VIETNAM ECON HIGHLIGHTS: IRAQ CANCELS VIETNAM OIL DEAL,

UNCLAS SECTION 01 OF 02 HANOI 000269

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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)

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IRAQ ACCUSES PETROVIETNAM OF "UNPROFESSIONALISM"
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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
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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
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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
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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
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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
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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).


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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
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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
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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%
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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