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Cablegate: Vietnam: Economic Reform Situation

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

UNCLAS SECTION 01 OF 03 HANOI 000579

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR EBRYAN
STATE ALSO FOR E, EB AND EAP/BCLTV
STATE ALSO PASS USAID FOR CHAPLIN/ANE
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: EFIN ECON ETRD VM FINREF SOE WTO
SUBJECT: VIETNAM: ECONOMIC REFORM SITUATION

Sensitive but Unclassified -- Please protect accordingly.

1. (SBU) Summary: The Ambassador hosted a breakfast on
March 4 for a number of Ambassadors as well as
representatives of the UNDP, IMF and World Bank to discuss
the economic reform situation in Vietnam in advance of the
mid-term Consultative Group (CG) meeting in early June. IMF
Representative Susan Adams expressed concern that Vietnam's
rapid credit growth (43 percent in 2004 versus 28 percent in
2003) would mask the amount of current non-performing loans
(NPLs), and lead to future problems as more poor qualify
loans were approved. Adams also argued that reforming the
financial sector is key to solving the SOE reform issue.
World Bank (WB) chief Economist Martin Rama shared much of
this assessment and noted that the WB intends to work with
the GVN on a financial sector reform roadmap. Competition
in public works procurement would help reduce the
possibility for corruption, he noted. To address a number
of issues, the Ministry of Finance (MOF) is considering
forming an investment consortium along the lines of Temasek
in Singapore. Noting that nothing had been set yet for the
CG agenda, Rama said that the Ministry of Planning and
Investment (MPI) had suggested corruption as an item for the
agenda. Other likely topics were the financial sector,
equitization, privatization of infrastructure projects and
the next five-year plan. Danish Ambassador Peter Hansen
recommended harmonization and judicial reform as good agenda
items. He added that at the December CG, there had been a
good dialogue with DPM Vu Khoan, but otherwise everyone had
been reading from talking points. End summary.

2. (U) The Ambassador hosted a breakfast on March 4 for a
number of Ambassadors as well as representatives of the
UNDP, IMF and World Bank to discuss the economic reform
situation in Vietnam in advance of the mid-term consultative
group meeting in early June.

IMF: Rapid Rise in Credit Growth Will Hide NPLs
--------------------------------------------- --

3. (SBU) In opening comments on the current situation, IMF
Representative Susan Adams said that the IMF and the World
Bank would be assessing the commercial and private banking
situation in Vietnam in coming weeks. She added that the
GVN was starting to show momentum on trying to address
financial sector reform through the Poverty Reduction
Support Credit (PRSC). The rate of credit growth had been
quite rapid with a rise from 28.5 percent at the end of 2003
to 43-45 percent at the end of 2004. While this rise alone
was not troubling and was having no impact on inflation, it
was affecting the quality of economic growth since many
loans are being granted for projects with no viable economic
basis. Credit growth varies on a sector-by-sector basis,
Adams observed. Of particular concern was the Development
Assistance Fund, which she considered to be a "black box,"
but which the IMF was seeking to examine carefully in
particular because it has funding links to the postal
savings plan.

SOEs: Fix the Financial Sector and Stop the Numbers Game
--------------------------------------------- --------

4. (SBU) To achieve effective SOE reform, Vietnam must
ensure efficient resource allocation, Adams observed. For a
long time, the IMF and World Bank had been engaged in a game
with the GVN of counting the number of SOEs equitized.
However, if the financial sector were effectively reformed
so that credit was priced accurately and banks measured
their performance by their rates of return, not by the rise
in the amount of credit, there would be more rational
lending and the credit available to SOEs would decline.
Slow and steady financial sector reform would lead to
rationalized SOEs, though this would not mean that all SOEs
would be eliminated. Having some profitable SOEs would
probably be acceptable.

5. (SBU) Asked how a firm might react to having its loan
application rejected, Adams said that the loan applicant
might use political connections or turn to the Development
Assistance Fund for credit. She noted that the GVN was
seeking to rationalize debt in order to improve its
international credit rating. Since the stock of non-
performing loans has always been muddled, the IMF is seeking
an accurate picture. The State Bank of Vietnam (SBV) had
recapitalized some of the banks three years ago, but this
had been a "band-aid" as the SBV now recognizes. In
addition, the issue of how to classify loans as non-
performing is a complex one as is how to provide for loan
losses. Deputy SBV Governor Tran Minh Tuan agrees with the
need to change the classification system as called for in
Decision 1627 of December 31, 2001, but believes it should
take place gradually.

6. (SBU) By the end of 2005, the IMF expects that Vietnam
will be closer to international accounting standards, but
this shift should be gradual to avoid antagonizing the GVN.
Banks are starting to put systems in place to get data to
the SBV on the same basis. EU Ambassador Markus Cornaro
noted the need for the GVN to measure the current and
investment budget on the same basis and combine the
analysis. Ambassador Marine asked when should one worry
about the rapid rate of credit growth. Adams replied that
20 percent annual credit growth had been the target under
the old IMF program. Already there was pressure in the real
estate market, but there was no inflationary "blowout"
though there was a poor quality loan portfolio, which could
affect important decisions on Official Development
Assistance (ODA) and sovereign finance. While there was no
need for alarm yet, there was a need to tell the GVN the
risk of this credit policy long term and the potential
fiscal liabilities it could create for the government. An
IMF staff team will be in Vietnam in March to provide
technical assistance on statistics such as the consumer
price index and the producer price index, she added.

