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Cablegate: Fuel Price Hikes Squeeze Hcmc Residents

VZCZCXRO4238
PP RUEHCHI RUEHDT RUEHNH
DE RUEHHM #0711 2190102
ZNR UUUUU ZZH
P 060102Z AUG 08
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC PRIORITY 4734
INFO RUEHHI/AMEMBASSY HANOI PRIORITY 3183
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHHM/AMCONSUL HO CHI MINH CITY 4962

UNCLAS HO CHI MINH CITY 000711

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET ENRG PGOV VN
SUBJECT: FUEL PRICE HIKES SQUEEZE HCMC RESIDENTS

REF: A) HANOI 846 B) HANOI 883

1. (SBU) Summary: Last week the Government of Vietnam (GVN)
took analysts and consumers by surprise when it hiked fuel
prices 31 percent with no advance notice. HCMC analysts saw an
immediate impact on the city's workers (one estimated his office
workers will spend an additional 5 percent of their current
salary on gas) but maintain that the move was long overdue as
Vietnam's fuel subsidies were a prime example of how wasteful
government spending has contributed to inflation. One
Vietnamese banker estimated that a third of the State transfers
translate into oil subsidies while 40 percent of Vietnam's fuel
is consumed by foreigners. End summary.

Out of the Blue
---------------
2. (SBU) The GVN surprised commuters and economists alike when
they increased fuel prices by 31 per cent on July 21. This was
an effort to cut state subsidies and ward off smuggling,
according to the media (reftel A). The price of gasoline rose
31 per cent to VND 19,000 (US $1.10) per liter (US $4.17 per
gallon) on top of an 11 percent hike in gasoline in February.
Both WTO commitments and environmental concerns were cited as
important reasons for lowering the fuel subsidy.

3. (SBU) When Finance Minister Vu Van Ninh announced the fuel
price hike he said the move would add just 0.5 to 0.7 percent to
the inflation rate (27 percent in year-on-year July). He would
not speculate on the secondary impact that higher gas prices
would have on the cost of food or other items in Vietnam's
consumer price index market basket. HCMC analysts estimate the
hike will add at least 2 percent and push year-end inflation
above 30 percent(reftel A and B).

and Into the Black
------------------
4. (SBU) The average HCMC resident will feel the pinch the
hardest. On average, HCMC's ubiquitous motorbikes now require
an additional VND 200,000-250,000 (US $12.10 to $15.13) per
month for fuel. For locally engaged staff in the Consulate's
Pol/Econ section, this means an additional 6.9 to 8.6 percent of
their disposable income. Residents also complain that the
government has not taken any concrete actions to improve the
city's public transportation system. Taxi operators in HCMC
increased their fares by 2 cents per kilometer and the national
railway corporation has applied to the Ministry of Transport for
approval to increase fares by 4 percent in response to the fuel
price hike.

HCMC Economists Welcome the Increase
------------------------------------
5. (SBU) Most HCMC bankers and fund managers saw this hike as a
long-overdue move to fight long-term inflation and use limited
state resources more appropriately. In the first half of 2008,
fuel subsidies cost US $854 million and are expected to go up to
USD 2.63 billion in the second half. One fund manager framed
the argument as the GVN spending 38 percent of the State's
income subsidizing gas consumption -- in reality subsidizing
PetroVietnam -- rather than core needs like infrastructure
development or poverty alleviation. By more appropriately
pricing consumption, Vietnam can actually avoid the kind of
misallocation of resources and wasteful investment that also
contributes to inflation. Moreover, the difference in fuel
prices between Vietnam (now US $1.10 per liter, previously US
$0.86 per liter) and its neighbors Cambodia (US $1.38 per liter)
and Laos (US $1.13 per liter) had encouraged smuggling (reftel
A). One influential Vietnamese banker told us it's widely held
that 40 per cent of Vietnam's fuel is consumed by "foreigners"
-- smuggled to Laos and Cambodia or consumed locally by foreign
direct investment.

Comment:
--------
6. (SBU) The timing of this move, just after the 7th Party
Plenum, suggests that this was a tough decision that needed to
be made by consensus at the highest levels. The latest attempt
to scale back the fuel subsidy occurred while Prime Minister
Nguyen Tan Dung was away from the country in February 2008; that
decision was reversed soon after he returned. This saga has as
much to do with potential harm to state-owned behemoth
PetroVietnam as the impact of expensive fuel on the Vietnam's
people. Despite the fact that many HCMC financial sector
experts see this as long overdue, the GVN will be closely
watching the public response to calibrate future price reform
moves. It's also encouraging to see the GVN and newspapers
using WTO and environmental arguments to justify this policy
decision -- that means economic integration and education
efforts are taking effect. End comment.

7. (U) This cable was coordinated with Embassy Hanoi.

FAIRFAX

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