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Cablegate: Vietnam's Exporters Expect to Grow in 2009, but More Slowly

VZCZCXRO6554
OO RUEHDT RUEHPB
DE RUEHHM #0972/01 3021201
ZNR UUUUU ZZH
O P 281201Z OCT 08
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5078
INFO RUEHHI/AMEMBASSY HANOI PRIORITY 3391
RUEHHM/AMCONSUL HO CHI MINH CITY PRIORITY 5307
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC PRIORITY 0088

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000972

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA
TREASURY FOR SCHUN
SINGAPORE FOR TREASURY
USTR FOR BISBEE
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: ECON ETRD EFIN EIND SOCI PREL VM
SUBJECT: VIETNAM'S EXPORTERS EXPECT TO GROW IN 2009, BUT MORE SLOWLY

REF: A) HO CHI MINH 940, B) HANOI 1206

HO CHI MIN 00000972 001.2 OF 002


1. (SBU) SUMMARY: Most Vietnam watchers believe that the economy
is largely shielded from the direct effects of global financial
turmoil, but would be hurt by any significant decline in
overseas consumer demand for Vietnamese exports. Orders for
most "value" products like low-cost apparel remain steady or are
growing, albeit more slowly than in previous years, while demand
has dropped precipitously for more expensive goods like
high-quality furniture. Producers of commodities like rubber
and coffee have seen some export orders cancelled, pushing down
the price paid to farmers. Taken together, these factors will
slow growth of Vietnam's exports in coming months and motivate
producers to push the Government of Vietnam (GVN) to loosen
monetary policy further and/or adopt other programs to support
exporters. End summary.

Export Orders, a Canary in the Coal Mine
----------------------------------------
2. (SBU) HCMC Economists are carefully watching exports,
especially to its largest export market, the United States, to
judge how Vietnam's economy will hold up next year. The US
$48.6 billion total value that Vietnam exported in 2007 is
striking when compared with the country's US $71 billion GDP.
Vietnam does import a significant volume of inputs for
value-added processing and re-export (e.g., hardwood imported
from the United States processed into furniture exported back to
the United States) creating what some HCMC economists think may
act as a natural balance of payments hedge against export
declines. They nevertheless expect that an export slowdown
would slow Vietnam's growth, impact its current account balance
and could even put pressure on Vietnam's currency.

Weaker Demand and Production Constraints Slow Export Growth
--------------------------------------------- --------------
3. (SBU) Overall, Vietnam's export growth continues, albeit more
slowly than the brisk pace set in the early months of 2008.
Vietnam's total exports in the first ten months of 2008 grew to
US $53.8 billion, up 36.7 percent over the first ten months of
2007, according to Vietnam's General Statistics Office (GSO).
Despite this strong performance so far in 2008, exporters are
concerned that orders for early 2009 are lower than expected.

4. (SBU) Because the United States is Vietnam's largest export
market and light manufacturing accounts for the majority of
Vietnam's exports to the United States, several HCMC analysts
say they consider orders for export to the United States to be a
leading indicator of Vietnam's future economic health.
According to the most recent U.S. Department of Commerce data,
Vietnam's exports to the United States continue to grow, up 18
percent compared to the first six months of last year. Our
informal survey of economic and trade officers posted at
consulates in HCMC found that investors remain optimistic about
exports to the United States on the whole. For example,
Taiwanese and Korean light manufacturing factories say that
while furniture orders (from the US) are down 20 to 30 percent,
low-end garment orders for early 2009 are "just fine".
Production issues like poor infrastructure or rising labor costs
are a bigger headache for FDI factories; according to one
insider 110 out of 330 Taiwanese-invested garment/footwear
factories in Vietnam have had strikes so far this year.

5. (SBU) The Vietnam Association of Seafood Exporters and
Producers' (VASEP) Le Van Quang told EconOff that seafood
exports will finish the year on target at US $4.25 billion (up
from US $3.76 billion in 2007), but fears the 2009 GVN target of
US $5.3 billion will be difficult to reach. Quang said U.S.
buyers in particular are asking to pay in installments or after
they are able to sell the product, rather than at the time of
shipment. Domestic factors have also restrained export growth.
Frequent power cuts and overloaded warehouses, roads and ports
all limit VASEP members' ability to increase exports, Quang
added.

