IMF CONGRATULATES WHILE CAUTIONING THE GVN

UNCLAS HANOI 000883 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: IMF CONGRATULATES WHILE CAUTIONING THE GVN REF: A) Hanoi 881 B) Hanoi 846 ¶1. (SBU) Summary: The IMF Resident Representative in Hanoi believes the macroeconomic situation in Vietnam has stabilized in the short term, citing exchange rates and the stock market as reflective of increasing investor confidence. He cautions, however, that a reduction in interest rates is premature and could undo the positive trends seen in the last month. End summary. ¶2. (SBU) Ambassador and Econoff met with IMF Resident Representative Ben Bingham on July 28 to exchange views on the current macroeconomic situation in Vietnam. Bingham believes that the situation has calmed and fears of an immediate balance of payment crisis have faded. He pointed to the black market currency rate being close to the official SBV rate, the non-deliverable forwards markets calming and the stock market gaining as evidence that the system is beginning to stabilize. ¶3. (SBU) He sees these improvements as a result of an influx of positive economic news, including a narrowing trade deficit, decreasing inflation and slowing credit growth. He attributes much of this success to the SBV for keeping dong liquidity very tight while pumping dollars into the market, but admits that "moral suasion" techniques have probably helped (sending inspection teams to the banks and gold shops, for example). According to Bingham, chronic excess demand for dollars has eased from its peak three to four weeks ago. He notes a "palpable sense of relief" in GVN officials. ¶4. (SBU) This sense of relief is somewhat worrying, he warns, because some GVN officials may already be considering an interest rate cut (Reftel A). Bingham feels strongly that it is far too early to be considering such a move because inflation and inflation expectations are still not anchored. He pointed to the currency and stock market fluctuations following the gas price hike (Reftel B) as examples of shaky investor sentiment. Bingham feels the GVN should be wary of upcoming inflation numbers following the fuel price hike, as anything over 30 percent may cause domestic investors to panic. ¶5. (SBU) He feels things are getting better on the fiscal side, as well. State-owned enterprises (SOEs) are "getting their horns trimmed" and cutting back on non-core projects. (Note: Local press reports indicate that both Vinashin and PetroVietnam have recently pulled out of major investment deals.) Bingham would still like to see a revised budget, however, and he criticizes the Ministry of Finance for not communicating with the public. He says that the PM's office could easily trim a large amount of investment spending, and that asking the provinces to bear most of the burden on this measure is "rather silly." ¶6. (SBU) Bingham cites the next two quarters as critical for getting data and expectations under control. Only when the fundamentals are stable will depositors return to the banks and investors to the stock market. He would also like to see the GVN using this time to look ahead and fix systemic problems so as to avoid similar occurrences in the future. Specifically, he points to the GVN's exchange rate policy, equitisation process and State Bank structure as areas ripe for reform. There could also be additional bad news forthcoming from the banking sector, where non-performing loans may jump and add to local doubts about the stability of the system. ¶7. (SBU) Comment: Bingham's concerns about premature interest rate reductions are well founded. Treasury DAS Dohner had similar concerns following his visit a few weeks ago (Reftel A). The message that "interest rate reductions must wait until the fundamentals are solid" should be reinforced at all levels of the GVN. Increasing liquidity at this critical juncture could reverse the early gains made by the GVN and result in long-lasting damage to investor sentiment both at home and abroad. End comment. MICHALAK