Part II: GVN ANNOUNCES FURTHER MEASURES TO INSTILL

UNCLAS SECTION 01 OF 02 HANOI 000658 SENSITIVE SIPDIS SINGAPORE FOR TREASURY TREASURY FOR SCHUN USTR FOR DBISBEE STATE FOR EEB/IFD E.O. 12958: N/A TAGS: EFIN EAID ECPS ECON EAGR ETRD VM SUBJECT: Part II: GVN ANNOUNCES FURTHER MEASURES TO INSTILL INVESTOR AND MARKET CONFIDENCE Refs: A) Hanoi 634 B) Hanoi 377 This cable is Sensitive But Unclassified. For official use only, not for dissemination outside USG channels or posting on the internet. ¶1. (U) This cable is part of an ongoing series on Vietnam's macroeconomic situation. ¶2. (SBU) Summary: Facing persistent high inflation and market concerns about the stability of the dong, the Government of Vietnam (VN) has begun to make a more concerted and public effort to address growing macro-economic concerns. The Prime Minister announced further actions to check speculation by Vietnam's state-owned sector, and the State Bank said it may force bank mergers and de-peg the dong from the dollar. In late May, the IMF Asia Pacific Director urged high-level GVN officials to take immediate action to shore up both international and domestic investor confidence. On May 31, after the PM vowed to redouble efforts against inflation and to tackle the state-owned sector, the National Assembly grilled the Minister of Planning and Investment, the State Bank Governor and the Minister of Finance on inflation, SOE growth and inefficient investment. On June 3, the GVN used the Vietnam Business Forum to reassure investors about its ability to control the macro-economic situation. End summary. IMF MAKES THE ROUNDS -------------- ¶3. (SBU) The Asia Pacific Director for the IMF, David Burton, visited Hanoi on May 29 and 30 to reinforce the IMF's message on the necessity of concrete GVN action to address macroeconomic concerns (Ref A). (Contrary to rumors, the visit did not involve discussion of an IMF package for Vietnam.) Burton told high-level GVN officials that the Prime Minister's plan to fight inflation was a good one, but that immediate and transparent action was needed to shore up both international and domestic investor confidence. The IMF sees the domestic component of investment as being critical to short-term financial sector stability, noting that if people stop using the banking system or start switching out of the dong, the flow will be difficult to reverse. The IMF says their message was well-received by the GVN. PM CALLS FOR REDOUBLING OF EFFORTS -------------- ¶4. (U) In remarks before the National Assembly (NA) on May 31, the Prime Minister (PM) called for greater efforts in the fight against inflation. He told the NA that the GVN was already applying a tighter monetary policy, reducing public expenditures and devoting resources to social welfare programs. He also addressed the critical issue of state-owned enterprise (SOE) reform, which local economists and analysts note has seen the least amount of concrete action since the PM's inflation plan was introduced on March 31 (REF B). While the PM observed that SOEs "have made an important contribution" to the economy, he said the GVN is preparing to review the large "economic group" model that is the basis of the SOE system and will submit a related decree. He added that the GVN will accelerate the restructuring of the SOEs by focusing on the "equitization" process and the "multi-ownership" model (most likely referring to strategic partners and foreign investors). MINISTRIES TO RESTRICT AND MONITOR SOE ACTIVITY -------------- -- ¶5. (U) The National Assembly then spent some time questioning the Minister of Planning and Investment (MPI),the State Bank Governor, and the Minister of Finance on inflation, SOE growth and inefficient investment. MPI Minister Vo Hong Phuc said that his ministry had been given the task of enacting the PM's plans on SOE reform, and that a decree would be submitted for approval in July. He went on to add that the decree will lay out clear regulations on SOE activities, especially in regards to mobilization of capital and operations in non-core areas. Phuc used state-owned Electricity of Vietnam Group (EVN) as example of speculative activities, saying that such a company should focus on power development projects (note: EVN has been one of the worst SOEs in terms of non-core expansion, with projects as diverse as telecommunications, hotels and banks). ¶6. (U) Meanwhile, the Ministry of Finance (MOF) announced the creation of a watchlist of inefficient and loss-making SOEs for "intensive monitoring." An SOE will make the list if it has two consecutive years of losses or a loss for one year with a 30 percent reduction in capital. These companies will have to submit comprehensive quarterly and annual financial reports for analysis by various ministries. Firms that do not improve will be sold or dissolved. The list will be completed on May 30 of every year, but for reasons unexplained, SOEs in the "finance, banking, insurance and securities sector" will be exempt from the program. MOF admits that of Vietnam's approximately 1,500 SOEs, 600 failed to make a profit last year. REASSURANCES ON THE MACROECONOMIC FRONT -------------- ¶7. (U) On June 2, GVN officials used the bi-annual Vietnam Business Forum (Septel) to reassure investors about the country's macroeconomic stability. When questioned by members of the Bank Working Group, State Bank of Vietnam (SBV) Deputy Governor Nguyen Dong Tien acknowledged that some financial institutions had been poorly managed and regulated, and noted that "very soon we will be seeing bank mergers." (Comment: There have been rumors that the SBV has already bailed out a few small banks, but our contacts at the SBV deny this.) Tien also agreed with recommendations that dong exchange rates be based on a basket of currencies (versus a dollar peg) and said that Vietnam would be moving in that direction. ¶8. (SBU) Comment: The recent slew of pessimistic press and high-level expressions of concern on Vietnam's macroeconomic management appear to have prodded the GVN to go public with additional initiatives. The discussions at the National Assembly were a very public effort to respond to investor concerns and remind public officials that all have a role in bringing government and SOE spending under control. The MOF's yearly list of poorly-performing SOEs misses the mark (the GVN should be focusing on privatization of SOEs, not nursing them along in some sort of a rehabilitation program) but other comments by the PM, Minister Phuc and SBV Deputy Governor Tien show that the IMF's message of transparent, rapid action may have gotten through at the highest levels. As of June 4, the dong continued to devalue on the black market, but if these initiatives can be implemented in a timely and decisive manner, they may help improve the investor confidence that is so crucial to Vietnam's macroeconomic stability. End comment. MICHALAK