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Cablegate: Part Iii: Pm Vows to Defend the Currency, Rejects Capital

VZCZCXRO5078
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0695/01 1620743
ZNR UUUUU ZZH
P 100743Z JUN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7997
INFO RUEHHM/AMCONSUL HO CHI MINH 4842
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 000695

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 III: PM VOWS TO DEFEND THE CURRENCY, REJECTS CAPITAL
CONTROLS AND TALKS RESERVES AND BALANCE OF PAYMENTS

REF: Hanoi 634 (Economic Data Sends HCMC Into a Panic)

HANOI 00000695 001.2 OF 002


1. (SBU) Summary: The Prime Minister told a group of bankers on
June 8 that the GVN has no plans to devalue the dong and will
continue to intervene to defend the currency. He rejected the
notion of capital controls, which he said would be a mistake. The
PM further stated that Vietnam is not contemplating an IMF program.
Shortly after his statements, the government of Vietnam (GVN) began
cracking down on black market currency exchanges, which may affect
Vietnam's small and medium enterprises. End Summary.

PM: NO PLANS TO DEVALUE THE DONG
-------------------------------

2. (SBU) Prime Minister Nguyen Tan Dung met in Hanoi with
representatives from JP Morgan and the Bank for Investment and
Development of Vietnam (BIDV, one of the large state-owned
commercial banks, not equitized) on June 8. (JP Morgan was given
access to the PM via BIDV, with whom they have a business
relationship.) The banks were required to submit their questions in
writing before the meeting, which is not uncommon in Vietnam.

3. (SBU) PM Dung told the visitors that the GVN has no plans to
devalue the dong. He noted that, even at this time of stress in
markets, the overall balance of payments showed a small $1 billion
surplus in the first five months of 2008. He admitted that the GVN
needed to send stronger and clearer messages about its resolve to
maintain currency stability in order to reassure investors.

BLACK MARKET RATES BASED "ON RUMORS AND SPECULATION"
--------------------------------------------- -----

4. (SBU) The PM said that he believed that the higher black market
exchange rate for dollars was not based on "true" supply and demand,
but on rumors, speculation and the activities of some "commercial
banks" (although he did not elaborate on the last point). He also
acknowledged that offshore markets are pricing in a devaluation of
the dong of up to 20-40 percent, but he does not believe this is an
accurate reflection of where the currency is headed. He said that
although up until now the State Bank of Vietnam (SBV) had not
intervened substantially, intervention will increase in size and
breadth in terms of counterparties. (Note: On June 9, the SBV made
a public announcement that it would begin cracking down on black
market currency exchanges. The exchanges that post usually contact
to check black market dollar rates are now not answering their
phones, and visible activity outside these shops has diminished
considerably. There are even reports that plain-clothes policemen
have been posted outside these establishments.)

5. (SBU) The PM assured the bankers that potential foreigner
portfolio outflows are manageable, relative to the size of SBV's
foreign currency reserves. PM Dung added that he planned to ask the
SBV whether it could report publicly the dollar level of FX
reserves. (Note: A mid-level SBV official was quoted in the press
on June 9 reporting that its foreign currency reserves were at $22
billion. This squares with what our contacts at the SBV told us
early last week - "about $20 billion.") The PM said that he is
aware that Vietnam has the ability to tap the swap lines set up
through the Chiang Mai Initiative. Drawing on the swap lines has
been studied and they are keeping it in view.

CAPITAL CONTROLS "A MISTAKE"
---------------------------

6. (SBU) PM Dung also told the bank representatives that he is
confident that the balance of payments will return to a significant
surplus in the medium term. With this medium-term view in mind, he
said that the SBV can intervene more aggressively now, if that is
what it takes to restore market confidence in the GVN's ability to
maintain a stable currency. The imposition of capital controls is
not/not being considered, he said, and added that he thought such
controls were a mistake and went against Vietnam's commitment to
freer markets.

MAINTAINING CONFIDENCE
----------------------

7. (SBU) The PM added there were two key points for maintaining
local confidence in the economy. First, depositors must be assured
of the overall stability of the banking sector and second, dong
deposit rates must be attractive. The PM said he would act to make
sure both occur. He also said that Vietnam will not enter into a

HANOI 00000695 002.2 OF 002


program with the IMF.

8. (SBU) Comment: The PM's comments and the subsequent release of
the reserve level show that the GVN is getting the message on
transparent and public action. While many of the PM's statements
are reassuring, the move to crack down on black market currency
exchanges may carry negative ramifications for Vietnam's small and
medium sized businesses (SMEs). These businesses are already having
a difficult time obtaining the capital they need to conduct
legitimate operations, while the big SOEs gobble up available
dollars through preferred lending with certain banks (Reftel). This
state-bias is also important because most observers believe that
profligate state-sector spending is a major contributing factor to
Vietnam's current inflation woes. While the SBV announced on June 9
that it was directing state banks to make some credit available to
Vietnam's aquaculture industry, which had been virtually excluded
from the credit markets due to credit tightening measures, many
thousands of other private sector firms continue to be frozen out of
official mechanisms for borrowing money and obtaining foreign
currency to purchase inputs. Closing down the black market may
completely eliminate the only source of foreign currency for these
SMEs, or drive the black market rate much higher (or a combination
of both.) End comment.

ALOISI

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