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Viewing cable 08HOCHIMINHCITY359, MONETARY POLICY PITS INFLATION HAWKS AGAINST EXPORTERS

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Reference ID Created Released Classification Origin
08HOCHIMINHCITY359 2008-04-09 08:54 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Ho Chi Minh City
VZCZCXRO7188
OO RUEHDT RUEHPB
DE RUEHHM #0359/01 1000854
ZNR UUUUU ZZH
O P 090854Z APR 08
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3966
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHHI/AMEMBASSY HANOI PRIORITY 2604
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHHM/AMCONSUL HO CHI MINH CITY 4188
UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000359 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS AND EEB/IFD/OMA 
USAID/ANE/EAA FOR FRANK DONOVAN 
COMMERCE FOR A/S SPOONER AND SSU 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
SINGAPORE FOR TREASURY 
STATE PASS USTR FOR BISBEE 
TREASURY FOR SCHUN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV VM
SUBJECT: MONETARY POLICY PITS INFLATION HAWKS AGAINST EXPORTERS 
 
REF: A) HANOI 394, B) HANOI 377, C) 07 HANOI 1729 
 
HO CHI MIN 00000359  001.2 OF 003 
 
 
1. (SBU) Vietnam's leadership remains intent on fighting 
inflation despite the increasingly apparent toll on economic 
growth; the Government of Vietnam (GVN) recently proposed 
revised growth estimates for 2008 down from 8.5 percent to 
6.5-7.5 percent.  Nevertheless, exporters now complain loudly 
and publicly that global commodities inflation, rising local 
costs and tight credit "threaten the very existence" of small 
and medium-sized (SME) exporting companies.  Since the apparel 
industry alone employs two million largely unskilled workers, 
the GVN will be seriously tempted to consider industry proposals 
that could undermine the fight against inflation.  End summary. 
 
GVN Seized with Inflation 
------------------------- 
2. (SBU) Vietnam's year-on-year consumer price index approached 
20 percent in March.  With newspapers carrying reports of 
dramatic increases in the cost of basic food items like rice (36 
percent over last March) or beef noodle soup (up 50 percent in 
some venues), the GVN must be concerned about possible impacts 
on social stability.  Industry is being hit hard by rising cost 
as well, especially for imported raw materials and local inputs 
like labor costs and fuel.  Nguyen Thai Hoc, Vice Chair of the 
Vietnam Cashew Association, said at a meeting between the 
Ministry of Industry and Trade and domestic exporters in HCMC on 
March 14, "Against the same period of last year, input costs for 
processing one ton of agricultural products has risen 40 
percent, fuel costs 30 percent, labor costs 30 percent and bank 
interest rates 50 percent." 
 
3. (SBU) In an effort to restrain inflation and control prices, 
the GVN announced a series of monetary policy moves earlier this 
year.  The State Bank of Vietnam (SBV) issued the compulsory 
364-day treasury bills worth VND 20,300 billion (U.S. $1.3 
billion) on March 17 and required 41 commercial banks and credit 
institutions to purchase the bills at an annual interest rate of 
7.8 percent.  To meet the State Bank of Vietnam's (SBV) mandate, 
commercial banks struggled to raise the required cash by March 
17.  The GVN also increased the reserve ratio at commercial 
banks from 10 to 11 percent.  Together, these moves pushed up 
monthly interest rates for commercial operation loans in VND 
from 1.1 to 1.6 percent per month (13 to 19 percent annually). 
(Comment:  Despite exporter complaints, these are negative real 
interest rates based upon current inflation rates.  End 
comment.) 
 
Higher Interest Rates Hit Business in the Pocket Book 
--------------------------------------------- -------- 
4. (SBU) Market analysts like HSBC expect a six to nine month 
lag before the effect these moves is felt on inflation, but the 
tightening monetary policy has immediate consequences for 
Vietnamese companies.  Industrial associations like the Vietnam 
Textile and Apparel Association (VITAS) and the Vietnam 
Association of Seafood Exporters and Producers (VASEP) complain 
that small and medium-sized enterprises (SME) in particular need 
to borrow in VND to cover operating costs and USD to cover 
trading costs.  The cost of borrowing has risen rapidly, cutting 
so deeply into returns that VITAS predicts many SMEs may go 
under if current conditions persist. 
 
