Identifier
Created
Classification
Origin
09AMEMBASSYHANOI1234
2009-11-19 09:37:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Hanoi
Cable title:  

VIETNAM APPROVES SECOND STIMULUS PACKAGE

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SUBJECT: VIETNAM APPROVES SECOND STIMULUS PACKAGE

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SUBJECT: VIETNAM APPROVES SECOND STIMULUS PACKAGE


1. (SBU) Summary. Vietnam has approved a second stimulus package
that extends and modifies elements of the existing package into

2010. This decision was hotly debated, with some economists and
National Assembly (NA) members arguing that the danger of resurgent
inflation outweighed any need for additional growth. Proponents
discounted the inflation risk and argued that the announced package
is largely psychological, with a value much smaller than the prior
stimulus. Additional stimulus, however, risks putting increased
pressure on the local currency. This step suggests that internal
political pressures to reach GDP growth targets continue to be
stronger than concerns for price stability. End summary.



The Rationale for Stimulus




2. (U) After much debate, on October 30 the GVN announced that it
would extend its stimulus plan into 2010 to ensure the steady
recovery of the economy. This decision was premised on several
assumptions: (1) the recovery of the world economy will be slow
and uncertain; (2) domestic enterprises need a soft landing from
the interest subsidies provided under the earlier stimulus; (3) the
consumer price index (CPI) increase in 2010 is unlikely to exceed
10%; and (4) continued stimulus will not further significantly
burden the budget as only 70 percent of previously budgeted
stimulus funds have been disbursed.



The Stimulus Package




3. (U) The size and details of this second stimulus are not
completely clear, but will likely be much smaller than the first
package. The first package included four components: subsidized
lending, public investment, tax breaks and social spending.
Subsidized lending for short-term working capital, because of its
immediate impact, was seen as the core of the first package and
will be continued through the first quarter of 2010. However, the
GVN will reduce the interest rate subsidy from 4 percent to 2
percent. Interest rate subsidies provided for medium- and
long-term credit will also be extended at the reduced subsidy.
However, in response to calls for stricter supervision of the
second package, this extension will focus on medium- and long-term
credit for infrastructure investment, particularly in agriculture,

labor-intensive industries, export-oriented enterprises and small
and medium enterprises.




4. (U) Following the initial announcement, more recent statements
have been vague about the scope and duration of the extension of
the lending subsidies beyond the first quarter of 2010, stating
only that the State Bank of Vietnam and the Ministry of Industry
and Trade will consider and make recommendations later on
continuing the subsidies. The second stimulus will not extend
further tax reductions and exemptions, including corporate income
tax, value added tax and personal income tax. Deferring of
corporate income tax, however, will be permitted for an additional
three months beyond the end of this year.



Stimulus Dissent from the National Assembly




5. (U) Despite expectations to the contrary, the second stimulus
package was not sent for NA review prior to its announcement.
Following the announcement, on November 2, Dinh Van Nha, Vice
Chairman of the Budget and Finance Committee of the NA, told
journalists that the second stimulus would not be implemented until
it gets NA approval. In a press interview on November 4, Nguyen
Duc Kien, Vice Chairman of the National Assembly said that, "we
should not launch a second stimulus at this point of time," and
that, "the National Assembly has not been informed of the source of
funding." In addition, both the Finance and Economic and Budget
Committees of the NA recommended stopping subsidized lending as
scheduled on December 31. While the GVN has made assurances that
it can finance additional stimulus, funding was not included in the
new budget recently approved by the National Assembly. Despite the

HANOI 00001234 002 OF 003


NA's statements, it is likely that the package will go forward.




6. (SBU) A National Assembly member from Ho Chi Minh City (HCMC)
who serves on the Finance and Economic Committees told the Consul
General that, while the first stimulus package may have played a
role in avoiding an even worse slowdown, it did not reach its
intended target of small and medium enterprises (SMEs). Based on a
review conducted by the NA, he estimated that 80% of all subsidized
loans went to large SOEs or joint ventures of SOEs. The majority
of the remainder went to large private companies, with only about
two percent of the total reaching SMEs. He believes that moves to
extend the subsidy have more to do with propping up SOEs than with
helping the economy as a whole. He expressed his fear that the
true cost of supporting the SOEs will be felt both in inflation in
the second half of 2010 and in a continuing decline in investment
effectiveness in Vietnam.



IMF Opposition to Further Stimulus




7. (SBU) The International Monetary Fund (IMF) had hoped for no
second stimulus package and was disappointed by this step, citing
the risks for future inflation. The IMF had recently recommended
to the GVN: (1) an orderly exit from the stimulus; (2) early
monetary tightening; and (3) reassurance of a conservative
(non-expansionary) fiscal policy. IMF Resident Representative
Benedict Bingham told Econoff that he believed this choice was
primarily a response to the political pressures of the upcoming
2011 Party Congress, as well as to continuing uncertainties
regarding global growth. Bingham also said that the GVN is betting
on being able to prevent any serious balance of payments problems
by: (1) increasing exports; (2) increasing FDI inflows; and (3)
seeking better portfolio (indirect investment) inflows that will
stick.




8. (SBU) The IMF thinks that the chief risks for future
macroeconomic instability come from rising inflation and pressure
on the foreign exchange market. Bingham noted that the World Bank
and Asian Development Bank share the IMF's concerns regarding the
GVN's balance of payments. Bingham stated, however, that the
greatest pressure on the local currency is not from the GVN's
weakening balance of trade or lower remittances, which together
account for only a $1.9 billion drop in Vietnam's foreign exchange
reserves, but from the "other" private capital outflows of some
$3.3 billion during the first half of 2009. Bingham states that
this outflow likely resulted from private "portfolio shifts" from
Vietnamese dong into dollars and gold, resulting from: (1)
uncertainty, (2) perceptions of a risk of devaluation, and (3) the
GVN's economic stimulus, particularly the interest rate subsidy,
increasing the supply of dong, and undermining confidence in the
currency.



Private Sector Wants the Psychological Impact of Another Stimulus




9. (SBU) In the Southern Key Economic Zone (SKEZ) including Ho Chi
Minh City, Binh Duong, Dong Nai and neighboring provinces, most
foreign-invested company managers say the direct benefits of the
stimulus package have been directed to the state-owned enterprises
and the clients of the state-owned commercial banks. They want a
stable macroeconomic environment and worry that stimulating growth
will lead to inflation and other problems associated with a rising
cost of living, such as the worker wage strikes at manufacturing
companies in 2008. In contrast, investment fund managers support a
second stimulus package that will create additional growth, arguing
that the proposed package is small and much of the possible
inflationary pressure would be offset by taxes scheduled to come
back into effect early next year. Others in HCMC's private sector
argue that there is now a capital shortage in Vietnam that
additional stimulus will help relieve. Most agreed that because
the proposed second package is considerably smaller than the first,
it will primarily have a psychological effect.

HANOI 00001234 003 OF 003



10. (SBU) Comment. The political interest in strong GDP growth at
this point appears to have overcome the economic argument for
ending economic stimulus. Concern over the financial health of
some of Vietnam's largest SOEs, who could be helped by continued
subsidized interest rates, could have also played a role in the
decision making process. At the same time, the reduction of the
interest rate and the phasing out of tax breaks likely indicates
that decision-makers are not ignoring inflation concerns and think
they can control inflation in 2010. End comment.
Michalak