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Cablegate: Vietnam Responds to Inflationary Pressure

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 HANOI 001918

SIPDIS

STATE PASS USTR FOR EBRYAN
STATE ALSO PASS USAID ANE
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO
BANGKOK FOR USAID

E.O. 12958: N/A
TAGS: EFIN ECON VM FINREF
SUBJECT: VIETNAM RESPONDS TO INFLATIONARY PRESSURE

1. SUMMARY. Vietnam's CPI has registered an increase of
7.2% so far this year. While the GVN attributes this rise
to external forces such as oil prices, the CPI is also
heavily weighted to reflect rises in the price of food and
foodstuffs. Credit growth has also rapidly increased by 33%
this year. The inflationary pressures resulting from these
developments have prompted the State Bank of Vietnam to
follow the IMF's advice and raise the compulsory reserve
ratio for both Vietnam Dong and U.S. Dollar deposits. END
SUMMARY.

SERIOUS INFLATION OR FAULTY CPI?
--------------------------------

2. (U) In recent months, inflation has been on the rise in
Vietnam. The Government Statistics Office (GSO) estimates
Vietnam's Consumer Price Index (CPI) to have increased 7.2%
from December 2003 - June 2004. The monthly CPI for June
continued to rise 0.8% compared to May. The year-to-date
increase surpassed the GVN target by nearly 1.5 times.
According to the IMF, Vietnam's year-on-year inflation (June
03 - June 04) is 8.3%.

3. (U) Explanations for the rate increase vary. The GSO
cites the increase in oil prices as the main factor, but the
IMF sees a domestic explanation. The IMF rep contends that
droughts caused food prices to rise and the large weight of
this component in the CPI (nearly half) was the primary
factor in the increase. The IMF contends that if Vietnam
only calculated "core" inflation (i.e. without foodstuffs
and fuel prices) the situation would appear more benign.
Vietnam's CPI basket includes 400 goods and services in 10
basic categories. Food and foodstuffs account for nearly
half of the total. Of the other 9 categories, the other
primary areas are: transportation and communication
(including energy) at 10%, housing and building materials at
8%, and household appliances at 9%. The food and foodstuffs
component has risen dramatically in the past year by 13-14%
while the other components have only risen by an average of
about 2%. The price of pharmaceuticals has also been on the
rise lately, but the category only accounts for 2.41%. The
local World Bank office points to increases in the prices of
steel and fertilizer, as well as temporary price shocks from
the outbreak of Avian Influenza earlier this year and the
subsequent ban on the sale of poultry meat and eggs.

EXPECTATIONS
------------

4. (U) GVN officials from various ministries have made
predictions about the eventual year-end inflation rate to
include worst-case scenarios should government actions not
succeed in reducing inflation. According to press reports,
Vice Minister of Finance Nguyen Ngoc Tuan anticipates that
the monthly CPI for July will increase by 0.8% or more and
that the annual CPI for this year may reach 9%. The press
also reported that the Ministry of Trade, following a recent
inter-agency meeting, predicted a 10-12% CPI at year's end
as the worst-case scenario.

5. (U) Many newspapers have also carried commentary by non-
governmental observers, some of it echoing the government's
worst-case scenarios. In an article in the newspaper Tuoi
Tre dated June 24, Vietnamese-American Pham Do Chi, a
regional economic expert who is frequently interviewed by
the paper, believes that if the GVN can manage a "soft
Landing" and cool down economic growth to about 6.5 - 7%
then the annual inflation rate might be curbed at 7 - 8%.
However, should the GVN fail to cool down the economy, he
predicts inflation could reach 10% by the end of the year.

EFFECT ON CONSUMERS
-------------------

6. (U) While the local IMF rep believes that the
inflationary pressures primarily resulted from an imbalance
in the CPI and would have likely proved to be transitory,
she and new IMF Managing Director Rodrigo de Rato (who was
in Hanoi June 26) urged the GVN to act to stem the
development of an inflationary psychology among consumers.
They feared that transitory price increases might eventually
combine with an increase in civil service wages scheduled
for this October to create real inflationary pressures. The
resulting consumer behavior would then begin to fuel the
inflation rate.

7. (U) Recent Vietnamese press reports on inflation have
been fairly accurate, but they may still have a negative
impact on consumer behavior. Several recent articles
pointed to a trend among Vietnamese of moving their savings
from VND deposits to USD deposits. In an effort to calm the
fears of the public, SBV Governor Le Duc Thuy and several
senior officials at large, state-owned commercial banks have
made themselves available for interviews with various
newspapers. However, the mere appearance of headlines on
inflation has probably already increased consumer anxiety.
SBV ACTS TO STEM CREDIT GROWTH
------------------------------
8. (U) To relieve inflationary pressure, the State Bank of
Vietnam (SBV) raised the compulsory reserve rate for Vietnam
Dong (VND) and U.S. Dollar (USD) deposits. SBV raised the
reserve requirement for VND short-term and at-call deposits
from 2% to 5% and doubled the rate for VND medium and long-
term deposits to 2%. The rate for USD short-term and at-
call deposits was doubled to 8%, and the rate for USD medium
and long-term deposits was also doubled to 2%. The Bank of
Agriculture and Rural Development raised rates for VND short-
term deposits from 1.5% to 4%, but the rate for VND medium
and long-term deposits remained unchanged at 1.5%. The SBV
hopes these actions will stem the rapid growth of credit.
So far this year, according to the IMF, credit has expanded
at a rate of 33%, compared with 28.4% in 2003. State-owned
enterprises or state-directed development projects receive
the majority of these loans that generally prove to be
underperforming loans. According to reports in the July 1,
2004 newspaper Lao Dong, many large commercial banks say
that they do not plan to raise interest rates in the coming
weeks.
BURGHARDT

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