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Viewing cable 07HANOI1150, Macroeconomic Developments in Vietnam

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Reference ID Created Released Classification Origin
07HANOI1150 2007-06-22 10:36 2011-08-25 00:00 UNCLASSIFIED Embassy Hanoi
VZCZCXRO3008
RR RUEHHM
DE RUEHHI #1150/01 1731036
ZNR UUUUU ZZH
R 221036Z JUN 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5712
INFO RUEHHM/AMCONSUL HO CHI MINH 3290
RUEHGP/AMEMBASSY SINGAPORE 2409
RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 02 HANOI 001150 
 
SIPDIS 
 
TREASURY FOR OASIA 
SINGAPORE FOR REGIONAL TREASURY ATTACHE BAKER 
STATE PASS FEDERAL RESERVE SAN FRANCISCO FOR DFINEMAN 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VM
SUBJECT: Macroeconomic Developments in Vietnam 
 
REF: HANOI 1149 
 
1.  (SBU) Summary.  With capital inflows, inflation and credit 
growth reaccelerating, the State Bank of Vietnam (SBV) is under 
increasing pressure to reign in liquidity.  Because of official 
policies calling for stable interest rates and exchange rates, 
however, SBV has been forced to resort to blunt instruments such as 
reserve requirements as the main tools to deal with these 
challenges.  Even open market operations were halted for a time due 
to conflicts between the Ministry of Finance (MOF) and SBV. 
Nevertheless, authorities and market participants remain confident 
that the favorable growth environment will continue in the short and 
medium term.  End Summary. 
 
2.  (U) This is one of five cables reporting on the visit 
of Regional Financial Attache Susan Baker's May 29-June 1 visit to 
Vietnam.  This message reports her findings and impressions of 
recent macroeconomic developments. 
 
INFLATION PICKING UP 
-------------------- 
 
3. (SBU) The SBV acknowledges that inflation in the first half of 
2007 will likely surpass 2006 levels and blames this development on 
the impact of WTO accession, the subsequent loss of the ability to 
control administered prices and new increases in fuel prices.  The 
SBV official in charge of foreign exchange policy also noted that 
Vietnam's progressive liberalization of the capital account has 
increased capital inflows, leading to monetary expansion.  The same 
official cited first quarter 2007 foreign inflows of $2.5 billion in 
FDI and $1 billion in remittances and first half 2007 portfolio 
inflows of $3.4 billion. 
 
4. (SBU) SBV officials also blame the MOF's expansive fiscal policy, 
particularly the government's policy of large increases in civil 
service wages, for fueling inflationary expectations.  Following an 
increase of 28.5 percent in October 2006, the SBV was able to win a 
concession from the MOF for no civil servant salary increases in 
2007.  In a separate meeting, MOF officials defended their policies 
and reiterated their view that such large increases are needed as 
part of the GVN's civil service reform efforts aimed at reducing 
corruption, and they expect the increases to resume in the future. 
 
CREDIT GROWTH 
------------- 
 
5.  (SBU) The SBV's monetary policy officials are also concerned 
about a resurgence of credit growth.  One official source reported 
that while credit growth had fallen from its 2004 peak of around 40 
percent to around 20 percent in the second quarter of 2006, it has 
moved back up into the 30 percent annual growth range more recently. 
 (Note: SBV's banking policy and supervision officials were not 
particularly concerned about the rising credit growth, which they 
said was needed to support high GDP growth and could be controlled 
with risk management and provisioning policies. End note.) 
 
DRAMATIC INCREASE IN RESERVE REQUIREMENTS 
----------------------------------------- 
 
6.  (SBU) The SBV noted that the SBV Governor has approved 
essentially to double the minimum reserve requirements effective on 
June 1, 2007.  The SBV officers expect the (unremunerated) reserve 
requirement for Vietnamese Dong-denominated deposits will increase 
from 4 percent to 8 percent, while U.S. dollar-denominated deposits 
will increase from 8 percent to 10 percent, although they said exact 
rates will also depend on the term of the deposits.  Bankers later 
reported that they had heard reserve requirements will rise from 5 
percent to 10 percent. 
 
7. (SBU) Surprisingly, market participants said the very large 
reserve requirement change has had no impact on the interbank 
lending market -- at least up to the first day of official 
implementation.  The SBV, the IMF resident representative and some 
market participants noted that most banks already had been holding 
excess reserves at the SBV before the increase, so they might not 
need to borrow more funds to meet the new requirement. 
 
MONETARY INSTRUMENTS GOING UNUSED 
--------------------------------- 
 
8. (SBU) When asked what else could be done to tighten monetary 
policy, SBV officials dismiss the options of raising interest rates 
or allowing the currency to appreciate, noting the government's 
policy objective of keeping these two items stable.  Regarding the 
exchange rate, one SBV official explained that letting the currency 
appreciate would be hard on exporters.  He also cited China as an 
 
HANOI 00001150  002 OF 002 
 
 
example of a fast-growing economy with strong capital inflows that 
has not let its currency appreciate.  SBV officials did say that 
they will be able to increase open market operations by issuing more 
SBV bills, although they consider it a relatively limited tool for 
addressing inflation due to the long lag time for such operations to 
have an effect.  (Note: According to one official source, the MOF 
chastised the SBV for issuing too many SBV bills and crowding out 
MOF fundraising efforts.  This led to a temporary halt on SBV 
issuances that may have contributed to the high liquidity 
environment.) 
 
9. (SBU) Comment: The muted impact of such a large increase in 
reserve requirements is disconcerting, considering the Vietnamese 
unwillingness to use other instruments to reign in liquidity.  The 
disputes between the SBV and the MOF, as well as the differing views 
of the SBV's monetary and banking supervision divisions, make it 
clear that not everyone is on board with the need to reign in excess 
liquidity in the economy.  With credit growth reaccelerating, 
especially at the private banks, and limited risk management 
systems, continued inaction may be storing up problems for when the 
economy slows down. End Comment. 
 
ALOISI