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Cablegate: Interest Rates Go Up, Dong Goes Down

VZCZCXRO8452
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0714 1650852
ZNR UUUUU ZZH
P 130852Z JUN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8020
INFO RUEHHM/AMCONSUL HO CHI MINH 4859
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS HANOI 000714

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: INTEREST RATES GO UP, DONG GOES DOWN

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

1. (U) Summary. The State Bank of Vietnam raised several key
interest rates by 2.0 percentage points, in an effort to rein in
inflation and slow lending growth, the latter of which is running at
more than 60 percent higher than a year ago. Even with these
increases, however, deposit and lending rates are capped at levels
that do not keep with inflation, which is running at around 25
percent. The SBV also announced a one-off 2 percent devaluation of
the fixing rate around which the Vietnamese dong can trade, but left
the trading band for the currency unchanged at plus/minus 1 percent
of the official fixing rate. Analysts were universally supportive
of the interest rate hike, although many expect further increases.
Views were mixed on the one-off devaluation, but market reaction has
been relatively subdued. End Summary.

2. (U) On June 10, the State Bank of Vietnam (SBV) raised several
interest rates by 2.0 percentage points, bringing the base interest
rate to 14 percent, the discount rate to 13 percent and the
re-financing rate to 15 percent. (The base interest rate is not used
by the SBV to provide liquidity, but instead to determine maximum
lending rates in the country.) Lending rates are capped at 1.5 times
the base rate, so the new official cap for lending rates now will be
21 percent, up from 18 percent previously (reftel). The SBV also
announced that any additional "management" or "commitment" fees
being charged by lenders would no longer be allowed. For the past
several months, various bank fees has been widely used to increase
the past rate cap of 18 percent to an effective rate of 21 percent -
22 percent for all borrowers except large State-owned enterprises
(SOEs) that continued to be able to borrow at the official rate or
less from State-owned commercial banks (SOCBs).

3. (U) The SBV's changes in policy interest rates have already
prompted banks to offer higher deposit rates, which should help
attract more deposits into the banking system and improve liquidity.
Local banks quickly put signs in their windows advertising deposit
rates anywhere between 17 and 19 percent. At the same time, the
resulting increase in lending rates (also now capped at 21 percent)
is intended to reduce demand for credit. The SBV is targeting
credit growth of 30 percent in 2008, although the recent figures
show credit growth up more than 60 percent compared to the same
period last year. The IMF sees room for more rate hikes, and the SBV
has not ruled it out.

4. (U) At the same time, the SBV also adjusted the inter-bank dollar
exchange rate from 16,139 to 16,461 dongs. This adjustment is
essentially a 2 percent one-off devaluation of the local currency.
The trading band, however, is still at one percent, despite earlier
comments by the PM that it would be widened to two percent. While
this devaluation moves the official rate slightly closer to black
market values (which have been hovering around 17,500 - 18,000 dongs
per dollar), some analysts initially criticized it for sending a
possible signal that the GVN could not defend its peg at the
previous rate. Reaction by local investors has been muted so far,
indicating that perhaps the move did not have adverse effects on
confidence.

COMMENT
-------

5. (SBU) While it is positive to see the SBV taking action to calm
markets and to move closer to market-based interest and exchange
rates rather than operate on administrative mandates, further
increases in the interest rate structure are likely to be needed to
slow credit growth to within the government's target. The small
devaluation may have been the bone the government threw to
businesses facing higher borrowing and input costs - although it
will only help the exporters. Of more help to the exporters would
be significant monetary tightening to prevent the real
(inflation-adjusted) value of the dong from appreciating
significantly. End comment.

ALOISI

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