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Cablegate: National Assembly Grills Gvn On Soes, Sets Budget and Vows

VZCZCXRO8981
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1298/01 3301035
ZNR UUUUU ZZH
P 251035Z NOV 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8774
INFO RUEHHM/AMCONSUL HO CHI MINH 5323
RUEHGP/AMEMBASSY SINGAPORE 2696
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 03 HANOI 001298

SENSITIVE
SIPDIS

STATE FOR EAP/MLS MBROWN
USTR FOR DBISBEE

E.O. 12958: N/A
TAGS: ECON EAID EFIN EINV KCOR KPRV PGOV VM

SUBJECT: NATIONAL ASSEMBLY GRILLS GVN ON SOES, SETS BUDGET AND VOWS
TO CONTINUE SLASHING POVERTY

REF: A) Hanoi 1108 (Highlights: Plug Pulled On Power Plants);
B) Hanoi 1108 (Highlights: MOIT Challenges Luxury Tax Proposal);
C) Hanoi 1260 ("Sowing the Seeds of a Biotech Discussion");
D) Hanoi 1072 ("Pharma, IPR and Market Access")

HANOI 00001298 001.2 OF 003


1. (U) Summary: The National Assembly (NA), in its October 15 to
November 15 session, came down hard on mismanagement in Vietnam's
state-owned sector, approved a 2009 budget deficit of $5.1 billion,
and reformed Vietnam's luxury tax regime, which will affect U.S.
automakers adversely but create opportunities for the U.S. liquor
industry. Reflecting the realities of the global economic climate,
the NA also set revised economic targets for 2009, such as reduced
GDP growth (6.5%). It also aimed to shore up Vietnam's social
agenda on poverty reduction and sanitation. NA deputies asked
pointed questions in the Q&A session, and voiced public and
widely-reported criticism of government policy. End summary.

THE STATE-OWNED SECTOR COMES UNDER FIRE
---------------------------------------

2. (U) Legislators came down hard on the state-owned sector, many
threatening to starve it of public funds or even have the NA take
over management of the sector if the Government of Vietnam (GVN)
does not improve its fiscal supervision. Deputies said that
state-owned enterprises (SOEs) have enjoyed too many sweet deals
from the GVN, were contributing little to the nation's economy, and
contributing to inflation. Many members called for an end to
government funding of SOEs, and one of them was quoted as saying
that from now on, "the companies will have to find the money by
themselves."
3. (U) NA members reserved their harshest judgment for power
monopoly Electricity of Vietnam (EVN), which announced in July that
it would award its employees bonuses totaling nearly $60 million (at
an average rate of $715 per employee), despite claiming to be so
cash-strapped that it has had to abandon much-needed power
generation projects (REF A). "We're moving from a state-run
monopoly to an enterprise-run monopoly," one deputy from the
northern province of Lang Son stated on the floor, according to
newspaper reports.

2009 STATE BUDGET
--------------

4. The 2009 State Budget approved by the NA projected revenues of
$23.6 billion, and limited on-budget spending to $28.9 billion,
resulting in a deficit of $5.3 billion, or 4.82% of GDP. The
Minister of Finance, in his budget discussions with the NA,
recommended that the government increase import tariffs on gasoline
and cut back on other planned spending, including delaying increases
in minimum wages, to balance next year's budget. Many deputies
complained that fraud and delays in state-funded projects and tax
evasion -- concerns they said were also raised in previous sessions
and remained unanswered-- continued to hurt the national budget.

ASSEMBLY LOWERS TARGETS FOR 2009
-----------------

5. (U) The GVN fell short of many of the targets it had set for
itself for 2008, including GDP growth (6.5% percent instead of
8.5-9%), and inflation (24% instead of 7%). Although many of the
deputies blamed unforeseen events like the world economic situation
and fluctuations in commodity prices, they also criticized the GVN's
poor forecasting record. As it does every session, the NA passed
resolutions setting targets on economic performance for 2009,
including export growth (13%), consumer price index growth (below
15%), job creation (1.7 million jobs), poverty rate (12%), access to
clean water (79% in rural areas) and environmental improvement
(treatment of 65% of harmful waste ensuring that 65% percent of
industrial and export processing zones meet environmental standards
for water treatment).
LUXURY TAX: BAD FOR CAR MAKERS, GOOD FOR THE LIQUOR INDUSTRY
--------------------------------------------- ---

6. (U) A Special Consumption (luxury) Tax Law harmonized rates on
foreign and domestic beer, wines and spirits, one of Vietnam's
commitments under WTO. As a result, the luxury tax rate for foreign
spirits will decrease from 65% to 45% in 2010, while Vietnamese
spirit rates will go up from 30% to match the 45% that their foreign
competitors will pay. Rates on beer and all alcohol under 20 grade
proof will be raised uniformly to 45%, also in 2010. The foreign
liquor industry, which had lobbied hard for a uniform system, is
reportedly "very happy" with this outcome, according to an EU

HANOI 00001298 002.2 OF 003


diplomat in Hanoi.

