Cablegate: Effects of U.S. Financial Crisis On Vietnam

DE RUEHHI #1158/01 2830614
P 090614Z OCT 08




E.O. 12958: N/A
SUBJECT: Effects of U.S. Financial Crisis on Vietnam

REF: Hanoi 1095

HANOI 00001158 001.2 OF 002

1. (SBU) Summary: The short term effects of the U.S. financial
crisis in Vietnam have been minimal; local banks, while suffering
from domestic troubles, are not heavily invested in sub-prime debt.
Longer term questions remain, however, as a global downturn may
affect exports and both direct and indirect capital flows. The GVN
is aware of the downside risks and is evaluating its plans for 2009
accordingly. End Summary.

Short Term Effects are Negligible

2. (SBU) In the short term, most analysts agree Vietnam will not
suffer severe adverse consequences as a result of the financial
crisis in the United States and elsewhere. Vietnam's fledgling
banks are not heavily invested in mortgage-backed securities or
derivatives, nor are they dependent on foreign financing. As a
result, the State Bank of Vietnam (SBV) has taken a relaxed stance
on the immediate effects of the turmoil in the U.S. On September
30, SBV Governor Giau told a press conference that "I do not see any
impact that the U.S. financial crisis would bring to Vietnam's
banking sector." Press reports a couple of days later indicated
that some local banks had withdrawn money from certain foreign banks
and reinvested the money in "prestigious banks in Hong Kong and
Singapore," but there have been no "bank runs" or other public
displays of panic.

3. (SBU) As previously reported, some of Vietnam's banks are
troubled, but those troubles are a result of internal causes such as
high credit growth, inflation, interest rate caps and poor
management/supervision, not sub-prime debt exposure (reftel). The
collapse or merger of many of the larger U.S. financial institutions
may mean that banks in Vietnam will have a more difficult time
finding foreign strategic partners, and foreign banks operating in
Vietnam (like HSBC) might take a second look at their expansion

4. (SBU) Global market psychology has affected Vietnam's stock
market; it has risen and fallen with the rest of the Asian markets
over the last couple of weeks. On September 30th, the market
dropped 4.7 percent, to 456, following news that the bailout plan
failed in the House, but such a percentage drop is not unusual in
Vietnam's thin market. The State Securities Commission (SSC) was
unfazed, telling the Embassy that they thought the market would be
"down for four days" but then recover. The market did better than
predicted initially, dropping by only .5 percent the following day
and then rising back up to 460 on October 2. On October 3 and 6,
the market was down a total of 8.5 percent and as of October 9, it
had finally fallen below 400. Vietnam's stock market had a large
negative adjustment earlier in the year, however, and the movements
now are small in comparison.

Risks to Exports and FDI Remain

5. (SBU) Analysts and economists agree that the more critical issue
for Vietnam is the long-term effect of the U.S. financial crisis.
Vietnam is heavily dependent on exports and foreign direct
investment (FDI), so a global slowdown could have serious adverse
affects on its balance of payments. Exports are the obvious
downside risk as economic growth slows in Vietnam's major foreign
markets. A slowdown in exports will also bring a reduction in
imports, but it is unlikely that imports will slow as much as
exports. The World Bank in Hanoi is currently examining this issue
to see if it can measure how Vietnam's balance of payments will be
affected by a drop in exports.

6. (SBU) Less certain is the financial crisis' effect on FDI.
Vietnam has been posting very high numbers of committed FDI
throughout 2008 (over $44 million for 1H 2008), but many analysts
feel that implemented FDI will take a hit as a result of the U.S.
financial turmoil. Pledged investment is calculated from signed
investment licenses and is a useful indicator of investor sentiment
and GVN plans for the future. The amount of FDI disbursed in 2008
will probably grow to around $8-10 billion at year's end, up from $5
billion in 2007. As credit becomes more scarce and risk less
tolerable, investors in emerging markets like Vietnam may lose their
financing commitments or simply rethink their business plans. Local
economists are already urging the GVN to use investment capital
efficiently and to select projects carefully, a message that will
become even more critical if FDI commitments drop significantly.

HANOI 00001158 002.2 OF 002

Slumping FII Flows and Fund Share Prices

7. (SBU) Vietnam financial sector analysts note that U.S. financial
sector's difficulties present two other reasons for potential
concern in Vietnam. First, "hot money" inflows of foreign indirect
investment (FII) could dry up completely, increasing Vietnam's
current account deficit and potentially putting pressure on
Vietnamese dong (VND) exchange rates. FII inflows are already down
sharply due to the macroeconomic problems Vietnam has experienced
this year, as much as 75 to 80 percent according to one fund
manager. At the same time, most funds in Vietnam are closed-end,
meaning that foreign investors are not able to pull their capital
out except by selling the listed shares. In a recent Vietstock
interview, Nguyen Son, Head of the Market Development Department
under the State Securities Commission, estimated the total value of
foreign portfolio investment in Vietnam currently at $7-8 billion.
Most industry professionals estimate that FII flows are still
slightly positive.

8. (SBU) The second follow-on effect affects fund share prices.
Strapped for cash overseas investors have been selling shares in
listed funds (e.g., Vinacapital's Vietnam Opportunity Fund -- VOF),
reducing the difference between the fund's share price and the
underlying net asset value (NAV) of the fund's holdings, and putting
pressure on fund managers. As the funds' share prices drop, some
funds are buying back their own shares to prevent a situation in
which the NAV exceeds the market value of the fund's share price.
If the fund's share price discount to NAV is particularly wide, this
creates an opportunity for another firm or investor to acquire
enough shares to take control of the fund, then sell off the assets
and pocket the difference. Widening discounts to NAV also makes it
difficult for the funds to raise new capital (which must be raised
at the NAV so as to not dilute existing shareholders).

GVN Response

9. (SBU) The GVN is aware of the issues it may face as a result of
a global downturn. The PM recently tasked various ministries and
agencies with preparing a report on the possible domestic
ramifications of the crisis. He also continues to advocate
publically for increasing exports and making Vietnam attractive for
foreign investors as a means of staving off slowing demand from the
U.S. and Europe. Communist Party head Nong Duc Manh, while not
referring directly to the U.S., recently directed the Central
Committee to evaluate its economic plans for 2009 "in light of the
international situation."

10. (SBU) Our interlocutors in the GVN are also keenly interested
in the latest news. Many of our bilateral meetings begin or end
with questions about the bailout plan, the debate in Congress, and
when the U.S. economy might recover. As Finance Vice Minister Ha
recently said after receiving an update, "Well, we want to know
because we will get better when you get better." Press coverage has
been extensive but rational and balanced thus far.


11. (SBU) Fortunately, the GVN is aware of Vietnam's susceptibility
to problems in the U.S. and, at least on paper, seems serious about
proactive solutions. Some analysts are privately speculating that
the Communist Party may use our financial crisis as an excuse to
slow the ongoing reform and equitization process for Vietnam's SOEs,
but most are focused on the more obvious impacts to the
macroeconomy. Post will continue to follow these issues and report

12. (U) This cable was written in conjunction with Con Gen HCMC.


© Scoop Media

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