VIETNAM - RESPONDING TO THE GLOBAL FINANCIAL CRISIS;

UNCLAS SECTION 01 OF 03 HANOI 000045 SENSITIVE SIPDIS STATE FOR EAP/MLS MBROWN; F/EAP JMARTIN; F/EAP NHIGGINS SINGAPORE FOR TREASURY TREASURY FOR SCHUN USTR FOR DBISBEE E.O. 12958: N/A TAGS: EINV ECON VM ETRD SUBJECT: VIETNAM - RESPONDING TO THE GLOBAL FINANCIAL CRISIS; ASSESSING THE IMPLICATIONS FOR U.S. BILATERAL ASSISTANCE Ref: STATE 00134905 A) Hanoi 37 ("VN's Economy 2008) B) HCMC 11 ("Falling U.S. Consumer Demand Prompts...") C) Hanoi 1399 ("Further Effects of Global Financial...") D) Hanoi 18 ("PM Announces Plan to Combat...") E) Hanoi 1196 ("VN's SMEs Thirsty for Capital") F) Hanoi 1316 ("VN Shifts Focus to Maintaining Growth") G) Hanoi 1349 ("VN's 2008 Consultative Group Meeting") H) Hanoi 1206 ("GVN Cuts Rates on Fears of Slowdown") HANOI 00000045 001.2 OF 003 ¶1. Summary: This cable is in response to STATE 00134905. As previously reported, the global economic downturn is already having effects in Vietnam and will continue to do so until there is an improvement in key export and credit markets. The GVN's ability to forecast and respond to economic instability is rudimentary and the current situation highlights the need for bilateral capacity building and assistance in those areas. The reasons for increased bilateral assistance to Vietnam are wider than the economic downturn, however, and are more closely examined in Hanoi septel, "Bilateral Assistance: Our Window of Opportunity in Vietnam". End Summary. IMPACTS OF THE DOWNTURN -------------- ¶2. General Real Economy Impacts: There is evidence that real economic activity is slowing in key sectors and that unemployment is increasing (reftels A, B). Unemployment in urban areas was 4.65 percent for 2008. That figure will rise for 2009. The GVN releases year-end unemployment figures only, so anecdotal and sectoral reports of unemployment are the best short term measure (reftel B). The GVN is in the process of implementing unemployment insurance (septel) but the system will not be capable of making payments for at least one year. Vietnam is a significant exporter of agricultural products and food security does not pose a substantial threat to the population. The GVN is currently discussing a 1 to 6 billion dollar stimulus package (reftel C) and the Prime Minister has recently released a five point plan for coping with the economic downturn (reftel D). Anecdotally, the broad economic downturn has led to an increase in petty crime in major cities, but the financial crisis has not created social unrest to date, and it is unlikely that widespread unrest as a result of the global economic downturn will occur. Smaller-scale, localized protests or strikes are likely as such activities had been increasing in Vietnam even prior to the global downturn. ¶3. Trade and Investment Impacts: Vietnam's principal export commodities, such as rice, coffee and pepper have been slowing since mid-summer. Crude oil exports have been variable but are down on an annualized basis. Imports of critical production inputs such as steel, fertilizer, fuel and insecticide are also down. Major importers and exporters, especially State owned enterprises, are generally able to get credit. The GVN has directed the State owned commercial banks to ensure that exporters have sufficient capital to conduct business. Small and medium enterprises, however, which constitute a large part of the supply chain and account for 30 to 40 of GDP, face continuing challenges with access to credit (reftel E). The GVN does not calculate the amount of remittances made by overseas workers but total remittances in 2008 amounted to USD 8 billion dollars. Local analysts predict the amount of total remittances will fall in 2009, with some speculating that it may go as low as USD 4 billion. Vietnam had approximately 85,000 workers abroad in 2008 and hopes to increase that number to 90,000 in 2009. Some major FDI projects planned for implementation in 2009 will likely be delayed. Local economists and analysts predict that implemented FDI will decrease from about USD 11.5 billion in 2008 to between USD 6 to 9 billion in 2009 (Reftel A and HCMC septel),which may lead to a weaker current account. The GVN optimistically estimates that implemented FDI will remain at USD 11 to 12 billion in 2009. ¶4. Financial Sector Impacts: After hiking interest rates to reduce inflation and control rampant credit growth during the first half of 2008, the GVN has been reducing interest rates at a rapid pace over the last four months (reftels F, H). The current base rate is 8.5 percent (making the maximum lending rate 12.75 percent) and further reductions are likely. The larger banks are reportedly very dong HANOI 00000045 002.2 OF 003 liquid but are still lending conservatively. Demand for new loans is reportedly