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Cablegate: Imf Congratulates While Cautioning the Gvn

VZCZCXRO9851
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0883 2130043
ZNR UUUUU ZZH
P 310043Z JUL 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8213
INFO RUEHHM/AMCONSUL HO CHI MINH 4970
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS HANOI 000883

SENSITIVE
SIPDIS

SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR DBISBEE
STATE FOR EEB/IFD

E.O. 12958: N/A
TAGS: EFIN EAID ECPS ECON EAGR ETRD VM
SUBJECT: IMF CONGRATULATES WHILE CAUTIONING THE GVN

REF: A) Hanoi 881
B) Hanoi 846

1. (SBU) Summary: The IMF Resident Representative in Hanoi
believes the macroeconomic situation in Vietnam has stabilized in
the short term, citing exchange rates and the stock market as
reflective of increasing investor confidence. He cautions, however,
that a reduction in interest rates is premature and could undo the
positive trends seen in the last month. End summary.

2. (SBU) Ambassador and Econoff met with IMF Resident
Representative Ben Bingham on July 28 to exchange views on the
current macroeconomic situation in Vietnam. Bingham believes that
the situation has calmed and fears of an immediate balance of
payment crisis have faded. He pointed to the black market currency
rate being close to the official SBV rate, the non-deliverable
forwards markets calming and the stock market gaining as evidence
that the system is beginning to stabilize.

3. (SBU) He sees these improvements as a result of an influx of
positive economic news, including a narrowing trade deficit,
decreasing inflation and slowing credit growth. He attributes much
of this success to the SBV for keeping dong liquidity very tight
while pumping dollars into the market, but admits that "moral
suasion" techniques have probably helped (sending inspection teams
to the banks and gold shops, for example). According to Bingham,
chronic excess demand for dollars has eased from its peak three to
four weeks ago. He notes a "palpable sense of relief" in GVN
officials.

4. (SBU) This sense of relief is somewhat worrying, he warns,
because some GVN officials may already be considering an interest
rate cut (Reftel A). Bingham feels strongly that it is far too
early to be considering such a move because inflation and inflation
expectations are still not anchored. He pointed to the currency and
stock market fluctuations following the gas price hike (Reftel B) as
examples of shaky investor sentiment. Bingham feels the GVN should
be wary of upcoming inflation numbers following the fuel price hike,
as anything over 30 percent may cause domestic investors to panic.


5. (SBU) He feels things are getting better on the fiscal side, as
well. State-owned enterprises (SOEs) are "getting their horns
trimmed" and cutting back on non-core projects. (Note: Local press
reports indicate that both Vinashin and PetroVietnam have recently
pulled out of major investment deals.) Bingham would still like to
see a revised budget, however, and he criticizes the Ministry of
Finance for not communicating with the public. He says that the
PM's office could easily trim a large amount of investment spending,
and that asking the provinces to bear most of the burden on this
measure is "rather silly."

6. (SBU) Bingham cites the next two quarters as critical for
getting data and expectations under control. Only when the
fundamentals are stable will depositors return to the banks and
investors to the stock market. He would also like to see the GVN
using this time to look ahead and fix systemic problems so as to
avoid similar occurrences in the future. Specifically, he points to
the GVN's exchange rate policy, equitisation process and State Bank
structure as areas ripe for reform. There could also be additional
bad news forthcoming from the banking sector, where non-performing
loans may jump and add to local doubts about the stability of the
system.

7. (SBU) Comment: Bingham's concerns about premature interest rate
reductions are well founded. Treasury DAS Dohner had similar
concerns following his visit a few weeks ago (Reftel A). The
message that "interest rate reductions must wait until the
fundamentals are solid" should be reinforced at all levels of the
GVN. Increasing liquidity at this critical juncture could reverse
the early gains made by the GVN and result in long-lasting damage to
investor sentiment both at home and abroad. End comment.

MICHALAK

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