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Cablegate: Vietnam's Smes Thirsty for Capital

VZCZCXRO0266
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1196/01 2950847
ZNR UUUUU ZZH
P 210847Z OCT 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8640
INFO RUEHHM/AMCONSUL HO CHI MINH 5231
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 001196

SENSITIVE
SIPDIS

STATE FOR EAP/MLS MBROWN
SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR DBISBEE

E.O. 12958: N/A
TAGS: ECON PGOV EAID VM
SUBJECT: VIETNAM'S SMEs THIRSTY FOR CAPITAL

Ref: Hanoi 377

HANOI 00001196 001.2 OF 002


1. Summary: Tight monetary policy has limited access to credit for
Vietnam's small and medium enterprises (SMEs). SMEs are feeling the
pinch, with many complaining that bank lending has dried up
completely. The GVN is aware of the issue and is taking steps to
improve access to credit, including loosening liquidity and
directing the state owned commercial banks to improve SME lending.
The GVN is also reexamining its failed SME credit guaranty program.
End Summary.

TIGHT MONETARY POLICY CUTS LENDING
----------------------------------

2. (U) As previously reported, Vietnam has struggled with inflation
in 2008. Although recent numbers show improvement, year-on-year
inflation is still at 27.9 percent as of September 2008. The PM has
identified controlling inflation as the GVN's top priority for 2008
(reftel). To achieve this goal, the GVN, via the State Bank of
Vietnam (SBV), has adopted a tight monetary policy focused on
reducing the money supply. Earlier this year, the SBV also
announced a credit growth rate target of 30 percent for the banking
sector, down from at least 53 percent in 2007. (Note: Although the
SBV reports average credit growth of 53% for 2007, many banks
privately admit to credit growth of 90 to well over 100 percent last
year.)


3. (SBU) In an effort to comply with the SBV's credit growth
numbers and in response to tightened liquidity, commercial banks in
Vietnam have had to tighten their lending portfolios. As a result,
businesses in general have had difficulty getting credit for either
ongoing business or expansion. Only 10.5 percent out of 282
surveyed enterprises had their financing needs met in the first six
months of 2008, according to a survey conducted by the Vietnam
Chamber of Commerce and Industry (VCCI)'s Institute of Enterprises
Development. At the same time, the GVN, in an effort to sustain
economic growth, has directed banks to lend their limited funds to
certain commodity and export-related industries. Many economists
and analysts also believe that too much of the available capital has
been funneled into Vietnam's powerful state owned enterprises
(SOEs).

SMEs STRUGGLE FOR FINANCING
------ --------------------

4. (SBU) In this credit environment, Small and Medium Enterprises'
(SMEs) access to credit has become more challenging. A
representative of the SMEs Association in HCMC told us that "it's
very difficult. It's difficult for SMEs to get bank loans for both
capital goods financing and working capital." For SMEs, banks tend
to require collateral and/or a credit guarantee to consider
providing a loan. With a tightened credit policy in place, banks
are inclined to provide credit to large, well established, reputable
firms or companies with whom they have a special relationship.
Even if they can get credit, the cost of borrowing is a heavy burden
on the SMEs. Lending rates rose from 12-13 percent per annum in
2007 to up to 20-21 percent this year, making the cost of capital
out of reach for some small businesses.


5. (SBU) From the banks' viewpoint, it is difficult to lend to SMEs
even when liquidity is ample. "These enterprises do not know how to
borrow, how to make a business plan, their collateral is not
sufficient, and their financial statements, if any, are not
transparent," according to an executive vice president at Techcom
Bank, a large commercial bank with a stated interest in lending to
SMEs. Bankers also cite other constraints in lending, including the
current high cost of capital, lack of SME credit guaranty, and the
extreme difficulty of repossessing collateral if a borrower
defaults.