World Bank View
---------------

7. (SBU) Martin Rama, World Bank Senior Economist in
Vietnam, then provided his view on the situation. He began
by noting that the World Bank agrees on the credit situation
and the inability to verify the stock of non-performing
loans (NPLs). Credit growth should be below 40 percent. One
positive note was that the fastest growing segment of
lending was by the joint stock banks, though they had the
lowest base. (Note: They account for less than five percent
of the credit market. End note.) Vietcombank had the
fastest growth among state owned commercial banks (SOCBs).
Rama noted that the (November 16, 2004) Decision 184 on
transparency had led to the full disclosure of the budget
and a requirement that public investment not take place
unless there was adequate disclosure. Ministries have to
repay these loans themselves and have been asking donors for
funds for such purposes. More competition in public works
projects would help reduce corruption, he opined. The World
Bank has not seen evidence of financial mismanagement, which
could indicate corruption, but has seen evidence of
collusion.

8. (SBU) The MOF is shifting to international accounting
standards, but the SOEs and banks, which it owns, are not
keen on changing quickly in these areas, Rama noted. The
MOF will seek to reform fiscal loan assessment to SOEs as
well as the NPL classification system and the amount loan
loss provisions required. The World Bank hopes to work with
the GVN on a road map for financial sector banking reform.
Rama cited the case of the fertilizer sector where SOCBs
refused to do a syndicated loan since the loan amount was
too large and the project returns were not good. The
provincial banks do not have this level of sophistication.
To address this, the MOF is considering forming an
investment consortium along the lines of Temasek in
Singapore. This change would enable them to eliminate many
small SOEs and resolve NPLs, but might take five years.

9. (SBU) Ambassador Marine asked the World Bank when the
roadmap of financial sector reform would be completed. Rama
responded that the government had different views on this.
The Prime Minister and Office of the Government were
committed to it, but needed a green light from the Party.
Should this approval come before the mid-term CG, it would
be possible to discuss at that time.

10. (SBU) EU Ambassador Cornaro commented that the lack of
foreign direct investment (FDI) in infrastructure could
indicate that there had been little change in the GVN's
attitude on the need to shift from reliance on ODA to FDI as
ODA gradually declined. Rama responded that there had been
a change in the regulatory framework in power generation.
The new electricity law and the decision to equitize several
power plants held promise in this area. The WTO
negotiations had led to some liberalization in telecom, Rama
opined. Many provinces were also creating infrastructure
funds and issuing their own debt for infrastructure
projects. The key steps for greater private sector
involvement in infrastructure were improved transparency,
integration of the capital and recurrent budgets, he added.

11. (SBU) Danish Ambassador Hansen remarked on the need to
make legal and judiciary reform a more important issue for
the donors. UNDP Representative Jordan Ryan said that on
March 7 UNDP would review with the Ministry of Justice the
strategy for judicial reform as well as the strategy on
legal reform. This issue was currently under consideration
by the Party Politburo where the judicial part was
reportedly encountering more difficulty. Ryan added that on
public administration, the GVN appeared to be making
progress. Public administration reform was slow and hard,
though there were signs that it was moving in the right
direction.

Foreign Direct Investment
-------------------------

12. (SBU) Swiss Ambassador Benedict De Cerjat observed that
although Switzerland had a significant stock of existing
FDI, there were very few new investments. Some structural
factors are holding back new investment. Ambassador Marine
noted that U.S. FDI certainly had not flooded into Vietnam,
but rather trickling in with no recent, significant new
projects. In part, this was because potential investors
were waiting for WTO accession and in part, because although
the GVN professes that it wants FDI, it is not yet willing
to be as open and transparent as it needs to be.

WTO Accession
-------------

13. (SBU) De Cerjat also asked about the Minister of Trade's
recent remark that WTO accession might take place after
2005. Ambassador Marine noted that the GVN is now realizing
how much work needs to be done for WTO accession. A meeting
is set for March 4 to give a green light to accession in
time for the Hong Kong Ministerial or to go slower. EU
Ambassador Cornaro remarked that it was not impossible for
the GVN to accede in December, but in particular on the
rules side, the GVN would need to begin sharing drafts of
WTO required legislation in advance of passage. French
Ambassador Jean-Francois Blarel opined that Vietnam might
want to get rid of the WTO issue before the Party Congress
when a change in Prime Minister and government was possible.
The current leadership risked losing credibility if it did
not succeed in WTO accession.

14. (SBU) Australian Ambassador Joe Thwaites noted that
progress in their market access bilateral was proving slow
and tough. In a recent bilateral in Geneva, Vietnam had put
no new offer on the table. When the meeting ended after two
hours, Vietnam agreed to provide a new offer. Ambassador
Marine noted that the United States would have a bilateral
in Washington in mid-March and that the GVN had put forward
a new offer, which was still under review. Swiss Ambassador
De Cerjat noted that the President of Vietnam's National
Assembly would be going to Geneva as well as Brussels along
with 20-30 parliamentarians and 70 businessmen in mid-March.

Consultative Group Agenda
-------------------------

15. (SBU) Ambassador Marine also asked what would be on the
CG agenda. Thwaites said that the mid-term CG tended to
have a more operational focus. Rama noted that the Ministry
of Planning and Investment had suggested corruption as an
item for the agenda, but said nothing had yet been set.
Danish Ambassador Hansen said that harmonization and
judicial reform would be good agenda items. He added that
at the December CG, there had been a good dialogue with DPM
Vu Khoan, but otherwise everyone had been reading from
talking points. Rama listed financial sector as the next
priority as well as equitization, privatization of
infrastructure projects, corruption and the next five-year
plan.


MARINE

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