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Cablegate: Mof and Sbv Discuss Plan to Fight Inflation

VZCZCXRO4900
PP RUEHHM
DE RUEHHI #0572/01 1360902
ZNR UUUUU ZZH
P 150902Z MAY 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7835
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2604
INFO RUEHHM/AMCONSUL HO CHI MINH 4728
RUEHBK/AMEMBASSY BANGKOK 6348
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000572

DEPT FOR EAP/MLS, EB/IFD, USAID/ANE, USAID EGAT/EG
BANGKOK PASS TO RDM/A
USTR FOR BISBEE
SINGAPORE FOR TREASURY SBAKER
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: MOF AND SBV DISCUSS PLAN TO FIGHT INFLATION

REF: A) Hanoi 377 ("PM Declares War On Inflation");

B) Hanoi 530 (PM Minister Floats Inflation Measures)

1. (U) Summary: The Ambassador met with State Bank of Vietnam
(SBV) Governor Nguyen Van Giau and Finance Vice Minister Tran Xuan
Ha on May 14 to discuss Vietnam's current macro-economic situation,
including implementation of the Prime Minister's seven-point plan to
fight inflation (Reftels). Separately, both confirmed that the
Government of Vietnam's (GVN) top priority is controlling inflation.
The Ministry of Finance (MOF) and the SBV are in the process of
making recommendations to the Prime Minister on credit growth,
banking, and limiting the expansion of state-owned enterprises.
Vice Minister Ha also assured the Ambassador that the MOF plans to
consult with industry before implementing the special consumption
tax. End Summary.

GOVERNOR GIAU ON BANKING
------------------------

2. (U) During his meeting with the Ambassador on May 14, SBV
Governor Giau cited the drop in inflation from 2.9 percent in March
to 2.2 percent in April as evidence that inflation is "under
control." He acknowledged that liquidity and credit growth in the
banking sector must be controlled, while cautioning that the credit
system was not well developed so its "stability must be maintained."
Giau clarified that the SBV was focusing on newly established banks
with limited expertise and capacity. (Comment: These banks have
been borrowing money on the inter-bank market, traditionally a short
term money source, and lending the money out for long-term property
loans, leading to a "maturity mismatch." As a result, the SBV
recently announced plans to inject liquidity into these banks at an
interest rate of 7.5 percent.)

3. (U) The Governor did not see a need to merge some of these newer
banks into more experienced institutions, and said only that they
have asked the banks to "follow the law" and operate within their
capacity. When pressed, he admitted that credit growth had been too
high but that the GVN would "take measures" to control the issue.
He said he was scheduled to meet with the PM on May 15 and that the
measures would be made public following that meeting. He mentioned
that two new joint stock banks would be licensed in the near future,
stating that these would "significantly impact the credit
situation."

CONTROLLING EXPENDITURES
------------------------

4. (U) On the fiscal side of the PM's plan, the Governor said that
Vietnam's provincial governments have received instructions to
revise their budget and expenditure plans. The provinces will
report those revisions to the Ministry of Planning and Investment
(MPI) in May, and MPI will then report that information to the PM.
He added that the central government ministries were also working on
similar revisions to their budgets.

5. (U) MOF Vice Minister Ha addressed the issue of rapid expansion
by State-Owned Enterprises (SOEs). He admitted that some of the
SOEs had grown too rapidly, often expanding into businesses outside
of their core area of expertise, especially into areas such as
banking, securities, and insurance. He said these areas were very
specialized, and carried a significant risk for SOEs lacking
relevant experience. As a result, Ha said, the MOF had submitted a
proposal to the PM that would limit non-core expansion of the SOEs
to 30 percent of their capital (which is supplied by the GVN when
the entity is formed). He stated that the MOF was "hoping that the
GVN would approve the recommendation and give instructions to the
SOEs to implement it" in the near future.

SPECIAL CONSUMPTION TAX
-----------------------

6. (U) At MOF, the Ambassador raised the GVN proposal to revise its
special consumption tax regime, especially affecting the liquor and
automotive industries. The Ambassador urged Ha to consult with the
private sector during its decision making process, cautioning that
changes under consideration were substantial and that some
businesses, especially auto manufacturers, would need lead time to
make changes to their business plans. Ha assured the Ambassador
that the MOF would consider the needs of stakeholders, including
local and foreign businesses.

7. (SBU) The MOF shared the proposed special consumption tax regime
with Embassy Hanoi on May 16. Proposed taxes on beer and spirits

HANOI 00000572 002 OF 002


are double what the industry had proposed. Local automakers have
decried the proposed special consumption tax regime, which would
double the taxes on many popular models, including locally-assembled
ones. Some, like Ford, particularly fear GVN attempts to rush in
the new taxes, and have asked the MOF to assure them that any new
regime would not come into effect until 2010. Embassy Hanoi has met
with the liquor industry and Ford, and will meet with GM, to develop
a strategy to promote a more business-friendly tax regime.

8. Comment: The PM's message that fighting inflation is the top
priority of the GVN has clearly gotten through to the MOF and SBV.
Unfortunately, the SBV Governor seems more concerned with bailing
out new banks who have engaged in risky borrowing rather than
creating a framework for the banking system that would prevent this
situation. Hopefully, the unspecified "measures" being proposed to
the PM may address this issue. Post will continue to follow the
issue and report septel. End comment.

MICHALAK

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