VIETNAM CONSIDERING CAPITAL CONTROLS

UNCLAS SECTION 01 OF 03 HANOI 000260 SIPDIS STATE FOR EB/OMA, EAP/MLS AND EAP/EP TREASURY FOR CAROL CARNES AND SUSAN CHUN STATE PASS USTR DAVID BISBEE SINGAPORE FOR SUSAN BAKER SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EFIN ECON ETRD EINV VM SUBJECT: VIETNAM CONSIDERING CAPITAL CONTROLS HANOI 00000260 001.2 OF 003 (U) This cable contains sensitive information and should not be placed on the internet. ¶1. (SBU) Summary. Rumors have surfaced that the Prime Minister is considering the imposition of capital controls as a measure to cooling off the overheated stock market. A contact in the State Securities Commission explained why that agency is opposed to the idea. The Citibank Country Officer for Vietnam informed the Ambassador of the banking industry's concerns. He noted the negative impact it would have not only on the stock market, but on the investment climate and the credibility of the central bank. The Bank Working Group of the Vietnam Business Forum has sent a letter (see text in para 11) requesting a meeting with the Prime Minister to discuss other ways to promote stability in the stock market. End summary. ¶2. (SBU) In the last couple of days, rumors have surfaced that the Government of Vietnam is considering the imposition of capital controls as a measure to cool off the overheated stock market. For example, Credit Suisse published a report to this effect dated February 7. Given the negative impact resulting from Thailand's recent imposition of capital controls, bankers are concerned that the Government has not consulted with them about this initiative. This new development, if implemented, would be a significant departure from Vietnam's hithertofore hands-off approach to regulating capital flows. ¶3. (SBU) In order to get a picture of what's going on, we tried contacting the State Bank of Vietnam, but were not able to get though (i.e., our contacts were in meetings). Our FSN did have better luck with a member of the equivalent of our SEC. Then, we got more information from Charly Madan, of Citigroup, who briefed Ambassador Marine at noon on February 9. The following is the information we have from both those contacts. ¶4. (SBU) Mr. Nguyen Son, DDG, Securities Market Development Department at the State Securities Commission (SSC) provided the following comments: -- Recently, the stock market is growing very hot but this is considered normal given announcements of good year-end results of many listed firms. -- The SSC is monitoring the market closely and studying measures to ensure a sustainable development of the market. However, administrative measures are being considered. -- The GVN recently (no date provided) issued a regulation on operations of foreign funds in the stock market, which stipulates that foreign funds must open a VND account and convert their capital into VND for investment activities in Vietnam. They are allowed to switch their capital and profits back to hard currency for repatriation. This regulation is interpreted actually as abolishing the previous requirement of a one-year lock-in period for foreign investment (because the new regulation did not mention any lock-in period). In Mr. Son's opinion, it is not likely that the GVN would reinstate the lock-in requirement in the immediate future to prevent unnecessary impacts on the market. (Comment: The thing to keep in mind about the above comments is that they come from a contact in the State Securities Commission. The above comments are consistent with the position of the SSC referred to in the next set of comments. End Comment.) ¶5. (SBU) The next report is from our conversation with the Citigroup Country Officer in Vietnam, Charly Madan, who met with the Ambassador at noon on February 9. Madan is also the Chairman of the Bank Working Group, which includes other foreign banks (e.g., HSBC, Deutsche Bank, Standard Chartered Bank, ABN-AMRO). Madan described his concern that Vietnam not become the next Thailand, but that was the risk if the rumors are true. He indicated the bankers had just started to hear a few days ago that Vietnam was considering some form of capital controls in an effort to deal with what is believed to be an overheated stock market. It was all kept very quiet. He understands the State Bank of Vietnam (SBV) has already submitted a proposal to the Prime Minister that is on his desk for signature, but it is not known if the Prime Minister has signed it already or if he will sign it. HANOI 00000260 002.2 OF 003 ¶6. (SBU) Madan said even now, nobody is sure what the elements of the proposal are, but understands SBV is considering what he termed a "lock-in period of one year" for all foreign portfolio investments, i.e. both equities and debt. He explained this meant the money must be kept onshore to buy and sell various securities and cannot be remitted before one year. He distinguished it from the case of Thailand on the grounds that the proposal would probably be intended for new foreign inflows, rather than applied retroactively (although he also noted that Thailand's recent