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Cablegate: Vietnam Economy in the First Half of 2004 - Stable

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

170747Z Nov 04

UNCLAS SECTION 01 OF 04 HANOI 003097

SIPDIS

STATE PASS USTR FOR EBRYAN
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO

E.O. 12958: N/A
TAGS: ECON EFIN VM FINREF
SUBJECT: VIETNAM ECONOMY IN THE FIRST HALF OF 2004 - STABLE
GROWTH WITH MILD INFLATIONARY PRESSURE

REF: HANOI 1918

1. SUMMARY: The Vietnamese economy grew steadily at an
annual rate of seven percent in the first six months of
2004. Nonetheless, the economy is facing increasing
inflation primarily resulting from external supply factors.
Boosted by higher oil prices, export performance remained
strong with growth of 20 percent. Foreign direct investment
has started a modest recovery after a two-year slowdown.
The government response to inflation has ranged from raising
the reserve ratio in banks to ordering government agencies
to keep prices rises down. The former is a hopeful sign of
a shift to more market-oriented policies while the latter is
more a centralized planning approach. Other policies such
as higher tariffs and taxes on automobiles have led to a
sharp drop in sales for the fledgling auto market. The
government may be getting some things right, but it is
avoiding the hard issues such as financial sector and state-
owned enterprise (SOE) reform while continuing to protect
its services sectors. This is preventing foreign investment
by cutting-edge firms that could bring better services at
lower costs and create jobs. The question, as one foreign
expert put it, is not how bad will inflation be this year,
but whether Vietnam is growing at its potential. END
SUMMARY.

GENERAL ECONOMIC PERFORMANCE
----------------------------

2. According to government estimates, Vietnam's Gross
Domestic Product (GDP) grew by 7 percent in the first six
months of 2004. This growth rate, at the same level compared
to the first half of 2003, is behind the 7.5 - 8 percent
target set by the National Assembly.

3. The growth rate of the agriculture, forestry and fishery
sector rose by only 2 percent. Agriculture grew at 1.6
percent, the slowest rate of growth since 2000. This slow
growth is due primarily to unfavorable weather conditions
and avian flu. The northern region experienced a prolonged
cold spell followed by a drought at the beginning of the
winter-spring crop, and the southern central region
experienced heavy rains. Avian flu also spread to many
cities and provinces earlier in the year leading to massive
culling of poultry stocks. Poultry farmers lost over 38
millions birds, 15 percent of the total stock.

4. The industry and construction sector grew by 10 percent,
the same rate as in the first six months of 2003. Foreign
invested enterprises and the domestic private sector were
the primary contributors to the higher growth rates with
growth of 14.7 percent and 21.8 percent respectively.
Within the sector, the mining industry achieved the highest
rate of growth at 15 percent, while other industries have
experienced a slowdown. The construction industry, buffeted
by rising steel prices in the first quarter, only grew at
7.3 percent compared to 10.6 percent for the same period
last year.

5. The Consumer Price Index (CPI) has risen since December
2003 and has reached 7.2 percent in June 2004. This increase
in CPI in the first half of 2004 was mainly driven by rising
prices for food and foodstuff, which account for 47.9
percent of the price basket. The prices of food and
foodstuff rose 13.2 percent, followed by pharmaceuticals and
medical services (6.6 percent), and housing and building
materials (4.8 percent). Rising world oil prices contributed
slightly to the rising CPI, as transportation services
account for 10.1 percent of the price basket.

6. In an effort to curb the increase of the CPI the State
Bank of Vietnam (SBV) raised the compulsory reserve ratio to
control credit growth and limit money supply. The IMF
welcomed this step. The CPI continued rising in the third
quarter but at a slower pace as a direct result of a more
gradual rise in food prices. The CPI has increased 8.6
percent in the first nine months of 2004. The IMF forecast
that annual inflation for 2004 would be around 9.5 percent,
assuming no further supply shocks or other major changes for
the rest of the year. (See Reftel for more on Vietnam's
inflation situation). More recently the GVN has instructed
agencies to limit price increases.

7. The Vietnamese Dong depreciated only 2 percent against
the U.S. Dollar in the first half of the year. Two trends
were apparent. There was a rise in USD remittances from
overseas. There was also a shift in personal savings from
USD to VND in the local banking system in pursuit of higher
interest rates. Dong deposit rates range from 7.5-8.5
percent per annum versus 1.9 to 2.1 percent for dollars held
locally. Some State Bank officials urged Vietnamese to keep
their personal savings in Dong, apparently arguing that this
would give a higher income, despite the fact that real
income would be negative. These factors do not explain the
limited depreciation of the Dong as much as the narrow band
that limits daily fluctuation of the Dong (under three
percent from the previous day's close) does.

