IMF SAYS GVN ECONOMY NOT OUT OF THE WOODS

UNCLAS SECTION 01 OF 02 HANOI 001095

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TAGS: EFIN EAID ECPS ECON EAGR ETRD VM
SUBJECT: IMF SAYS GVN ECONOMY NOT OUT OF THE WOODS

HANOI 00001095 001.2 OF 002



1. (SBU) Summary: An IMF team concluded its twelve-day assessment
of Vietnam's macroeconomic situation and briefed the Hanoi donor
community on September 16, 2008. While a number of economic
indicators including the current account balance have improved, core
inflation remains high and the banking system is under stress from
non-performing loans. The team encouraged the Government of Vietnam
(GVN) to retain a tight monetary and fiscal policy and improve its
capacity to track and report economic data. The assessment came
prior to the most recent round of U.S. financial turmoil, so as the
team concluded its briefing the GVN was scrambling to deal with the
new wave of macroeconomic uncertainty. Another IMF team will return
in December for Article IV consultations. End Summary.

Current State of the Economy
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2. (SBU) Following a twelve-day evaluation, the IMF team tasked
with assessing Vietnam's macroeconomic situation reported to the
donor community on September 16. The team began by outlining recent
improvements in a number of economic indicators. The current
account balance has improved and is hovering at around 13.5 percent
of GDP, down from as high as 20 percent in 2Q08. The team leader
noted that the Vietnamese dong (VND) has stabilized and is now
trading in the middle of the trading range without government
intervention. (Note: An article in the Vietnamese press that same
day indicated that the State Bank of Vietnam has started to
intervene again, raising the average interbank exchange rate to
VND16,512/US$1 and buying dollars.) The trade deficit, though still
significant, is trending down from its peak in March and April of
this year.


3. (SBU) The team cautioned that while overall inflation has
peaked, core inflation (overall inflation minus food, fuel and
administratively controlled prices) has not. The team attributes
this to second-round effects of the initial inflation spurt, as
workers receive wage increases and prices are raised
correspondingly. The IMF Resident Representative noted that while
recent surveys put wage increases at around 18-20 percent, anecdotal
evidence provides a number closer to 30 percent. (Note: The GVN is
already planning a civil service pay increase and a 15 percent
increase in pensions, effective October 1, and a change to the
minimum wage law set for January 1, 2009.) The team was also unable
to determine if overall government spending is declining; while it
appears that was the case for the first half of 2008, GVN
projections for the second half of the year show a significant
increase in expenditures. It was not clear whether this was the
actual intent of the GVN or just the result of weak forecasting
skills at the Ministry of Finance.


4. (SBU) The team also noted the continued strains on the banking
system, where data is extremely scarce. High credit growth in 2007
combined with heavy investment in the now-declining property market
means that there will likely be a significant jump in non-performing
loans by the end of this year. The Resident Representative added
that depositors will not return to the banks until inflationary
expectations are brought down by sustained GVN commitment to tight
monetary and fiscal policy. (Note: The current interest rate cap
of 21 percent has deposit rates at around 18 percent, still under
year-on-year inflation of 28 percent, so people are reluctant to
place their assets in the banking system.) The IMF team did receive
assurance from the SBV that the base rate will remain stable through

2008. (Note: Recent statements in the press by mid-level SBV
officials indicate, however, that the base rate and/or reserve
requirements may be adjusted following the release of September or
third quarter inflation figures. Our contacts at the SBV claim this
is not that case and that the tight liquidity situation will be
maintained through the end of the year.)

Outlook Improving, but Inflation Persists
--------------


5. (SBU) Assuming there is no change in interest rates and fiscal
policy, the IMF believes that the economic situation in Vietnam will
improve, but only gradually. The team forecasts GDP growth of 6
percent in 2008 and 2009 and overall inflation at 15 percent in

2009. Core inflation (which excludes fuel, food, and
administratively controlled prices),however, will stay above 20
percent in 2009 as food and fuel prices will fall by more than other
prices. The current account deficit will decrease to around 10.5
percent of GDP and reserves will rise modestly as long as there is
not a significant decrease in FDI and remittances.

IMF Recommends Continued Tightening, More Transparency

HANOI 00001095 002.2 OF 002


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6. (SBU) The team also made a number of recommendations to GVN
policy makers. Along with controlling inflation expectations, the
IMF feels that the base rate should be raised by 2 percent. The
team also recommended that the GVN contain fiscal spending and
reduce the budget deficit in 2009. They noted that the recent
elimination of fuel subsidies will help in this regard. Spending by
state owned enterprises (SOEs) should continue to be tightly
supervised, and the equitization process accelerated. Bank
supervision should be improved and legal reform implemented to
strengthen the independence of the SBV. Finally, the team
recommended that data provisioning and communications be improved,
but also noted that the SBV will be launching and English language
website and recently began supplying the IMF with updated
macroeconomic data (available on the IMF Resident Representative web
site, http://www.imf.org/external/country/VNM/rr/in dex.htm).


7. (SBU) Comment: The GVN is facing real pressure, from both
internal sources such as pro-growth ministries like the Ministry of
Planning and Investment and external sources such as businesses who
want easier access to credit, to shift from an anti-inflationary
policy to a policy that supports rapid economic growth. In
addition, Vietnam still faces risks from a global slowdown, as its
balance of payments is heavily dependent on FDI and exports. The
newly-empowered State Bank of Vietnam (SBV) will have to stand firm
in its commitment to a tighter monetary policy in the face of mixed
messages about fiscal policy from the Ministry of Finance. End
Comment.

MICHALAK