Identifier
Created
Classification
Origin
05HANOI2237
2005-08-29 10:27:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Hanoi
Cable title:  

MONETARY POLICY IN VIETNAM

Tags:  EFIN ECON VM SOE FINREF 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 HANOI 002237 

SIPDIS

STATE PASS USTR FOR EBRYAN
STATE ALSO PASS USAID ANE
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO
BANGKOK FOR USAID

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON VM SOE FINREF
SUBJECT: MONETARY POLICY IN VIETNAM

This cable contains sensitive information and should not be
posted on the internet.

UNCLAS SECTION 01 OF 03 HANOI 002237

SIPDIS

STATE PASS USTR FOR EBRYAN
STATE ALSO PASS USAID ANE
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO
BANGKOK FOR USAID

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON VM SOE FINREF
SUBJECT: MONETARY POLICY IN VIETNAM

This cable contains sensitive information and should not be
posted on the internet.


1. (SBU) Summary: Responsibility for monetary policy-making
rests with the State Bank of Vietnam (SBV),which functions
as a central bank as well as the owner and supervisor of the
State-owned commercial banks (SOCB). For 2005, the SBV
decided to focus on controlling the monetary aggregate,
restraining credit growth from its 42 percent level in 2004
and stabilizing the exchange rate. The SBV has begun to act
more indirectly to manipulate the money market. While the
Government blames recent inflation on supply-side and
external shocks like rising global rice and oil prices,
avian influenza, a persistent drought and loose monetary
policies may also contribute. Continued policy lending
between State-owned enterprises (SOE) and State-owned
commercial banks has fueled rapid credit expansion and may
pose future risks. End Summary.

MONETARY POLICY MAKING
--------------


2. (SBU) The State Bank of Vietnam (SBV) is the central bank
as well as the owner and supervisor of the State-owned
commercial banks (SOCBs) which still dominate Vietnam's
financial sector. For many years, monetary policy in
Vietnam was simple: the SBV made sure there was adequate
liquidity for SOCBs to fund state-owned enterprises (SOEs).
Tight government controls on access to foreign exchange, as
well as a fixed exchange rate, insulated the economy from
external shocks and minimized the need for sophisticated
monetary policy making. Relative to its neighbors, the
country was largely untouched by the 1997 Asian financial
crisis, not because of policy prowess, but because of its
limited integration with the regional economies most
affected by the crisis. As Vietnam's economy has gradually
become more open, it has faced greater exposure to external
shocks, exchange rate fluctuation and the need to develop a
monetary policy. In recent years, the IMF has sponsored
technical assistance programs to give SBV officials a better
understanding of market-based monetary control techniques.
At the same time, the SBV's increasing reliance on indirect
instruments such as open market operations, which were first
introduced in 2000 and still in their nascent stages, have

given the SBV somewhat more influence in the domestic money
market.


3. (SBU) Vietnam's constitution assigns the SBV
responsibility for creating an annual set of monetary policy
objectives. Following approval by the Government and the
National Assembly, the SBV sets the specific policies to
meet these objectives. SBV's Monetary Policy Office's
Deputy General Director Nguyen Ngoc Bao said that policy
makers had agreed on 2005 growth rate targets of 8.5 percent
for GDP and 6.5 percent for the Consumer Price Index (CPI).
Based on those targets, SBV has determined its own secondary
objectives for 2005, namely controlling the monetary
aggregate, restraining credit growth and stabilizing the
exchange rate. Bao noted that interest rates have recently
been liberalized and are now largely controlled by market
forces. The SBV only manipulates the discount rate to
control bank credit, which is the main source of capital for
the Vietnamese economy.


4. (SBU) The SBV faced its first recent inflationary
challenge in 2004 when CPI reached ten percent. Vietnam's
annual inflation rate had been consistently below four
percent since 1998, and had not been in the double-digits
since 1995. Bao attributed the rapid inflation rate to
higher prices for imported raw materials, the return of
avian influenza, price increases for rice on the global
market and distribution problems, particularly for
pharmaceutical products. 1Bao downplayed the impact of
loose monetary policy as a factor contributing to inflation.
In order to manage last year's inflation, he explained that
the SBV had adjusted its benchmark discount rate, raised the
required reserve ratio and restrained the money supply. The
SBV has been maintaining a cautious monetary policy stance
throughout 2005, Bao added. Since the SBV introduced open-
market operations five years ago, the response from the
market has been encouraging, with electronic trading
sessions now taking place three to five times each week. An
SBV committee is responsible for managing open-market
operations, which Bao said has been very effective in
manipulating the money market. The SBV plans to use open-
market operations increasingly as a policy instrument.