6. (SBU) The GVN is aware that SMEs are struggling. Following a
series of negative press reports citing SME complaints about credit,
the SBV released a study that painted a mixed picture about SMEs.
According to the report, total outstanding loans provided to SMEs by
July 31, 2008 reached VND 299,472 billion ($18,717 million),
accounting for 27.3 percent of total outstanding loans in the
economy, an increase of 16.65 percent compared to December 31, 2007.
The report also stated that 23 percent of the SMEs which have
"borrowing relationships" with banks are doing well, 73.2 percent
are average performers, 3.8 percent face difficulties, and only 1.42
percent are at risk of bankruptcy.

HANOI 00001196 002.2 OF 002

7. (SBU) The real situation, however, seems more difficult. An
official at the SME Association in Hanoi told us that she was aware
of the report but that "(she) has not heard from our members about
easier access to banks loans". According to another member of the
SME Association, while many banks claim interest in SME lending,
they are not following through with real action or "putting their
money where their mouth is."

8. (SBU) Vietnam's current tight monetary policy could bankrupt 20
percent of the country's small to medium sized enterprises (SMEs),
according to Dr. Cao Sy Khiem, Chairman of Vietnam's SME Association
and former Governor of the SBV. Khiem told P?u Tu T`i Chnh
(Financial Investment) that another 60 percent of SMEs are facing
difficulties while just 20 percent are unaffected. This expert
suggests the GVN should help SMEs by extending corporate tax
deadlines, reforming Vietnam's tax systems and customs, and setting
up credit guarantee and insurance facilities for the SMEs.


THE GVN RESPONDS
----------------

9. (U) The GVN has taken some steps to ease access to credit. On
October 20, the SBV raised the interest rate paid on banks'
compulsory reserves to 10 percent from 5 percent and lowered the
base rate from 14 to 13 percent. It also allowed banks to use the
SBV compulsory bills to participate in refinancing transactions
(such as borrowing, discounting or open market operations) with the
SBV. These moves were designed to enhance liquidity in the system
and to enable banks to cut lending rates.

10. (SBU) Many state owned commercial banks, likely at the behest of
the GVN, have also announced financing programs for SMEs. The Bank
for Investment and Development of Vietnam (BIDV) announced VND 33
trillion ($1.9 billion) loans for SMEs during 2008-2010, which will
be used to help restructure debts of SMEs. It planned to disburse
VND 3 trillion ($178 million) in 2008, VND 10 trillion ($594
million) in 2009, and VND 20 trillion ($1.2 billion) in 2010. BIDV
expects to have outstanding SME loans of VND 100 trillion ($5.9
billion) by 2010, which will account for 50% of the bank's total
outstanding loans. The Industrial and Commercial Bank has allocated
VND 10 trillion ($594 million) for its SME lending portfolio.
Lastly, Vietcombank has set aside VND 3 trillion ($178 million) to
support SMEs and says that its target is to have 25 percent of its
lending portfolio in SMEs.


11. (SBU) The GVN is also making attempts to resuscitate its SME
credit guaranty program. While the program has been on the books
for about ten years, it is not yet functional due to structural
issues. The fund(s), while overseen by Ministry of Finance (MOF),
are supposed to be established, managed and financed by each
individual province. To date, only ten such funds have been
established, with the vast majority of provinces not able or willing
to participate in the program. Concerned ministries, the SME
Association, and local banks agree that most provinces lack the
financial and human resources to comply with the program's
requirements. The PM has now tasked MOF with fixing the program,
even if it means centralizing the fund.

12. (SBU) Comment: SMEs employ a significant number of Vietnamese
workers and account for 30 to 40 percent of GDP so the GVN is right
to be concerned about their welfare. The GVN knows that
bankruptcies would have a devastating effect on employment numbers
and is trying to bolster this vulnerable part of the economy.
Unfortunately, too much attention and capital has been directed to
the large, inefficient SOEs that function as the GVN's political
patronage machine. The PM's newfound interest in the SME credit
guaranty program is a positive indicator that the SMEs are finally
being heard. Not coincidentally, MOF is now welcoming our
Treasury's SME credit guaranty technical assistance program, which
is well placed to address the fund's problems. End comment.

13. (U) This cable was coordinated with Con Gen HCMC.

MICHALAK

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