also low. Dollar supply is tight and dollar lending is carefully monitored by the State Bank of Vietnam (SBV) because the financial system is heavily dollarized. Non Performing Loans (NPLs),which are not calculated according to international standards, are officially at 3.5 percent, but unofficial estimates put the real rate at easily 3 to 4 times that amount. NPLs will likely increase in the coming six to 12 months due to a declining property market. The GVN and the SBV have encouraged lenders to "restructure" loans that are in default. The SBV has increased dialogue with the banking sector and is enforcing some regulations strictly (such as foreign exchange regulations),but still lacks adequate enforcement and technical capacity. This lack of capacity extends to bank closures, making bank mergers the default option for troubled banks. Earlier this year, the GVN proposed possible mergers for a group of small, troubled joint stock banks, but those plans have not materialized and may be increasingly unlikely in light of the global financial crisis. Licenses for new joint stock banks are frozen pending release of revised licensing criteria by the SBV. ¶5. Impacts on Government Revenue and Expenditures: Post is not aware of any state plans to curtail investment or other important government spending, although some cuts have been contemplated at the provincial level. Indeed, there may be some increase in government spending as part of the stimulus package now in development. Import-export tariffs and the special consumption tax on imports account for 14.5 percent of total budget revenue and the GVN does not foresee a significant decline in those revenues in ¶2009. Local economists, however, are predicting a decline in budget revenues due to the decline in oil prices and exports/imports. Other funding sources, such as donor assistance and bonds, are not expected to decline. The GVN does not finance its budget deficit via commercial loans. ¶6. Other Donor and Multilateral Institutions, Plans: Neither the IMF, World Bank nor ADB have entered into discussions with the GVN regarding accelerating assistance in response to the global economic downturn. The World Bank will begin discussion with the GVN this week about possible partial financing of the GVN's proposed stimulus package, but does not expect those discussions to alter the total amount of assistance that the Bank will provide to Vietnam in 2009. At the recent 2008 Consultative Group Meeting, multilateral and bilateral donors pledged a total amount of approximately USD 6 billion for 2009, compared to USD 5.4 billion last year (reftel G). (Japanese ODA of approximately USD 1 billion was suspended pending a corruption investigation, but some of that money is already flowing and the rest will likely be reinstated during the year - see ref G.) Effects on Bilateral Assistance -------------- ¶7. As a result of the above factors, the GVN needs to address significant structural issues so that it is better able to predict and respond to global economic instability, both now and in the future. The Prime Minister's Office has already asked us to provide assistance in macroeconomic analysis and for recommendations as to what monetary and fiscal policies could be adopted to deal effectively with the current challenges. This assistance could take the form of analytical reports and publications; consultation with U.S. experts; training workshops to improve the capacity of the Vietnamese Government/policy makers in macro-economic policy management, including development of monetary policy framework and better coordination among GVN agencies. ¶8. The United States could also provide assistance via U.S-Vietnam economic, financial and trade talks or forums. Together with relevant international organizations and donors, these could help the GVN assess the impact of global crisis, develop capacity of provincial governments to develop strategies aiming at finding ways to integrate financial and economic, social and labor, as well as environmental policies in a common sustainable development approach for growth and investment. This type of activity would potentially attract foreign and domestic businesses, and leverage resources from the private sector. ¶9. Comment: While Vietnam will certainly suffer from the global economic downturn, the reasons for increasing our bilateral HANOI 00000045 003.2 OF 003 assistance here are broader and more compelling than easing the effects of the next year or two. Vietnam is, and will continue to be, a key strategic partner in the region and our assistance is critical to its transformation. Post reports more fully on this issue in Hanoi septel, "Bilateral Assistance: Our Window of Opportunity in Vietnam". End comment. ¶10. This cable has been coordinated with ConGen HCMC. MICHALAK