the market like those
seen as a result of the securities cap implemented in 2007. Rama
noted that such a tax might also make government bonds more
attractive to investors, thereby allowing the State Bank of
Vietnam's (SBV) "sterilization" of currency inflows more to be more
effective. (Note: The property tax is not scheduled to be rolled
out until 2009, but the mere mention of it in the press last fall
caused a brief but noticeable drop in property prices.)

9. (U) The WB also advised Vietnam to adopt a more modern
management style for funds held by state agencies, specifically
those held by Vietnam Social Security (VSS). VSS has approximately
$4 billion in pension funds, and is accumulating at a rate of one
billion a year. The WB suggests that VSS purchase bonds on the
domestic market, rather than forcing the SBV to mop up liquidity
through compulsory bond purchases. Rama cautioned SOE's against
questionable investments, noting their role in credit growth.
Finally, the WB advised the GVN to de-link from the U.S. dollar, and
recommended instead that it reference a "basket" of currencies which
would help it respond to regional inflationary pressures.

WORLD BANK POSITIVE ON VIETNAM'S FUTURE

10. (U) Despite the macroeconomic challenges, the WB believes
significant foreign investment in Vietnam will continue through 2008
and sees a "low probability" of capital flight. The WB is
forecasting between 7.5 and 8 percent GDP growth for Vietnam in
2008, and between a 10.1 and 10.8 percent increase in FDI. The Bank
does not expect VN to be amongst the most "directly affected" by the
global slowdown, and instead believes that VN will gain market share
as it is not a margin producer like some countries. Rama noted
that low dollar interest rates will likely create a liquidity surge
which could result in an influx of short-term capital for Vietnam
and stressed that better tracking of capital flows is needed.

POLITICAL ANGLE - THE PRIME MINISTER SPEAKS

11. (U) Prime Minister Dung returned from an extended overseas trip
last month to a nation seriously rattled by inflation, which
continued to increase rapidly even after the early February Tet
holiday, when prices traditionally spike. This, combined with
continuing problems in the equity markets and unsettling
fluctuations in the currency's value against the dollar, catapulted
economic issues to the top of the government's agenda. Dung's
advisers have told us that he understands that he must be seen as in
control and taking action, and the very public March 31 rollout of
the "plan" is definitely part of an effort to influence popular
psychology. The U.S. economic slowdown is cited as influencing
Vietnam's current situation, but, to its credit, the GVN is not
sugar coating its domestic economic problems. The GVN knows that
its legitimacy rests to a large degree on its economic performance,
and is appropriately concerned that a further deepening of current
problems could undermine its support.


MICHALAK

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