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Cablegate: Gvn Cuts Rates On Fears of Slowdown

VZCZCXRO3076
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1206 2980726
ZNR UUUUU ZZH
P 240726Z OCT 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8652
INFO RUEHHM/AMCONSUL HO CHI MINH 5237
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS HANOI 001206

SENSITIVE
SIPDIS

STATE FOR EAP/MLS MBROWN
SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR DBISBEE

E.O. 12958: N/A
TAGS: ECON PGOV EAID VM
SUBJECT: GVN CUTS RATES ON FEARS OF SLOWDOWN

Ref: A) Hanoi 1196
B) Hanoi 1095
C) Hanoi 1158

1. (U) In a surprise move on October 21, the State Bank of Vietnam
(SBV) issued Decision 2316 lowering the base interest rate to 13
percent from 14 percent. The SBV also cut the discount rate to 12
percent from 13 percent and the re-financing rate to 14 percent from
15 percent. The base interest rate is used by the SBV to determine
the maximum lending rates in the country. According to Vietnam's
civil code, lending rates cannot exceed 1.5 times the base rate, so
the new official cap for lending rates now will be 19.5 percent from
21 percent previously. At the same time, the SBV also injected some
liquidity into the system by implementing Decision 2321, doubling
the interest rate paid on compulsory reserves by financial
institutions to 10 percent from 5 percent, and Decision 2317,
pre-paying compulsory bills issued on March 17, 2008 worth VND
20,300 billion (approx. $1.2 billion).


2. (SBU) In the announcement issued on the 21st, the SBV states
that its actions follow the GNV's instructions to "contain
inflation, proactively limit the negative impacts of the global
economic recession and financial crisis, ensure macroeconomic
stability and sustain reasonable growth." The SBV expects that
lower lending rates will ease the credit crunch faced by most
businesses, especially small and medium enterprises (reftel A), and
therefore lead to economic growth. The SBV attributes the rate cut
to recent declines in the Consumer Price Index, which showed a 0.2
per cent monthly increase in September and is expected to fall
further in October. The SBV's Monetary Policy officials, however,
noted to the Embassy that "the base rate is not fixed. SBV will
adjust and determine the base rate in line with market conditions".
They also said that "currently there's no change" to the 30 percent
credit growth target set by the GVN earlier this year.

3. (SBU) Most analysts and economists were surprised by the move in
light of recent GVN promises about tight monetary policy through the
end of the year (reftel B). The PM recently reinforced those
messages in his remarks to the National Assembly on October 16,
identifying the GVN's "core task as controlling inflation,
stabilizing the macro-economy, ensuring social security and rational
and sustainable growth, of which inflation control is the top
priority." Both ADB and IMF representatives in Hanoi called the
measures "premature" but understandable given easing inflationary
pressures and increasing downside risks for both exports and FDI
(reftel C).

4. (SBU) Comment: Privately, some local economists are saying
that these liquidity measures run the risk of sending the wrong
signal to the market - that some may see them as another wild swing
in Vietnam's economic policy or as a sign of panic by the GVN.
Following the SBV's announcement, the dong depreciated to the top of
the official trading band and continues to hover there, perhaps
indicating that immediate market reaction is not as positive as
hoped. Given the global downturn, the GVN's monetary policy will
have to continue to walk the increasingly fine line between
mitigating external risks to growth and combating inflationary
pressures.

MICHALAK

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