VIETNAM ECON HIGHLIGHTS: IRAQ CANCELS VIETNAM OIL DEAL,

UNCLAS SECTION 01 OF 02 HANOI 000269 SIPDIS STATE FOR EAP/MLS MBROWN SINGAPORE FOR TREASURY TREASURY FOR SCHUN USTR FOR DBISBEE E.O. 12958: N/A TAGS: ECON VM SUBJECT: VIETNAM ECON HIGHLIGHTS: IRAQ CANCELS VIETNAM OIL DEAL, TRADE SURPLUS IN FIRST QUARTER, WARNER BROS TESTS IP MARKET REF: A) Hanoi 211 ("Plan To Deregulate Power Sector Lags"); B) Hanoi 233 (Vietnam Trade in 2008) HANOI 00000269 001.2 OF 002 IRAQ ACCUSES PETROVIETNAM OF "UNPROFESSIONALISM" -------------- ¶1. (SBU) The Iraqi Oil Ministry cancelled negotiations with state-run PetroVietnam in early March 2009 on a $300 million contract signed under former President Saddam Hussein's reign. The Iraqi side said it called off the final round of talks because PetroVietnam "was not committed to the required professionalism." An official from PetroVietnam's International Cooperation Department told Post there was a "misunderstanding" between the two sides. He said a delegation led by Vietnam's Ministry of Foreign Affairs would travel to Iraq to resolve the issue. A PetroVietnam Exploration & Production official directly involved with the Iraqi project said he was unable to comment due to the issue's sensitivity. In any event, it appears that PetroVietnam is still interested in pursuing the deal. INFRASTRUCTURE LIMITATIONS TURN U.S. MANUFACTURER AWAY -------------- ¶2. (SBU) Potential foreign investors often cite Vietnam's poor infrastructure as a key drawback. U.S. heavy equipment manufacturer Caterpillar has decided against setting up a manufacturing plant in Vietnam because the poor road and port facilities "outweighed the lower labor costs," according to one of the companies' top executives in Asia. Vietnam's domestic market is too small to absorb the plant's production so it would have needed to establish itself as an export operation. The executive told us that the company had set up plants elsewhere in southeast and south Asia. WARNER BROS SET TO ENTER VIETNAMESE MARKET -------------- ¶3. (U) U.S. entertainment company Warner Brothers announced on March 12 that it had chosen Vietnamese joint stock company Nhan Hieu Toan Cau to license and distribute products from WB's brand portfolio, including Looney Tunes, Tom & Jerry, Harry Potter, Batman, Superman and Scooby-Doo. The products will include apparel, accessories, toys, stationery, gifts & novelties, branded food and personal care products. WB has said it has no immediate plans to distribute DVD movies or music CDs in Vietnam, due to high optical disc piracy rates and market access barriers to legitimate imports. VIETNAMESE SMES FALTERING BECAUSE OF DOWNTURN -------------- ¶4. (U) A recent report on the impact of the global economic recession on Vietnam's 350,000 small and medium enterprises (SME) said 70 percent of SMEs have experienced difficulties due to the economic slowdown, while another 20 percent are on the verge of bankruptcy. The survey, conducted by the Vietnam Small and Medium Business Association, said 10 percent of Vietnam's SMEs have either halted operations, shifted to other business models or may soon shutter. Vietnam's Deputy Director General of Taxation blamed a lack of technology, poor corporate governance skills and limited access to capital and markets for the SMEs' troubles. RICE EXPORTS INCREASE -------------- ¶5. (U) As of the date of this report, Vietnam earned more than $454 million on rice exports of 1.15 million tons, according to the Vietnam Food Association. The total exceeds rice exports for the entire first quarter 2008, when Vietnam exported 859,000 tons worth $366 million. Vietnam, the world's second biggest rice producer after Thailand, exported 4.7 million tons of rice worth $2.66 billion in 2008 and expects to export 5 million tons in 2009. STATE GAS & OIL MONOPOLY CALLS KETTLE BLACK -------------- ¶6. (U) Despite an ongoing shortage of electricity, state-owned PetroVietnam (PVN) and the Vietnam Coal and Minerals Group (Vinacomin) have been unable to conclude tariff negotiations with state-run utility Electricity of Vietnam (EVN). Vietnam's retail electricity tariff remains below rates in neighboring countries, even after a recent price hike, and is often the source of protracted negotiations among EVN and domestic and foreign investors in Vietnam's power sector (REF A). HANOI 00000269 002.2 OF 002 ¶7. (U) In the latest case, EVN and PVN have been unable to agree to a tariff price for the proposed Nhon Trach 1, and Ca Mau 1 and 2 power stations, whose combined output would account for about 14% of Vietnam's electricity supply in 2009. Vinacomin has also been unable to persuade EVN to agree to a tariff for the proposed Son Dong Power Plant. After the latest negotiations broke down, Vinacomin and gas and oil monopoly PVN publicly accused EVN of abusing its monopoly power and placing the country at risk of additional blackouts. EVN responded by blaming PVN and Vinacomin for delaying price negotiations until the eleventh hour, after the power stations had been built and were about to enter operation. VIETNAM BUILDING LPG DEPOT -------------- ¶8. (U) State-owned PetroVietnam, keen to reduce Vietnam's reliance on petroleum imports, has begun construction on a liquid petroleum gas (LPG) depot and tank truck station located next to Vietnam's first petrochemical refinery in central Dung Quat, which entered operation in February. LPG is a synthesis of refined petroleum and liquid gas and is often used as a cooking fuel, refrigerant and a fuel in heating appliances. The LPG depot, valued at more than $13 million, will include two 1,000-ton LPG storage tanks, a distribution system to deliver the cooled and liquefied gas from tanks to trucks, and an industrial pipeline system. The facility should ease distribution of hydrocarbon gas to Vietnam's central coast and mountainous region when it comes onstream in the first quarter of 2010. VIETNAM PLANS HIGH-SPEED RAILWAY BY 2035 -------------- ¶9. (U) Vietnam revealed further details last month about its plan, first announced in April 2007, to build a 1,550-kilometer high-speed railroad from northern capital Hanoi to the country's economic hub, Ho Chi Minh City (HCMC),in the south. The railway would be built in four stages, with the first two stages complete by 2019 and the final two in 2035. When complete, travel time between Hanoi and HCMC would shrink from 36 hours currently to about 5.5 hours. Vietnam plans to utilize technologies used in Japan's Shinkansen, Germany's Inter-City, and France's TGV high-speed rail systems, according to a report by Bloomberg News. Vietnam's existing north-south railway was built by the French between 1882 and 1936. TRADE SURPLUS IN FIRST QUARTER, EXPORTS TO THE U.S. UP 26% -------------- ¶10. (U) Vietnam is expected to post a trade surplus of $1.7 billion in the first quarter of 2009, according to GVN estimates. A steep 45% decline in imports is to blame for reversing Vietnam's largest ever deficit in 2008 (REF B). Imported inputs for Vietnam's construction and export industries, in particular, were down: steel (-65 percent),iron (-71%),fertilizers (-29%) and textiles (-60%). Exports went up by 2.4%, to a total of $13.5 billion. Agricultural exports accounted for some of that growth: rice (+71.3%). In January, exports to the U.S. were up by 11%, while U.S. exports to Vietnam were down by 26%, according to the U.S. Department of Commerce. The GVN is concerned that despite the modest growth in exports, 12 out of the country's top 13 exports were down from the first quarter 2008. MICHALAK