7. (U) The automotive industry, however, fared less well. The NA
approved a shift from a luxury tax system that rewarded larger
seating capacity to one that favors small engines. Thus, the large
9-seaters that the previous luxury tax system encouraged will soon
find themselves taxed at double the rate they are now (from 30% to
60%). Worse, unlike the luxury taxes on liquor, those on cars are
effective April 1, 2009, rather than the 12 months the industry had
asked for, and which the Ministry of Industry and Trade had
supported (REF B).
8. (U) The discussions over the luxury tax were heated, as
supporters of both the car industry (both foreign and domestic
manufacturers lobbied jointly against the bill) and the domestic
liquor market criticized the proposals. The discussions on what
should be considered as luxury items also revealed Vietnam's
changing perceptions about luxury, as legislators publicly ridiculed
including air conditioners in a country where people suffer from
temperature extremes (to no avail, a/c units remained subject to
luxury taxes).

GVN GRILLING: RICE EXPORT POLICIES, CORRUPTION AND POLLUTION
--------------------------

9. (U) NA legislators sharply criticized the government for placing
restrictions on rice exports when international prices were at an
all-time-high, leading to lost earnings that the Assembly calculated
at $500 million. In the Q&A session, the Prime Minister and members
of his cabinet defended the restrictions as "necessary" to ensure
sufficient domestic supplies and hold prices steady. Deputies were
not satisfied with their explanations, saying the government still
owed farmers an apology. The Natural Resources and Environment
minister was also grilled about lax enforcement of environmental
regulations, particularly the long time it took for the authorities
to act against MSG producers (including the infamous case of the
Taiwanese Vedan factory) that were dumping noxious chemicals in
Vietnam's waterways.

10. (U) One NA deputy asked the Prime Minister point blank how he
planned to address the still unfolding corruption scandal in which
Japanese businessmen admitted in a Tokyo Court to bribing a Ho Chi
Minh City Transport official in exchange for consulting contracts on
a road-building project. The Prime Minister responded that he asked
authorities to fully investigate and promised his government would
punish anyone found to be involved (Note: the Transport official has
since been suspended. End Note).

11. (U) During the Q&A sessions, NA members publicly criticized
various ministers with comments like: "not satisfactory," "not to
the point," "not brave enough to assume responsibilities." In the
end, the deputies were frustrated enough over the GVN's
non-responsive answers that they passed a resolution requiring all
ministers to explicitly answer questions.

CALLS FOR MORE NOT LESS GLOBAL INTEGRATION
-----------------------------------------

12. (SBU) Although the global financial crisis was on everybody's
minds during the NA session, the deputies did not call for Vietnam
to back off from greater global integration; in fact, Chairman
Nguyen Phu Trong, who is not particularly known for his reformist
leanings, did just the opposite. In his opening remarks, he called
for more global economic integration as a way to steady the
country's economy through the international financial turmoil.
Specifically pointing to WTO accession, he said that WTO accession
had helped Vietnam "gain more experience in managing its economy."

PROMOTING HI-TECH AND BIOTECH DEVELOPMENT
------------------------------------
13. (U) Legislators passed a new High-Tech Law to promote investment
in this sector. The law, which had been submitted by the Ministry
of Science and Technology, seeks to promote investment in the
information, biotechnology and automation sectors by creating tax
and other incentives.
14. (U) Among the many issues included in the new Law on
Biodiversity are conservation planning, sustainable development of
biodiversity, management of conservation areas, and risk management

HANOI 00001298 003.2 OF 003


of genetically modified organisms. During the sessions, several
deputies proposed amendments to the Biodiversity Law to allow wider
use of genetically modified organisms (GMO) (REF), but were
dissuaded from doing so with promises from Agriculture Minister Cao
Duc Phat that the GVN would allow wide-scale use of GMOs after
testing, currently underway, concludes in 2010.
OTHER LAWS: DUAL CITIZENSHIP, JUDGMENTS AND CIVIL SERVICE
--------------------------------------------

15. (U) The NA recognized dual citizenship, a move that will help
expatriate Vietnamese enjoy the same privileges as Vietnamese
citizens, particularly important in the ability to conduct real
estate transactions. The Assembly also removed tenure for all
government officials, making it easier to fire them at the end of
their limited labor contracts. The NA approved the Law on the
Execution of Civil Rulings, which eases out-of-court transactions
between litigants. Laws on insurance and transportation will
introduce important reforms in these sectors as well.

FOR THE NEXT SESSION
----------------

16. (U) The legislature saved for its next session in May 2009,
discussions for reforms to: the Criminal Code that would introduce
IPR protections (REF D); the Labor Code, that would allow for
greater labor freedoms; and Public Debt Management to centralize
international loan agreements and promote effective debt
management.

COMMENT: AN INCREASING APPETITE FOR FISCALIZATION
-------------------------------------

17. (SBU) Over its last half dozen sessions, the NA has grown
increasingly feistier in its criticism of economic governance. In
previous sessions, it has grumbled but eventually fallen into line
with the GVN program. This year, however, it made significant
budget revisions (for instance, trimming $1.7 billion from projected
revenues), and disregarded Trade and Industry Ministry proposals on
luxury taxes. More significant, its criticism of the SOEs, and in
particular EVN's move to award itself bonuses when it is strapped
for cash, gave a public and widely covered voice to what many
reformers would shy away from saying in public.

18. (U) This cable was coordinated with ConGen HCMC.

MICHALAK

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