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Cablegate: Vietnam: Further Effects of Global Financial Crisis

VZCZCXRO1876
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1391/01 3570218
ZNR UUUUU ZZH
P 220218Z DEC 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8897
INFO RUEHHM/AMCONSUL HO CHI MINH 5417
RUEHGP/AMEMBASSY SINGAPORE 2724
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 001391

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: EINV ECON VM
SUBJECT: Vietnam: Further Effects of Global Financial Crisis

REF: A) Hanoi 1158 (Effects of U.S. Financial Crisis on VN)
B) Hanoi 1171 (VN Stock Market Drops on Global Financial Turmoil)
C) HCMC 972 (VN's Exporters Expect to Grow in 2009, But More
Slowly)
D) Hanoi 1206 (GVN Cuts Rates on Fears of Slowdown)
E) Hanoi 1242 (VN Macroeconomic Update)
F) Hanoi 1250 (VN Favors Global Solution to Financial Crisis)
G) Hanoi 1316 (VN Shifts Focus to Maintaining Growth)

HANOI 00001391 001.2 OF 002

1. (SBU) Summary: The U.S. financial crisis and the resulting
global economic slowdown continue to have ramifications in Vietnam
(reftels). The GVN is preparing a fiscal stimulus in response to
growing negative economic numbers, though the size and details are
still under consideration. Demand in Vietnam's major labor export
markets is weakening, and as a result, remittances from overseas
workers are expected to decline. Vietnamese tourism officials
report that arrivals are falling significantly and will likely drop
in 2009 compared to this year. The IMF projects that Vietnam's
economy will grow 5 percent next year and inflation fall to single
digits. The current account deficit will decline but remain high as
a percentage of GDP. The fiscal deficit will rise to 8.3 percent of
GDP, a shortfall the GVN will likely fund domestically. The risks
to these projections are to the downside, the IMF says. End
summary.

Government Preparing Fiscal Stimulus
------------------------------------

2. (SBU) In response to the growing tide of negative economic news
(reftels), the GVN recently announced a USD 1 billion stimulus
package and now says it is considering boosting the size by
approximately USD 5 billion more. The original package of USD 1
billion reportedly included money for high-priority development
projects, including construction and housing and interest-free
credit for state-owned distributors to make rice purchases.

3. (SBU) According to sources at the Office of Government, an
official announcement on the additional USD 5 billion is expected at
the monthly cabinet meeting sometime this week. Nonetheless, Deputy
Prime Minister Nguyen Sinh Hung discussed the additional amount with
a group of young businessmen on December 14, saying that the GVN
"will use its reserve fund to support production, business and
consumption, as well as exempt and cut down taxes to businesses,
particularly small and medium-sized firms." He added that part of
the package will be used to invest in rural infrastructure
development, including the construction of schools, hospitals and
houses for low income residents, as well as "vocational training,
hunger eradication and poverty elimination." Hung also said that
the money would come from various sources, including the issuance of
new government bonds.

4. (SBU) Local economists are already privately voicing concerns to
us about how the money will be spent, noting that channeling more
money into state owned enterprises (SOEs) will result in potentially
inefficient or unimplemented projects, a primary source of inflation
earlier this year. Nguyen Dinh Cung, Director of Macroeconomics for
the Central Institute for Economic Management, told the press that
he couldn't say "whether it is a good and effective investment - it
depends on how the government spends and controls it." The PM and
several DPMs held a meeting with SOEs on December 16 to discuss
measures to prevent economic slowdown, but many of the SOEs used
their time to request funds from the stimulus package. The Chairman
of Vinatex, a state owned textile firm, took a different approach,
suggesting that the GVN distribute stimulus funds directly to needy
people "as is done in other countries."

Foreign Demand for Vietnamese Labor Drops
-----------------------------------------

5. (SBU) At a December 15 Hanoi Conference on Employment and Labor
Export, Vietnamese officials said that demand in Vietnam's major
labor export markets has weakened as a result of the global economic
crisis. Factories in Taiwan, Malaysia, and Korea are reducing
operations and are no longer providing employees with extra work,
which usually accounts for 20 to 40 per cent of the workers' total
income. Some Vietnamese workers in Taiwan reportedly face the
prospect of having their labor contracts terminated early, and some
firms in Taiwan and Malaysia have stopped receiving workers despite
signing contracts. In the first 11 months of 2008, Vietnam sent
78,700 workers overseas to its main markets. The target for 2009 is

HANOI 00001391 002.2 OF 002


90,000 workers, but many now question the feasibility of this goal.
A large decline in foreign worker remittances would not help
Vietnam's relatively precarious balance of payments situation, which
relied on remittances for an estimated $8 billion in foreign
exchange payments in 2008.

Tourism Falls
-------------

6. (SBU) Another source of needed foreign exchange earnings -tourism
- is also declining as a result of the global economic downturn.
International tourist arrivals have been falling over recent months,
with October bringing 300,000 visitors, a drop of almost 12 percent
compared to October of last year. November arrivals were down 22
percent year on year, although part of this decline may have been
due to airport closures in Bangkok. Tourism operators note that
clients from the United States and Europe are increasingly scarce
compared to years past. The Minister for Culture, Sports and
Tourism warns that the tourism sector, which employs more than 10
percent of Vietnam's workforce, is facing zero or possibly negative
growth in 2009. The Vietnam National Administration of Tourism is
more pessimistic, projecting that arrivals will fall 20 to 30
percent compared to 2008.

IMF Projects 2009 Growth of 5 Percent
-------------------------------------

7. (SBU) In a December 18 briefing for the diplomatic corps at the
conclusion of annual Article IV Consultations, IMF Assistant
Director in the Asia and Pacific Department Shogo Ishii said the IMF
projects that Vietnam's economy will grow by 5 percent in 2009 and
year on year inflation will fall to single digits by year end. The
current account deficit is forecasted to drop with very rapidly
declining imports offsetting lower exports, FDI, and private
remittances. However, the current account deficit will remain at a
high level (9 percent of GDP) and remains a source of vulnerability
given Vietnam's relatively low 3 months of international reserves to
import cover. The IMF said that risks to these projections are
primarily on the downside given likely further drops in global
economic growth.

8. (SBU) The IMF projects that the GVN's fiscal deficit (using
international standards) will rise significantly to 8.3 percent of
GDP in 2009 given falling tax revenues. The GVN told the IMF it
will fund the shortfall domestically, probably through bond
issuance. The Ministry of Planning and Investment (MPI) tells us
that funding will come from several sources, including disbursed
ODA. This budget projection does not include the $6 billion in
announced fiscal stimulus. The IMF said the GVN did not ask for
advice on the stimulus package and the IMF believes its size,
details, and funding are still under debate. The IMF representative
noted that fiscal stimulus could lead to increased imports and
pressure Vietnam's balance of payments. The IMF cautioned the GVN
about further monetary policy easing and the impact it could have on
the exchange rate. [Note: Per reftels, the GVN has dramatically
dropped its base interest rate, now at 8.5 percent, and cut banks'
required reserve ratios in the last two months. End note.] It also
emphasized that the GVN should be prepared to deal with any banking
system strains as non-performing loans are expected to increase in
2009.

Michalak

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