lock-in measures were also not applied retroactively). He described the other proposed measures being considered as being more administrative in nature, such as a 30-day approval process for repatriation of profits, capital raising restrictions for bank, rules on dividend payments and stricter guidelines for public listing. ¶7. (SBU) Madan's main concern was the potential impact of the proposed one-year lock-in provision on the investment climate. He thought it could weaken offshore investor sentiment, and possibly send a wrong signal on Vietnam's commitment to market liberalization. Again, at this point, it is not clear if the proposed rules will be signed and implemented, and it may well be that the Prime Minister has not and will not sign off on the idea. Madan also understands that the State Securities Commission (SSC) is against the proposed rules and thinks other foreign stakeholders have also been lobbying against them. He has made calls on the World Bank and IFC to intervene with the Prime Minister, and said he would be calling the IMF this afternoon. He noted the stock market in Vietnam has been up significantly in 2006 and up about 50% already since the beginning of the year. While understanding the interest of the authorities in wanting to cool down the stock market, he was concerned that this kind of proposal could cause a negative shock to the system that would have a wider impact than merely the stock market. Madan believes that the impact of adopting the proposal would lead to a significant drop in the stock market, and would hurt small-scale local stock market investors, such as taxi drivers, more than the institutional investors. ¶8. (SBU) Already, following the surfacing of the rumors the day before, Madan noted that the VN Index had dropped 4 percent. He thought adopting the proposal would cause the stock market to drop significantly, and lose about 20 percent of its value. He commented that billions of dollars were lost in market capitalization when Thailand announced capital controls. ¶9. (SBU) The biggest loss from the imposition of capital controls would be to the credibility of Vietnam's central bank, Madan continued. He also explained that in his view Vietnam needs to be careful to avoid doing anything that might harm its bond market as Vietnam needs the flexibility that the bond market provides in raising money. In his view instead of imposing capital controls, Vietnam ought to be taking steps in the direction of improving issues such as governance, accounting, documentation and insider trading issues. ¶10. (SBU) Madan stressed that the GVN should have at least asked for the advice of the private sector before considering and receiving any proposals for capital controls from the SBV. In that regard, he signed a letter (see para 11) along with other bank officers on behalf of the Vietnam Business Forum's Bank Working Group asking the Prime Minister to have a meeting to discuss foreign portfolio investments in the Vietnam securities market. Here is the text of that letter ¶11. (SBU) Begin Text 07 February 2007 Request an urgent meeting appointment with the Prime Minister to discuss foreign portfolio investments in the Vietnam securities market. On behalf of the Banking Working Group of the VBF, we would like to send our warmest greetings to you and the Government of the Socialist Republic of Vietnam. By this Letter, we would like to seek an urgent meeting appointment with yourself at the earliest in order to discuss the recent changes in the Vietnam securities market and would like to represent the interest of foreign and local investors operating in this market. HANOI 00000260 003.2 OF 003 We understand that the Government is looking at measures related to monitoring and/or controlling the movement of non-resident capital into and out of the country and would like to extend our sincere offer of assistance to the Government and all related institutions in their forthcoming deliberations. As leading foreign banks in the market with unparalleled global reach, we are able to provide a range of information on cross-border investment channels, the role of custodian banks, and investment regulation in Asia and throughout the world. We would be delighted to contribute further to streamlining the subject regulations to ensure that they are implemented in a fair, orderly and practical manner, and above all meet the objectives of promoting stability of the local securities and currency markets. Should you require further information, could you please request your office to contact any of us as the undersigned. Your acceptance shall be an honour to Banking Working Group of the BVF in Vietnam and we look forward to this meeting. Thank you very much for your acceptance. Yours sincerely, Charly Madan Chairman of the Bank Working Group Citigroup Country Officer (Vietnam) Alain Cany President and CEO of HSBC Vietnam Lawrence Wolfe Chief Country Officer - Deutsche Bank Ashok Sud CEO-Standard Chartered Bank END TEXT ¶12. (SBU) The Consulate General is reporting by septel the view from Ho Chi Minh City. MARINE 2