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Cablegate: Part Ii: Gvn Announces Further Measures to Instill

VZCZCXRO0769
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0658/01 1560927
ZNR UUUUU ZZH
P 040927Z JUN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7941
INFO RUEHHM/AMCONSUL HO CHI MINH 4801
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000658

SENSITIVE
SIPDIS

SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR DBISBEE
STATE FOR EEB/IFD

E.O. 12958: N/A
TAGS: EFIN EAID ECPS ECON EAGR ETRD VM
SUBJECT: Part II: GVN ANNOUNCES FURTHER MEASURES TO INSTILL
INVESTOR AND MARKET CONFIDENCE

Refs: A) Hanoi 634 B) Hanoi 377

This cable is Sensitive But Unclassified. For official use only,
not for dissemination outside USG channels or posting on the
internet.

1. (U) This cable is part of an ongoing series on Vietnam's
macroeconomic situation.

2. (SBU) Summary: Facing persistent high inflation and market
concerns about the stability of the dong, the Government of Vietnam
(VN) has begun to make a more concerted and public effort to address
growing macro-economic concerns. The Prime Minister announced
further actions to check speculation by Vietnam's state-owned
sector, and the State Bank said it may force bank mergers and de-peg
the dong from the dollar. In late May, the IMF Asia Pacific
Director urged high-level GVN officials to take immediate action to
shore up both international and domestic investor confidence. On
May 31, after the PM vowed to redouble efforts against inflation and
to tackle the state-owned sector, the National Assembly grilled the
Minister of Planning and Investment, the State Bank Governor and the
Minister of Finance on inflation, SOE growth and inefficient
investment. On June 3, the GVN used the Vietnam Business Forum to
reassure investors about its ability to control the macro-economic
situation. End summary.

IMF MAKES THE ROUNDS
--------------------

3. (SBU) The Asia Pacific Director for the IMF, David Burton,
visited Hanoi on May 29 and 30 to reinforce the IMF's message on the
necessity of concrete GVN action to address macroeconomic concerns
(Ref A). (Contrary to rumors, the visit did not involve discussion
of an IMF package for Vietnam.) Burton told high-level GVN
officials that the Prime Minister's plan to fight inflation was a
good one, but that immediate and transparent action was needed to
shore up both international and domestic investor confidence. The
IMF sees the domestic component of investment as being critical to
short-term financial sector stability, noting that if people stop
using the banking system or start switching out of the dong, the
flow will be difficult to reverse. The IMF says their message was
well-received by the GVN.

PM CALLS FOR REDOUBLING OF EFFORTS
----------------------------------

4. (U) In remarks before the National Assembly (NA) on May 31, the
Prime Minister (PM) called for greater efforts in the fight against
inflation. He told the NA that the GVN was already applying a
tighter monetary policy, reducing public expenditures and devoting
resources to social welfare programs. He also addressed the
critical issue of state-owned enterprise (SOE) reform, which local
economists and analysts note has seen the least amount of concrete
action since the PM's inflation plan was introduced on March 31 (REF
B). While the PM observed that SOEs "have made an important
contribution" to the economy, he said the GVN is preparing to review
the large "economic group" model that is the basis of the SOE system
and will submit a related decree. He added that the GVN will
accelerate the restructuring of the SOEs by focusing on the
"equitization" process and the "multi-ownership" model (most likely
referring to strategic partners and foreign investors).

MINISTRIES TO RESTRICT AND MONITOR SOE ACTIVITY
--------------------------------------------- --

5. (U) The National Assembly then spent some time questioning the
Minister of Planning and Investment (MPI), the State Bank Governor,
and the Minister of Finance on inflation, SOE growth and inefficient
investment. MPI Minister Vo Hong Phuc said that his ministry had
been given the task of enacting the PM's plans on SOE reform, and
that a decree would be submitted for approval in July. He went on
to add that the decree will lay out clear regulations on SOE
activities, especially in regards to mobilization of capital and
operations in non-core areas. Phuc used state-owned Electricity of
Vietnam Group (EVN) as example of speculative activities, saying
that such a company should focus on power development projects
(note: EVN has been one of the worst SOEs in terms of non-core
expansion, with projects as diverse as telecommunications, hotels
and banks).

6. (U) Meanwhile, the Ministry of Finance (MOF) announced the
creation of a watchlist of inefficient and loss-making SOEs for
"intensive monitoring." An SOE will make the list if it has two
consecutive years of losses or a loss for one year with a 30 percent
reduction in capital. These companies will have to submit
comprehensive quarterly and annual financial reports for analysis by
various ministries. Firms that do not improve will be sold or
dissolved. The list will be completed on May 30 of every year, but
for reasons unexplained, SOEs in the "finance, banking, insurance
and securities sector" will be exempt from the program. MOF admits
that of Vietnam's approximately 1,500 SOEs, 600 failed to make a
profit last year.

REASSURANCES ON THE MACROECONOMIC FRONT
---------------------------------------

7. (U) On June 2, GVN officials used the bi-annual Vietnam Business
Forum (Septel) to reassure investors about the country's
macroeconomic stability. When questioned by members of the Bank
Working Group, State Bank of Vietnam (SBV) Deputy Governor Nguyen
Dong Tien acknowledged that some financial institutions had been
poorly managed and regulated, and noted that "very soon we will be
seeing bank mergers." (Comment: There have been rumors that the
SBV has already bailed out a few small banks, but our contacts at
the SBV deny this.) Tien also agreed with recommendations that dong
exchange rates be based on a basket of currencies (versus a dollar
peg) and said that Vietnam would be moving in that direction.

8. (SBU) Comment: The recent slew of pessimistic press and
high-level expressions of concern on Vietnam's macroeconomic
management appear to have prodded the GVN to go public with
additional initiatives. The discussions at the National Assembly
were a very public effort to respond to investor concerns and remind
public officials that all have a role in bringing government and SOE
spending under control. The MOF's yearly list of poorly-performing
SOEs misses the mark (the GVN should be focusing on privatization of
SOEs, not nursing them along in some sort of a rehabilitation
program) but other comments by the PM, Minister Phuc and SBV Deputy
Governor Tien show that the IMF's message of transparent, rapid
action may have gotten through at the highest levels. As of June 4,
the dong continued to devalue on the black market, but if these
initiatives can be implemented in a timely and decisive manner, they
may help improve the investor confidence that is so crucial to
Vietnam's macroeconomic stability. End comment.

MICHALAK

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