Cablegate: Macroeconomic Developments in Vietnam

VZCZCXRO3008
RR RUEHHM
DE RUEHHI #1150/01 1731036
ZNR UUUUU ZZH
R 221036Z JUN 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5712
INFO RUEHHM/AMCONSUL HO CHI MINH 3290
RUEHGP/AMEMBASSY SINGAPORE 2409
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 001150

SIPDIS

TREASURY FOR OASIA
SINGAPORE FOR REGIONAL TREASURY ATTACHE BAKER
STATE PASS FEDERAL RESERVE SAN FRANCISCO FOR DFINEMAN

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN VM
SUBJECT: Macroeconomic Developments in Vietnam

REF: HANOI 1149

1. (SBU) Summary. With capital inflows, inflation and credit
growth reaccelerating, the State Bank of Vietnam (SBV) is under
increasing pressure to reign in liquidity. Because of official
policies calling for stable interest rates and exchange rates,
however, SBV has been forced to resort to blunt instruments such as
reserve requirements as the main tools to deal with these
challenges. Even open market operations were halted for a time due
to conflicts between the Ministry of Finance (MOF) and SBV.
Nevertheless, authorities and market participants remain confident
that the favorable growth environment will continue in the short and
medium term. End Summary.

2. (U) This is one of five cables reporting on the visit
of Regional Financial Attache Susan Baker's May 29-June 1 visit to
Vietnam. This message reports her findings and impressions of
recent macroeconomic developments.

INFLATION PICKING UP
--------------------

3. (SBU) The SBV acknowledges that inflation in the first half of
2007 will likely surpass 2006 levels and blames this development on
the impact of WTO accession, the subsequent loss of the ability to
control administered prices and new increases in fuel prices. The
SBV official in charge of foreign exchange policy also noted that
Vietnam's progressive liberalization of the capital account has
increased capital inflows, leading to monetary expansion. The same
official cited first quarter 2007 foreign inflows of $2.5 billion in
FDI and $1 billion in remittances and first half 2007 portfolio
inflows of $3.4 billion.

4. (SBU) SBV officials also blame the MOF's expansive fiscal policy,
particularly the government's policy of large increases in civil
service wages, for fueling inflationary expectations. Following an
increase of 28.5 percent in October 2006, the SBV was able to win a
concession from the MOF for no civil servant salary increases in
2007. In a separate meeting, MOF officials defended their policies
and reiterated their view that such large increases are needed as
part of the GVN's civil service reform efforts aimed at reducing
corruption, and they expect the increases to resume in the future.

CREDIT GROWTH
-------------

5. (SBU) The SBV's monetary policy officials are also concerned
about a resurgence of credit growth. One official source reported
that while credit growth had fallen from its 2004 peak of around 40
percent to around 20 percent in the second quarter of 2006, it has
moved back up into the 30 percent annual growth range more recently.
(Note: SBV's banking policy and supervision officials were not
particularly concerned about the rising credit growth, which they
said was needed to support high GDP growth and could be controlled
with risk management and provisioning policies. End note.)

DRAMATIC INCREASE IN RESERVE REQUIREMENTS
-----------------------------------------

6. (SBU) The SBV noted that the SBV Governor has approved
essentially to double the minimum reserve requirements effective on
June 1, 2007. The SBV officers expect the (unremunerated) reserve
requirement for Vietnamese Dong-denominated deposits will increase
from 4 percent to 8 percent, while U.S. dollar-denominated deposits
will increase from 8 percent to 10 percent, although they said exact
rates will also depend on the term of the deposits. Bankers later
reported that they had heard reserve requirements will rise from 5
percent to 10 percent.

7. (SBU) Surprisingly, market participants said the very large
reserve requirement change has had no impact on the interbank
lending market -- at least up to the first day of official
implementation. The SBV, the IMF resident representative and some
market participants noted that most banks already had been holding
excess reserves at the SBV before the increase, so they might not
need to borrow more funds to meet the new requirement.

MONETARY INSTRUMENTS GOING UNUSED
---------------------------------

8. (SBU) When asked what else could be done to tighten monetary
policy, SBV officials dismiss the options of raising interest rates
or allowing the currency to appreciate, noting the government's
policy objective of keeping these two items stable. Regarding the
exchange rate, one SBV official explained that letting the currency
appreciate would be hard on exporters. He also cited China as an

HANOI 00001150 002 OF 002

example of a fast-growing economy with strong capital inflows that
has not let its currency appreciate. SBV officials did say that
they will be able to increase open market operations by issuing more
SBV bills, although they consider it a relatively limited tool for
addressing inflation due to the long lag time for such operations to
have an effect. (Note: According to one official source, the MOF
chastised the SBV for issuing too many SBV bills and crowding out
MOF fundraising efforts. This led to a temporary halt on SBV
issuances that may have contributed to the high liquidity
environment.)

9. (SBU) Comment: The muted impact of such a large increase in
reserve requirements is disconcerting, considering the Vietnamese
unwillingness to use other instruments to reign in liquidity. The
disputes between the SBV and the MOF, as well as the differing views
of the SBV's monetary and banking supervision divisions, make it
clear that not everyone is on board with the need to reign in excess
liquidity in the economy. With credit growth reaccelerating,
especially at the private banks, and limited risk management
systems, continued inaction may be storing up problems for when the
economy slows down. End Comment.

ALOISI

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