GVN ROLLS OUT STIMULUS PACKAGE

UNCLAS SECTION 01 OF 02 HANOI 000138

SENSITIVE
SIPDIS

STATE FOR EAP/MLS MBROWN
SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR DBISBEE

E.O. 12958: N/A
TAGS: EINV ECON VM
SUBJECT: GVN ROLLS OUT STIMULUS PACKAGE

REF: A) Hanoi 1391 - "Further Effects of the U.S. Financial..."
B) Hanoi 1196 - "VN's SMEs Thirsty for Capital"

HANOI 00000138 001.2 OF 002


1. (SBU) Summary. The GVN is in the process of implementing its
stimulus package. The package consists of three main parts; USD 1
billion in interest rate subsidies, one-time payments to poor
families, and reductions in the value-added, corporate and personal
income taxes. Additional measures are being announced on an ad-hoc
basis by various ministries and agencies. While some are optimistic
that the plan may help businesses survive the economic downturn,
others foresee implementation issues and financing concerns. End
summary.


2. (U) The GVN is beginning to implement its much-discussed
stimulus package (reftel A). The centerpiece of the package is USD
1 billion in interest rate subsidies, available to all businesses
except consumer goods importers and securities investors and
brokers. Commercial banks will deduct 4 percentage points from
their ordinary lending rates and then request compensation from the
GVN for that amount. It will apply to new loans only and the
subsidy will be paid for a maximum of eight months. The program
technically began on February 1 and will be in place through
December 31, 2009, but no banks have applied for the subsidy to date
because implementing directives were not released until last week.
Banks have begun to announce "set asides" for lending at the
subsidized rate. The Bank for Investment and Development (BIDV),a
state owned commercial bank, says it has up to VND 65-68 trillion
(USD 3.73-3.91 billion) available, and may make adjustments to loan
contracts signed before February 1. Privately-held Asia Commercial
Bank will lend up to VND 35 trillion (USD 2.01 billion) at the
subsidized rate.


3. (U) The second part of the package, aimed at Vietnam's poorest
citizens, provides for one time payments of VND 200,000 per person
(about USD 11.50),but not to exceed VND 1 million (USD 57) per
family, to families earning less than VND 1 million (USD 57) per
year. The GVN estimates that total cost for this fund will be about
VND 3,800 billion (USD 217 million). Most of these payments were
made during the Tet holiday at the end of January.


4. (U) The third part of the package is a 50 percent VAT reduction
for certain sectors and industries, effective February 1 through
December 31, 2009. The reduction is narrowly focused on industrial
inputs such as coal, basic chemicals, machinery, some types of
vehicles and related components (such as engines and gear boxes),
ships and boats, cargo handling, hotel and tourism services. The
GVN also enacted a 30 percent reduction in the corporate income tax
(CIT) on small and medium sized-enterprises (SMEs) and businesses
operating in some sectors such as agriculture-forestry-fishery,
textile and garment, footwear and electronics. The reduction
applies retroactively for the fourth quarter of 2008 and for all of

2009. Some other sectors, such as machine manufacturing, building
materials, construction and installation services, tourism, food and
fertilizer trading may defer payment of the CIT for nine months.
Finally, implementation of the new personal income tax has been
delayed until May.


5. (SBU) In addition to the formally announced initial stimulus
package, some ministries and agencies are beginning to develop
complementary initiatives. Some public investment infrastructure
projects that were delayed last year as part of the fight against
inflation will be revitalized in an effort to create jobs and spur
spending, but no new funds will be allocated from either the budget
or off-budget accounts. In a move aimed at stimulating public
consumption, the SBV issued a circular, effective February 1, that
allows banks and their retail customers to negotiate borrowing
interest rates (based on market rates) for consumer credit. The cap
on lending rates (150 percent of the SBV's base rate),however, is
still in place and applies to corporate lending. The Ministry of
Finance has also extended the deadline for paying taxes on imported
materials used in the production of exports by 275 days from the
date customs procedures are completed. Finally, Ho Chi Minh City is
in the process of unveiling its own package, which will likely
consist of already-planned infrastructure spending re-bundled as a
"stimulus plan." Several other southern provinces confirm that they
are already reprogramming their budgets to put money into the hands
of businesses and the poor, in addition to any stimulus funds they
may receive from the central government.

THE DEVIL IS IN THE DETAILS
--------------


HANOI 00000138 002.2 OF 002



6. (SBU) According to the Director of Macroeconomic Policy at the
Central Institute for Economic Management (CIEM),a GVN-sponsored
analysis and forecasting group, the purpose of the interest rate
subsidy is to allow businesses to continue operations during what
will likely be a difficult period, thereby preventing layoffs. He
doesn't foresee many businesses using the money to expand operations
or increase investment, and expressed some doubt that commercial
loans would find many takers even at reduced rates, saying "People
don't even have business plans for 2009 - they just don't know what
is coming." He also expressed doubt about the effectiveness of the
VAT cut, noting that sector-based reductions are difficult to
administer and often invite fraud.


7. (SBU) Local bankers and businesses are more hopeful about the
program's ability to spur economic growth. The head of Vietnam's
SME Association thinks that the plan has the potential to make a
meaningful difference for Vietnam's struggling SMEs, which have
recently struggled with access to capital. (reftel B) Some bankers
worry, however, that implementation may be challenging. The SBV
must still approve each loan, and if it decides that a project
doesn't meet requirements for a subsidy, lenders are stuck with the
4 percent loss. The head of a foreign bank operating in Vietnam
tells us that there is considerable pressure on banks to make
riskier loans under the new program, and worries that a portion of
the funds will find their way back into Vietnam's bubble-prone real
estate market. Finally, the interest rate subsidy will only be paid
for eight months and does not require any structural adjustment by
borrowers, so if the current downturn lasts into 2010, businesses
will be no better equipped to cope with difficulty than they are
now.

COMMENT
--------------


8. (SBU) A larger concern is how the stimulus plan will be funded.
While there may be some funds available in the GVN coffers for the
interest rate subsidy portion of the plan, there has been no public
cost estimate, nor a revised state budget, that accounts for the
revenue side of the package. The IMF Resident Representative notes
that the initial budget for 2009 already carried significant
financing requirements (approximately VND 52 trillion, or USD 3
billion, which equals 2.9 percent of GDP by international standards
or 4.8 percent of GDP by Vietnamese standards). A substantial
decrease in oil revenues because of declining oil prices combined
with falling revenues resulting from less economic activity and the
tax cuts discussed above will result in an even larger deficit. The
PM recently issued a directive to the MOF to undertake a
dollar-denominated domestic bond issuance to help cover this
shortfall, but it's not yet clear how big (or successful) the
issuance will be, especially with dollars in short supply on the
local market. For its part, MOF has been reluctant to discuss
details of how the package will be financed, which only creates more
questions about who is charged with balancing the books.


9. (U) This cable was coordinated with Con Gen HCMC.

MICHALAK