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Cablegate: Dpm Hung Speaks On Inflation, Banks and Fiscal Restraint

VZCZCXRO0687
PP RUEHHM
DE RUEHHI #0606/01 1430942
ZNR UUUUU ZZH
P 220942Z MAY 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7878
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2610
INFO RUEHHM/AMCONSUL HO CHI MINH 4759
RUEHBK/AMEMBASSY BANGKOK 6359
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000606

DEPT FOR EAP/MLS, EB/IFD, USAID/ANE, USAID EGAT/EG
BANGKOK PASS TO RDM/A
DEPT PASS USTR FOR DBISBEE
SINGAPORE FOR TREASURY S BAKER
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: DPM HUNG SPEAKS ON INFLATION, BANKS AND FISCAL RESTRAINT
MEASURES

Ref: Hanoi 572 (MOF and SBV Discuss Inflation)

1. (U) Summary: The Ambassador met with Deputy Prime Minister
(DPM) Nguyen Sinh Hung on May 21 to discuss macro-economic issues
and the Government of Vietnam's (GVN) plans to address inflation.
Hung acknowledged the challenges, but said there were plans to
address State Owned Enterprise (SOE) expansion and budget
expenditure reform. He conceded that some private banks were
lending too much and may go bankrupt or merge, but said the GVN will
"try our best not to let that happen" and would not limit the growth
of new banks. End Summary.

THE MARCOECONOMIC DPM SPEAKS
----------------------------

2. (U) The Ambassador met with Deputy Prime Minister (DPM) Nguyen
Sinh Hung on May 21. DPM Hung's portfolio includes monetary and
fiscal policy, planning, price controls, customs, banking,
securities, statistics, labor, employment and social issues, and the
restructuring of SOEs. He supervises the Finance and Labor
ministries, the State Bank and the State Capital Investment
Corporation. Hung is a member of the Politburo and also chairs the
National Council for Monetary Policy. He also oversees ethnic
minority affairs. He was Finance Minister from 1996 to 2006.

3. (U) Hung started the meeting by noting that both the U.S. and
Vietnam are facing economic challenges. He compared the U.S.
economy to a "big ship in the sea" whose waves ripple across the
world, including in Vietnam, which he considers "a small ship, just
starting its journey."

4. (U) The DPM went on to note that Vietnam has some advantages
that will allow it to weather the current economic storm. The first
advantage, he said, is that foreign investors are still interested
in doing business in Vietnam. The second is Vietnam's strong export
sector, which accounts for a significant portion of the country's
GDP. Lastly, Hung said, Vietnam has a stable political and
investment environment. He admitted that productivity and
efficiency were still not very high, but pointed to the hundreds of
new private enterprises and growing foreign investment as signals of
Vietnam's potential.

HUNG ON INFLATION
-----------------

5. (U) DPM Hung said he was confident of the GVN's ability to
overcome inflation. "The political and administrative leadership
would work with the people and businesses to control inflation," he
said cryptically. He pointed to the 1997 Asian financial crisis,
which was "more tense than now, so we have experience" in these
types of situations. He also cited first quarter registered FDI of
eight billion dollars as being on pace to increase over last year's
registered FDI of over $20 billion. Hung encouraged the Ambassador
to help make the U.S. the number one foreign direct investor in
Vietnam, noting that good U.S. -Vietnam relations were
"irreversible."

6. (U) The DPM then outlined the GVN's three major tasks: to
control inflation, to maintain growth, and to "care for people's
lives." He forecasted that economic growth will be around 7 percent
in 2008, and that inflation will slow down, but that there may still
be difficulties in 2009 before things improve in 2010. Hung added
that the GVN is "not very worried" because exports remain strong
and, as a rice producer, Vietnam has good food security.

BANKING AND CREDIT GROWTH
-------------------------

7. (U) Hung stated that reining in credit growth was necessary to
control inflation, but that Vietnam "still needed growth and
exports." He conceded that some private banks were lending too much
and may go bankrupt or merge, but said the GVN will "try our best
not to let that happen." He said the GVN will not limit the
creation of new banks but is now using better criteria for
establishment of these banks. Furthermore, he added, as the number
of businesses and foreign investors in Vietnam increased, Vietnam
will need more banks, both foreign and local.

EXCHANGE RATE POLICY
--------------------

8. (U) DPM Hung refused to confirm reports in the local press that

HANOI 00000606 002 OF 002


the Dong trading band would be widened from one to two percent. He
reiterated the oft-heard line that the Dong exchange rate will "be
flexible to encourage exports" and to allow Vietnam to import
commodities that are not produced in-country. The DPM said that in
addition to the Council for Monetary Policy, the GVN had recently
established a National Committee for Supervision of the Financial
Sector to make forecasts and recommendations. The Committee is
headed by former State Bank Governor Thuy.

SOE REFORM
----------

9. (U) Although Hung acknowledged that SOEs would be limited from
expanding into non-core areas, he did not say whether he supported
the 30 percent cap proposed by the Finance Ministry (Reftel). Hung
added that the GVN was trying to learn from the experiences of other
"major international economies" to develop standards for SOE
expansion. The DPM also stated that the GVN is encouraging SOEs to
identify strategic partners and that this would be an efficient
means for foreign investors to "get access to Vietnam."

BUDGET CUTS COMING
------------------

10. (U) The DPM said that the central and regional governments had
been asked to revise their budgets in an effort to trim
expenditures. Hung noted that he was still awaiting revised budgets
from certain districts, communes, and investment projects, but said
the results of the exercise would be reported at this month's
cabinet meeting, in late May.

BIOGRAPHICAL NOTES
------------------

11. (SBU) Hung, who rarely meets with USG officials, was the last of
Vietnam's five DPMs to agree to meet with the Ambassador.
Throughout the meeting, he avoided being drawn into specifics,
relying instead on bureaucratesse to make his points.

COMMENT: A REFORM CYPHER
------------------------

12. (SBU) Comment: Hung seems committed to the idea of SOE reform,
but reluctant to divulge details of how the GVN plans to achieve
this goal, perhaps because the issue is still under discussion. He
seems personally involved in overseeing budget reform efforts, which
is a good sign. Not as promising is his position on banks, seeming
to imply that protecting bad banks and even encouraging more banks
would be a good thing for Vietnam's economic growth. End comment.

MICHALAK

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