Cablegate: Vietnam Shifts Focus to Maintaining Growth

VZCZCXRO3636
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1316/01 3370808
ZNR UUUUU ZZH
P 020808Z DEC 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8795
INFO RUEHHM/AMCONSUL HO CHI MINH 5335
RUEHGP/AMEMBASSY SINGAPORE 2704
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 001316

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: EINV ECON VM

SUBJECT: VIETNAM SHIFTS FOCUS TO MAINTAINING GROWTH

REF: A) Hanoi 377
B) Hanoi 1158
C) Hanoi 1206

HANOI 00001316 001.2 OF 002

1. (U) Summary: Inflation control has been Vietnam's top policy
priority since the spring of 2008. In light of discouraging
economic numbers and the financial crisis, the GVN is now shifting
its priority to preventing economic slowdown and sustaining growth.
Growth targets have been revised downward, interest rates dropped
three times and the currency trading band widened. End Summary.

INFLATION UNDER CONTROL
-----------------------

2. (U) The GVN previously identified inflation control as its top
priority for 2008 (reftel A). To achieve this goal, the State Bank
of Vietnam (SBV) adopted a tight monetary policy with a focus on
reducing money supply and controlling credit growth. Vietnam's
double digit inflation appears to have peaked in September, when it
hit 27.9% year on year. Recently released figures show that the
downward trend has continued. Year on year inflation for November
fell to 24.2%, down from 26.7% in October. The GVN and local
economists, including the IMF, are predicting that falling commodity
prices and easing capital inflows will bring single digit inflation
in 2009.

GVN CONCERN ABOUT FINANCIAL CRISIS
----------------------------------
3. (SBU) GVN concern about the financial crisis and its long term
effects on the Vietnamese economy have increased in recent weeks
(reftel B). During his remarks to the National Assembly in
November, Prime Minister Nguyen Tan Dung said that "inflation and
the global downturn have clearly had a negative impact on our
economy in late 2008." Nguyen Xuan Phuc, Chairman of the Office of
the Government (OOG), recently made similar statements in the press.
He said that the GVN expects the global economic downturn will have
negative impacts on Vietnam's economy, especially on its export,
foreign investment, tourism, and stock market. Nguyen Dinh Cung,
Director General of Vietnam's think tank Central Institute for
Economic Management (CIEM) told Econoffs that he thinks "Vietnam's
economy will be gradually but severely affected by the global
recession."
4. (U) Their fears have basis in recent statistics. Vietnam's
exports have fallen in the last few months, from $6.5 billion in
July, to $6.1 billion in August, $5.8 billion in September, and $5.1
billion in October. The Ministry of Industry and Trade stated in its
export planning for 2009 that, given the global downturn, "it is
very difficult to expect a high growth in exports in 2009 and the
growth is expected to be less than 10%". (Note: MOIT then set an 18
percent export growth target to "motivate" exporters.)
5. (U) New registered FDI is already dropping, down to $726 million
in November from over $2 billion in October and almost $10 billion
in September. (Note: Registered FDI in this case means the amount
of new investment "pledged" in investment licenses during the
reporting period, not the amount actually invested during the
period.) The GVN predicts the trend will continue in 2009. The
Ministry of Planning and Investment (MPI)'s Foreign Investment
Agency (FIA) recently released estimates indicating that registered
FDI will fall by half next year, down to $30 billion from
approximately $65 billion this year. (Note: MPI has admitted that
it was approving projects in 2008 based in large part on the amount
of pledged capital, so the decreased forecast may be partially a
result of a policy shift towards project approval based more on
likelihood of implementation and development goals.) The FIA states
that the leading challenge to attracting FDI is the global economic
downturn and its impact on developed nations. Although Vietnam does
not release monthly statistics on implemented FDI, Phan Huu Thang,
Director of MPI's FIA, said "with banks facing financial problems,
capital disbursement for investment projects will not be smooth".