8. Overseas remittances by Vietnamese residents and
Vietnamese workers have been rising steadily. A State Bank
official estimated that total remittance to Vietnam may
reach USD 3 billion this year, surpassing the record figure
USD 2.5 billion in 2003. The IMF estimates that an
additional USD 3-4 billion enters the country through
informal channels.

FOREIGN DIRECT INVESTMENT
------------------------

9. In the first six months of 2004, 280 foreign direct
investment (FDI) projects were licensed with a total
investment capital of USD 806.6 million. The number of new
projects stood at the same level compared to the same period
last year, but the registered capital increased by 13.6
percent, with the increase in average registered capital per
project from USD 2.5 million in 2003 to USD 2.88 million in
the first half of 2004. New projects continued to
concentrate in the industry and construction sector with
71.8 percent of new projects (201 projects), and 59.5
percent of the total registered capital (USD 479.6 million).

10. The southern region remains the most attractive
location to foreign investors with 199 projects worth USD
454.7 million, accounting for 71.1 percent of the total
number of new projects and 56.4 percent of the total
registered capital.

11. Among foreign investors, Taiwan, with 65 projects worth
USD 231 million, accounts for 28.6 percent of the total
registered capital and was the largest foreign investor in
the first six months 2004. Taiwan is followed by Canada,
South Korea, Malaysia, and Japan. Due to a large investment
project this year (USD 147 million) Canada, ranked in the
top ten foreign investors. Since the GVN continues to
include only direct U.S. investment and ignore U.S.
investment through third country subsidiaries in its
official statistics, the total for the United States appears
lower than it really is.

12. Although Vietnam's investment climate has improved
considerably, there are still many issues to be ironed out.
The investment evaluation and licensing process is in
practice lengthier than stipulated. Site clearance and land
lease procedures often delay project deployment. Regulations
on foreign investment are sometimes vague and inconsistent.
13. The GVN has stated publicly that it recognizes the
importance of foreign investment to economic growth and is
aware of increasing competition in the region for foreign
investment. In seeking to boost foreign investment levels
from the recent slump, the GVN is working to formulate an
adequate common legal framework for both foreign and
domestic investors. The GVN has also pledged to facilitate
foreign investment in essential areas such as real estate,
financial services, aviation, marine transportation, legal
services, telecommunications and trade.

TRADE
-----

14. Exports continued to be strong in the first half of
2004, generating USD 11.8 billion and maintaining steady
growth at 20 percent compared to the same period last year.

Top ten export products in 1H/2004
Name Value Percent of
(USD mil) total exports

1 Crude Oil 2,501 21.2
2 Textile & Garment 1,996 16.9
3 Footwear 1,290 10.9
4 Aquatic products 982 8.3
5 Rice 506 4.2
6 Wooden products 492 4.2
7 Electronic products,
computers 405 3.4
8 Coffee 360 3.0
9 Handicraft Rubber 194 1.6
10Power conduit & cable 168 1.4

Source: General Statistics Office

15. Crude oil was the main contributor to export growth,
earning USD 2.5 billion and recording a 29.3 percent growth.
This was the combined result of increases in both export
volume and oil prices. Other significant contributors to
export growth included: footwear, rice, wooden products,
coffee and power cables.

16. Textile and garment exports generated nearly USD 2
billion in the first half of 2004, a 7.8 percent increase
compared to the same period in 2003. Also in the first half
of 2004, textile exports to the European Union, Canada and
Japan surged dramatically (53.8 percent, 17.9 percent and
10.2 percent respectively) offsetting the reduction of these
exports to other markets such as the United States, ASEAN,
and South Korea. (Note: The U.S.-Vietnam Bilateral Textile
Agreement took effect in May 2003, capping growth of
Vietnamese textile and garment exports to the United States.
End Note.)

17. Traditional key export commodities such as rice, coffee
and coal have gone up significantly as a direct result of
recovered or rising prices. Rice exports were down by 3.3
percent in volume but up 14.5 percent in value thanks to
improved quality and higher prices. (Note: the price of rice
went up by USD 35 per ton compared to the same period last
year. End Note.) Coal and coffee exports also increased
sharply in both quantity and value (48.8 percent and 59.9
percent respectively for coal, 52.5 percent and 46 percent
respectively for coffee). These helped maintain high export
growth. This year wooden products are emerging as Vietnam's
new major export, earning nearly USD 500 million in income
in the first six months.

