VIETNAM ECONOMIC HIGHLIGHTS: FUEL PRICE HIKES TEMPER GOOD

UNCLAS HANOI 000938 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: VIETNAM ECONOMIC HIGHLIGHTS: FUEL PRICE HIKES TEMPER GOOD NEWS, SOE BANK GROWTH FROZEN REF: A) HANOI 846 (Gas Price Increase Fuels Inflation, Unhappiness); B) HANOI 830 (Car Sales Take Ride on GVN Tax Rollercoaster); C) HANOI 739 (Vietnam to Resume Rice Exports in July) ¶1. (U) This cable is part of an ongoing series on developing economic stories in Vietnam. VN INDEX AND INFLATION IMPROVE BEFORE FUEL PRICE INCREASES -------------- -------------- ¶2. (U) Although Vietnam's inflation declined and the stock market went up during July, the fuel price hike announced on July 21 (REF A) is expected to hamper progress on those fronts. Consumer prices rose 1.1 percent in July, the slowest rate since October 2007. The fuel price hike, however, will likely drive inflation up by as much as 3 percent during August, according to international investment firms, bringing Vietnam's inflation, already at 27 percent year on year, up to as high as 30 percent or more. The VN Index, meanwhile, after gaining on 18 of the 20 trading days preceding the fuel hike announcement, slumped 9 percent the day after. In a move to dampen the effects of the fuel price increase, the GVN banned price increases for electricity, coal, water, and bus transportation for the rest of 2008. BUOYED BOND MARKET -------------- ¶3. (U) July's more positive trade and inflation numbers, higher foreign investment, and stock market gains helped buoy Vietnam's bond market, as yields fell by 185 basis points the last week of July. The Vietnamese bond market also saw notable activity on August 8, when the Government of Vietnam (GVN) auctioned $33.5 million of a planned $59.7 million of bonds. Proceeds from the bonds will fund major infrastructure projects such as roads, bridges, and ports. GVN ENCOURAGES RICE EXPORTS -------------- ¶4. (U) The GVN has expanded its rice export target for the year from 4.5 to 4.6 million tons as farmers were unable to sell their bumper harvest domestically. On June 18, the GVN capped rice exports for the 3rd Quarter of 2008 at 1 million tons (REF C) and on July 21 announced a first ever export tax on rice, but Vietnamese farmers have accumulated stockpiles amidst disappointing sales. Though export enterprises have signed contracts to export 3.6 million tons of rice by the end of September, Vietnam had only exported 2.8 million tons by the end of July. In response, Prime Minister Dung has asked government ministries and food corporations to buy more rice from farmers, urging them to make sure that farmers receive a profit of 40 percent or more. He also asked rice export companies to accelerate their shipments and asked the State Bank of Vietnam not to apply export taxes to rice exports selling for less than $800 per ton. STATE BANK AIMS TO SLOW SOE BANKING ACTIVITIES -------------- ¶5. (U) On August 8, the State Bank of Vietnam (SBV) temporarily halted the establishment of new joint stock commercial banks while the SBV works to revise their establishment criteria. The SBV will also stop processing all "in-principle" approvals that are currently pending. The action appears to be directed at large state-owned enterprises intent on setting up their own banks. The SBV confirms that this licensing freeze applies only to domestic banks but will not reveal when the suspension will be lifted or when the revised criteria will be released. From January to July 2008, the SBV granted "in-principle" approvals for the establishment of 10 new joint stock commercial banks and granted operational licenses to two of those banks. In addition, the GVN announced on July 29 new requirements for foreign banks and financial groups, stipulating that they must now have at least $10 billion in assets before they can set up in Vietnam. The prior regulations, released in 2002, only required the submission of financial statements during the permit application process. MICHALAK