6. (SBU) The stock market has also been on a rocky ride, hitting a
three year low of 303 last week. Foreign investors were net sellers
of bonds and stocks in the past month. The State Securities
Commission remains sanguine, however, telling us that they will
continue to avoid market intervention because current market woes
are "affecting everyone in the region, not just Vietnam."

GVN SHIFTS FOCUS FROM INFLATION TO GROWTH
-----------------------------------------

HANOI 00001316 002.2 OF 002

7. (SBU) Given these macroeconomic headwinds, the GVN is shifting
its policy priority from controlling inflation to preventing
economic downturn, according to Chairman Le Duc Thuy of the National
Financial Supervisory Committee (NFSC). (Note: The NFSC is an
organization set up by the PM to provide macroeconomic policy advice
and, at some point in the future, supervision of the entire
financial sector.) The GVN believes that Vietnam's inflation will
continue to fall, eventually dropping below 10 percent in 2009.
Thuy says the GVN is concerned that, in the context of global
recession, Vietnam may face issues such as economic slowdown, even
recession, or high unemployment if it fails to make timely policy
responses.
8. (SBU) There is ample evidence that this policy shift is already
occurring. During the National Assembly session in November, the
GVN lowered its economic growth target for 2009 from 6.7 percent to
6.5 percent. Well-placed sources say that the internal GVN growth
estimate for 2009 is actually much lower, currently at 4.2 percent,
and the higher public number will be dialed back over the course of
the coming year. Local economists agree. Both the IMF and the ADB
recently revised their 2009 growth projections down to 5 percent.
Thuy says that the GVN has estimated that it needs to achieve 8
percent annual GDP growth to create a sufficient amount of jobs for
new graduates and to maintain quality of life. On December 1, a
senior MPI official told the annual Vietnam Business Forum (septel)
that s "stimulus package," including tax cuts, state spending and
social security programs, is in the works and should be made public
soon.
9. (SBU) The GVN is also slashing interest rates in an attempt to
spur domestic economic activity (reftel C). After raising interest
rates to reduce inflation and control credit growth earlier in 2008,
the SBV has now decreased rates three times in the last month and
lowered the reserve requirement from 10 to 8 percent. NSFC Chairman
Thuy believes that such relaxation should be continued in 2009.
Prime Minister (PM) Dung also told the National Assembly during his
November remarks that "we will continue to reduce interest rates".
There has been speculation in the press that rates could be reduced
as low as 7 or 8 percent in the coming months.

10. (SBU) Lastly, the SBV widened the currency trading band from two
to three percent in early November, effectively allowing the dong to
depreciate. This move was aimed at supporting Vietnam's exports and
containing its trade deficit, which reached US$ 16.8 billion in the
first ten months of 2008. (Note: the GOV set an informal trade
deficit target of US$ 20 billion for 2008.) According to Chairman
Thuy, the currency trading band should "continue to be widened" to
avoid the possible need for a sudden devaluation and to prevent
pressure on foreign reserves. According to local banks, however,
the SBV may already be feeling that pressure; the SBV is not
defending the band and dollars are in shorter supply.

11. (SBU) COMMENTS: Most economists consider Vietnam's shift
towards preventing economic slowdown as a reasonable response to a
challenging global situation. The concern, however, is that rapid
policy actions may signal inexperience or even panic to investors.
Banks are reportedly already very liquid, but are not lending due to
decreased demand for capital from the slowing business sector. As a
result, some local economists and advisors called the third interest
rate cut premature. The dong/dollar exchange rate lends credence to
this view; the dong is at the top of the trading band and the black
market rate somewhat higher. The SBV is once again warning people
against dollar hoarding. While some of this may be as a result of a
flight to "safe" currencies during a time of uncertainty, the effect
of multiple interest rate decreases is likely playing a role in
investor confidence. End Comment.

12. (U) Ho Chi Minh City has cleared on this cable.
MICHALAK

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