18. According to analysis by the GVN, exports are
maintaining a high growth rate for several reasons. First,
some products achieved a higher export volume (namely crude
oil, coal, coffee, tea). The world economy is recovering
and the prices of some commodities (e.g.: crude oil, rice,
coal, rubber) were rising. Finally, the government of
Vietnam and concerned agencies were active in expanding
export markets and promoting exports.
Top ten import products for 1H/2004
Name Value Percent of
(USD mil) total
import

1 Machinery & equipment 2,093 14.7
2 Petroleum products 1,588 11.2
3 Leather, textiles, garments 1,174 8.3
4 Steel & iron 1,111 7.8
5 Cloth 1,019 7.2
6 Electronic products,
computers and components 549 3.9
7 Plastic 496 3.5
8 Fertilizer 346 2.4
9 Automobile 344 2.4
10Chemical products 336 2.3

Source: GSO

19. Imports reached USD 14.2 billion, and rose 14.7 percent
compared to last year. The domestic sector spent USD 9.1
billion (64 percent of total import value), up 12.8 percent
from last year, and foreign invested enterprises (FIEs)
imported USD 5.1 billion (36 percent of total import value),
up 18.2 percent from last year.

20. As a result of rising prices of some products such as
petroleum, steel, fertilizer and plastic, the import value
of these products increased considerably even though import
volumes rose only modestly or even declined. For example,
petroleum imports grew only 5 percent in volume but rose
25.6 percent in value due to a 20 percent increase in price,
while steel and iron decreased 0.7 percent in volume but
rose 21.3 percent in value due to a 22 percent increase in
price.

21. Machinery and equipment imports dropped 17.6 percent
compared to the same period last year. The 2003 level was
particularly high as a result of a surge in imports of
machinery and equipment for the Southeast Asia (SEA) Games
XXII. The import of auto parts and kits for local assembly
decreased in the first half of 2004. A five-fold increase in
the Special Consumption Tax on autos, from 5 percent to 25
percent (effective from 1 January 2004) resulted in an over
20 percent increase in the sales prices of locally assembled
vehicles, slowing sales.

22. The trade deficit in the first six months of 2004 stood
at the same level in value compared to the same period in
2003. However, as a percentage of total export income the
trade deficit was down to 20 percent from 24.3 percent. The
domestic sector had a trade deficit of USD 3.7 billion while
foreign invested enterprises (including crude oil exporters)
reported a trade surplus of USD 1.3 billion. Excluding
crude oil the foreign invested sector had a trade deficit of
USD 1.1 billion.
Vietnam-US trade for 1999 - 2003 (In USD million)
2001 2002 2003

Exports to US 1,053 2,395 4,555
(US customs value)
Imports from US 461 580 1,324
(US FAS value)
Trade balance 592 1,815 3,231

Source: US International Trade Commission

23. Vietnam's exports to the United States continued to
grow, generating nearly USD 2.4 billion in the first six
months of 2004. Major export merchandises with high growth
included footwear, wooden products (furniture), fruits and
nuts and garments. However, Vietnam's imports from the
United States dropped to USD 339 million from USD 670
million, due mainly to a difference in aircraft sales in
2004. This resulted in Vietnam's widened trade surplus with
the United States, to over USD 2 billion in the first half
of 2004. Excluding aircraft sales, however, U.S. exports to
Vietnam grew 6 percent in the first of 2004, with strong
growth in exports of cotton, electrical machinery, plastics,
wood and paper.
24. COMMENT: Benefiting from higher export earnings from
oil and largely insulated from domestic oil price rises,
Vietnam's steady growth continued. The local headline is
and continues to be inflation from external supply shocks in
the food and foodstuffs that comprise half of the CPI
basket. The government response has ranged from raising the
compulsory reserve ratio in banks to ordering government
agencies to keep prices rises down. The former is a hopeful
sign of a shift to more market-oriented policies while the
latter is more of a centralized planning approach. There
have been rumors that the government may revise the market
basket to reduce the share of foodstuff and with it
inflation. Other policies such as higher tariffs on
automobile kits for assembly and higher taxes on their
finished products have caused a sharp drop in sales in the
fledgling auto market that has already led Toyota to layoffs
and threatens the investments of major auto makers.
25. While the government may be getting some things right,
it is avoiding the hard issues such as financial sector and
SOE reform while continuing to protect its services sectors.
This is preventing foreign investment by cutting-edge firms
that could bring better services at lower costs and create
jobs. For example, there were no FDI projects in the
banking and finance sector licensed in the first half of the
year. The question, as one foreign expert recently put it,
is not how bad will inflation be this year, but whether
Vietnam is growing at its potential. End Comment.
MARINE

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