VIETNAM'S FIRST HALF WEAK, BUT SHOWING SIGNS OF RECOVERY

UNCLAS SECTION 01 OF 02 HANOI 000704

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TAGS: ECON ETRD EINV KTDB VM

SUBJECT: VIETNAM'S FIRST HALF WEAK, BUT SHOWING SIGNS OF RECOVERY

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1. (U) Summary: Vietnam's economic growth in the first half of 2009
was 3.9 percent year-over-year (yoy). Exports were $27.6 billion,
10.1 percent lower yoy, while imports fell more drastically, by 34
percent, to $29.7 billion. The trade deficit was $4.6 billion,
excluding the re-export of gold. Newly committed FDI fell
significantly from the same period last year, coming in at only $4.7
billion. There are no hard numbers available, but most analysts
believe the GVN's stimulus package has had a positive effect on
growth. However, CPI was up 10.3 percent over the same period last
year, leading the National Assembly in its recent session to set an
inflation ceiling of 10 percent for 2009. End Summary.

STRONGER SECOND QUARTER GROWTH PROVIDES GLIMMERS OF HOPE
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2. (U) According to the GVN's General Statistics Office, most
macroeconomic statistics for the first half of 2009 were lower than
the same period last year, but second quarter figures showed notable
improvement compared to the first quarter. GDP growth yoy in the
first half was 3.9 percent. Vietnam's Q1 GDP grew by 3.1 percent,
the lowest in the last decade. However, the economy started to
accelerate in Q2, with GDP growth at 4.5 percent. Despite this
respectable showing in the midst of a global economic downturn,
meeting the GVN's 5 percent GDP growth target for this year presents
a significant challenge.

INDUSTRIAL AND SERVICE SECTORS LEAD THE WAY TOWARD RECOVERY
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3. (U) All sectors of the economy experienced positive growth, with
services leading the way at 5.5 percent yoy. Industrial production
increased by 4.8 percent yoy. Construction showed 8.4 percent
growth for the first half of 2009, attributable to the subsidized
interest rates of the GVN stimulus package and the fall in prices of
construction materials. Production output of agriculture, forestry
and fisheries grew 2.5 percent yoy in the first 6 months.

DRCREASE IN FOREIGN TRADE
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4. (U) Export revenue for the first half of 2009 dropped by 10
percent yoy, and average prices of many key products fell sharply,
including crude oil (down by 53 percent),rubber (44 percent),
coffee (28 percent),and rice (21 percent). However, export
quantities of most agricultural products rose significantly yoy,
e.g. cassava (up by more than 3 times),rice (up 56 percent),pepper
(up 40 percent),coffee (up 22 percent) and tea (up 10 percent).
Other key export items, including textiles and garments, footwear,
and aquatic products saw decreases of 1.3 percent to over $4
billion, 8.7 percent to $2 billion, and 10.7 percent to $1.7
billion, respectively, in the first six months. Meeting the GVN's
adjusted target of 3 percent growth in exports for all of 2009 will
require 57 percent growth of export revenue during the remaining six
months of 2009. Exports to the US of textiles and garments, wood
products, computers, and electronic products increased sequentially
in each month from March through June.


5. (U) Imports for the first half of 2009 were $29.7 billion, 35
percent lower yoy. Imports of steel and iron dropped 54 percent;
automobiles, 47 percent; timber and woodwork, 40 percent; machines
and equipment, 19 percent, and cotton 25 percent. Other segments
experiencing declines included chemicals, computers and electronic
equipment, pesticides, paper, dairy products, petroleum and
fertilizers. Only a handful of categories increased, including
wheat (up by 61 percent),pharmaceuticals (up by 27 percent),and
liquefied petroleum gas (up by 15 percent).

TRADE DEFICIT REPLACES FIRST QUARTER SURPLUS
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6. (U) Vietnam ran a trade deficit in the second quarter, erasing a
first quarter surplus largely attributable to significant gold
re-exports. In June alone, the deficit was estimated to be $1
billion, raising the total trade deficit in the first half of this
year to $2.1 billion. According to the Ministry of Planning and
Investment, the deficit could reach $10 billion for the full year

2009.

DOMESTIC INVESTMENT ROSE, FDI HIT HARD BY GLOBAL RECESSION
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7. (U) Investment has been a significant driver of the Vietnamese
economy. However, in the first half of 2009, domestic investment

HANOI 00000704 002.2 OF 002


increased, while FDI dropped dramatically. More than three hundred
new FDI projects worth $4.7 billion were licensed between January
and June, down 87 percent from last year's record levels.
Additional registered capital on existing projects rose by 4
percent. Combined registered FDI in the first half of 2009 totaled
$8.9 billion, dropping 77 percent yoy. Disbursed investment was $4
billion, down by 18.4 percent yoy. Despite the decline relative to
2008, a record year for FDI in Vietnam, figures for the first half
of 2009 still reflect the general upward trend since 2005.


8. (U) Most of the newly registered or additional investment of FDI
in the first half of this year focused on accommodation and food
services, a trend in Vietnam since WTO accession in 2006. Cities and
provinces with favorable conditions, including Ba Ria Vung Tau, Ho
Chi Minh City, Binh Duong, Danang, and Hanoi, have attracted the
greatest investment by foreign investors. The top investors in the
first half of 2009 were the U.S., Taiwan, Korea, British Virgin
Islands, Hong Kong, Singapore and Malaysia.

CPI IMPROVES BUT INFLATIONARY PRESSURES BUILDING
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9. (U) The consumer price index (CPI) at the end of June was up 2.7
percent compared to December 2008 and 10.3 percent compared with the
same period last year. Prices of food climbed by 14.8 percent yoy,
housing and construction materials by 2.9 percent and household
appliances and utensils by 10.9 percent. Education services
increased 6.1 percent, while medical services increased by 8.3
percent.


10. (U) Money supply growth (M2) in the first half was 16.4 percent,
and according to the State Bank, credit growth increased by 17.0
percent since the end of 2008, and 17.5 percent compared to the same
period last year. Average lending interest rates have remained
relatively low and eligible borrowers have received an additional 4
percent subsidy as part of the GVN's economic stimulus plan. There
is growing concern that the significant credit growth, consistently
low interest rates, and global commodity price increases could be
inflationary in the second half of 2009 and 2010. In addition,
mounting concerns about foreign exchange risks have resulted in a
preference to hold foreign currency. Several rating agencies,
including Standard & Poor's and Fitch both downgraded the Vietnamese
Dong to BB-/BB- during the quarter, citing concerns about the
growing fiscal deficit.

COMMENT: PATIENCE IS A VIRTUE
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11. (SBU) While the performance of Vietnam's economy so far in 2009
has lagged the rapid growth of recent years, Vietnam has avoided
recession and is weathering the global economic storm better than
many other countries in the region. Slight improvement in the
second quarter numbers provide reason for hope that a turnaround may
have begun. Most economists and government officials have a
positive outlook on Vietnam's economic growth prospects and several
investment banks have revised slightly upward their real GDP growth
projections for 2009. However, it remains unclear how long it will
take Vietnam to return to higher growth rates and whether the
country can avoid a return to double digit inflation.

MICHALAK


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