Orders for "Value" Goods Grow, Sales at the High-end Down
--------------------------------------------- ------------
6. (SBU) More broadly, Vietnamese industrial organizations are
seeing orders for high-end goods fall sharply, while orders for
value goods continue to grow. The Vietnam Textile and Apparel
Association (VITAS) expects an export turnover of US $11.5
billion by the end of the year, up 21 percent from 2007.
Vice-chairman Pham Xuan Hong told Econoff that many member
companies are actively (and successfully) shifting their
production from high- or mid-priced apparel products to

HO CHI MIN 00000972 002.2 OF 002


low-priced product. Hong said the industry expect another 15
percent growth in exports for 2009.

7. (SBU) Nguyen Cong Quyen, the Secretary General of the Wood
and Forestry Products Association of Vietnam (HAWA) told Econoff
that furniture exporters are being particularly hard hit by a
downturn in orders. HAWA members will export US $3 billion in
2008, falling short of the US $3.5 billion GVN target. The
general manager of one high-end furniture company that
manufactures furniture for five-star resorts and custom-ordered
collections (one collection piece bookshelf sold for US
$100,000) confided that their orders have dropped to virtually
zero in early 2009. While they did not have solid numbers,
trade officials from Binh Duong Province, Vietnam's industrial
heartland, said that low- and mid-priced furniture export orders
are indeed down, but "only slightly" for early 2009. Vietnam is
the largest supplier of candles imported into the United States,
but one of Vietnam's largest candle exporters told EconOff that
post-Christmas orders from the United States had dropped by half.

Falling Prices and Inflation Pinch Farmers
------------------------------------------
8. (U) Vietnam's agricultural sector is feeling more immediate
impact from the global downturn than its manufacturing sector.
Producers and exporters are reporting that local prices for
rubber, coffee, pepper, rice and seafood are all trending
downward and stockpiles are building as global demand for
commodities drops.

9. (U) Representatives of the Vietnam Rubber Industries Group
said that the local price of rubber sap has dropped almost by
half, from US $3,400 (earlier in the year) to US $1780 per
metric ton. In response, stocks of rubber has have grown by
almost two thousand metric tons. The Vietnam Coffee and Cocoa
association says that the local price paid for coffee has
dropped by a quarter from US $2,110 (September) to US $1,570
(October). Pepper prices are similarly down by twenty-five
percent and rice traders have seen prices fall as well (Ref A).

10. (SBU) High input costs, increasing wages and ten months of
tight monetary policy are further squeezing Vietnam's exporters,
especially small and medium-sized enterprises without ready
access to credit from state-owned commercial banks (Ref B).
Increased wages and inflation on inputs hurt, several private
sector managers told EconOff, but tight monetary policy hurts
more because many of their state-owned competitors can get
preferential loans from tight relationships with state-owned
commercial banks (SOCB).

Exporters Seek GVN Action
-------------------------
11. (SBU) Industrial associations are pushing for a range of
government policies that they feel will help their members, such
as a looser monetary policy, directed or subsidized lending for
exporters and reduced import tariffs on raw materials used to
produce export products. Many managers, most privately but a
few quite publicly, are calling for the GVN to ease up on its
instinctive bias toward supporting state-owned enterprises
(SOE). Private sector rice exporters assert that the GVN should
liberalize that industry so they can compete more effectively
with SOEs (Ref A).

Comment:
--------
12. (SBU) In addition to slowing economies in their major
markets, Vietnamese exporters will also face a headwind from the
strengthening U.S. dollar, to which the Vietnamese dong is
linked. While there are undoubtedly tough times ahead for many
Vietnamese exporters, those companies with a competitive
advantage and inelastic demand (e.g., low-cost garments) are set
to grow. Vietnam's tight domestic credit environment and
persistent inflation, and global financial turmoil mean that
only the best privately owned Vietnamese companies will be able
to borrow the money they need to expand. End comment.

13. (U) This cable was coordinated with Embassy Hanoi and the
regional Financial Attache in Singapore.
FAIRFAX

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