5. (SBU) According to Nguyen Thi Vu, the SBV's inflation
expert and manager of the Economic Analysis and Forecast
Division, the SBV is continuing to reevaluate the CPI basket
in order to represent core inflation values more accurately.
Food and foodstuff prices constitute about 48 percent of
Vietnam's CPI, which was originally calculated based on a
survey of household expenditures in 2000. SBV officials
acknowledge that a rising standard of living, especially in
urban areas, has already altered consumer spending habits,
probably reducing the share of income spent on food items.
While the General Statistics Office (GSO) plans to complete
a survey on household expenditures by 2005, the SBV's
inflation expert said preliminary data from the survey shows
that food still represents more than 40 percent of the CPI's
weighted prices.


6. (SBU) According to International Monetary Fund Country
Representative Susan Adams, the GVN's efforts to combat
inflation have been somewhat misdirected. In recent years,
the GVN has been reluctant to tighten monetary policy
because of a largely political commitment to sustain growth
numbers before the five-year plan terminates at the end of

2005. Besides that, the SBV attributes the rising prices to
temporary supply shocks resulting from continued drought,
avian influenza and inflationary trends on the international
market. Adams said the IMF has encouraged the SBV to
implement tighter monetary policies. The IMF is also
encouraging the SBV to more frequently use indirect monetary
instruments, like open-market operations.


7. (SBU) One of the SBV's primary objectives is to ensure an
adequate supply of capital for continued growth. Credit
growth was 41.6 percent last year - a rate Bao considered
reasonable in order to sustain the economy's 7.7 percent GDP
growth rate for 2004. The SBV is less concerned about
credit growth because of the high level of investment for
borrowed capital, he added. The SBV's major challenge is to
expand lending while improving loan quality. Efforts to
this end are reflected in commercial bank restructuring,
which include implementing risk management regulations. Bao
also mentioned poor-quality bank loans and a high level of
dollarization as added challenges for the SBV.


8. (SBU) Borrowing and lending remain unrestrained,
especially for the state-owned sector, according to Adams.
This credit expansion reflects persistent structural
problems, as state-owned banks continue to extend
politically motivated loans to faltering state-owned firms.
Joint stock and private domestic enterprises also represent
a growing proportion of bank lending. The SBV's
contractionary monetary policies in 2004 did very little to
affect credit growth. Nevertheless, Adams believes rapid
credit expansion is not directly correlated with inflation,
but could be a contributing factor in the future if monetary
policy remains loose. To a limited extent, credit expansion
is also an encouraging sign of positive intermediation in
the economy, as well as growing public confidence in
financial institutions.

FOREIGN EXCHANGE RESERVES
--------------


9. (SBU) The SBV's Foreign Exchange Management Department
Deputy Division Chief Nguyen Chi Thanh estimates foreign
exchange reserves for Vietnam at 10-12 import weeks. While
the SBV officially refers to the exchange rate policy as a
"regulated market policy," the policy functions like a
"crawling peg" exchange regime. The GVN has taken a heavy-
handed approach to foreign exchange rates, according to
Adams. Vietnam's crawling-peg policy has further weakened
its already weak foreign exchange position, making it even
more vulnerable to external supply shocks. Vietnam's
dollarized economy has also become a cause of concern for
the SBV. At least in urban areas, a number of businesses
accept U.S. dollars as well as Vietnam dong and change in
dollars.


10. (SBU) Comment: Even though SBV officials are still
honing their monetary policy making skills, Vietnam's
monetary policy has been prudent over the last year with a
few exceptions. In its capacity as a central bank, however,
the SBV would do well to limit its politically motivated
decisions. Specifically, the SBV's initial reluctance to
tighten monetary policy in the face of rapid inflation may
have been politically motivated. In any case, the IMF
considers that the impact of interest rate changes is
unclear. The exchange rate position might benefit from
looser controls. Better risk management and less policy
lending will be needed to control inflation as well as
credit growth to SOEs in the future. End Comment.

MARINE

_______________________________
1Sam: I could not read your comment on this. I added what I
could make out.