5. (SBU) According to the Director of Vinamit fruit processing 
company, the sharp jump in interest rates has forced the company 
to scale back investment plans.  Chairman of the Young 
Entrepreneurs' Association of HCMC said the "current monetary 
policy is driving exporting companies to cede the playing field 
to foreign investors because the current exorbitant interest 
rates of bank loans mean expansion projects are no longer 
feasible." 
 
Waiting for the Other Shoe to Drop -- FOREX 
------------------------------------------- 
6. (SBU) By pushing up VND interest rates, the SBV is also 
creating pressure on the VND to appreciate, making Vietnam's 
exports (especially contracts in USD) less attractive.  From the 
end of 2007 to mid-March, the VND experienced nominal 
appreciation of nearly five percent against the USD.  (Note: 
Because Vietnam's surging inflation has eroded the purchasing 
value of the VND, the real rate of appreciation of the VND had 
been much greater. End Note.)  Pham Xuan Hong, General Director 
of Saigon Garment No. 3 Company, estimated that each month his 
company exports about 800,000 units valued at US$1 million. Due 
 
HO CHI MIN 00000359  002.2 OF 003 
 
 
to the USD depreciation, the company lost U.S. $12,500 each 
month.  Buu Huy, Director of An Giang Seafood Import Export 
Company, blamed the sharp fall in the U.S. dollar for exporters' 
financial loses.  In January, his company signed a U.S. $1 
million export contract at an exchange rate of VND 16,000 to the 
dollar.  After the contract was paid, the foreign exchange rate 
dropped to VND15,550/USD, costing the company VND450 million 
(U.S. $28,000) each delivery because of the 60-day interval 
between contract signing and payment. 
 
Adding Insult to Injury 
----------------------- 
6.  In the meantime, exporters find it extremely hard to sell 
dollars to commercial banks for dongs.  While export revenue 
falls and the VND appreciated against the USD, banks added to 
exporter woes through their reluctance to exchange VND for 
dollars.  With a surplus of U.S. dollars, banks were afraid to 
accumulate dollars that they expected would fall further in 
value.  "We set a limit of the USD we buy each day because we 
must balance our capacity to buy and sell," said Vietcombank 
Treasury Director Nguyen Thanh Ha.  Eximbank Deputy General 
Director Dao Hong Chau told us, "The USD value on free market is 
much lower than the officially listed price so banks must 
consider both its volume and price each day."  (Comment: 
Another factor limiting VND/USD trade is that the SBV threatens 
legal/criminal action against banks caught trading outside the 
official band.  End comment.)  To make the situation even worse, 
banks typically charge a fee of two percent on currency 
exchange. 
 
Who Goes Where From Here? 
------------------------- 
7. (SBU) Exporter organizations like VITAS, HAWA and VASEP are 
pressing the GVN to stabilize the foreign currency exchange 
rate, stabilize interest rates for loans in VND and ensure 
industry access to bank loans.  Some have argued directly to the 
Prime Minister that State-owned commercial banks should provide 
lower interest rates specifically for export-oriented companies. 
 They also suggest easing lending restrictions to in order to 
make trade financing available on "more reasonable" terms. 
(Comment:  In the past week they may have seen some success as 
the VND fell sharply against the dollar.  Part of this was due 
to less overall pressure on the dollar, but some of it may have 
been due to market participants concern about Vietnam's widening 
current account deficit. End comment.) 
 
A Silver Lining, at Least for U.S. Exports 
------------------------------------------ 
8. (SBU) The weak dollar presents a good chance for U.S. exports 
to make inroads into Vietnam's market, especially hardwood. 
According to HAWA Vice Chairman Manh relatively cheap U.S. 
hardwood has the added benefits of stable supply and guaranteed 
quality.  Malaysia and Indonesia, key wood suppliers to Vietnam, 
limit their wood exports thereby driving up the price of their 
wood exports to Vietnam.  Moreover, Vietnam furniture 
manufacturers are increasingly familiar with U.S. hardwood and 
trust its quality.  He suggested to ConGen that U.S. wood 
exporters should set up a distribution system in Vietnam now to 
capitalize on the current market opportunity. 
 
Comments: 
--------- 
9. (SBU) There is a legitimate choice between whether to fight 
inflation with interest rates alone, or whether to also fight it 
with currency appreciation.  Considering that the VND has gone 
down with the dollar, Vietnam has actually gained 
competitiveness vis-a-vis most of the rest of Asia.  Vietnam 
could strike a different balance if they chose to let the 
currency appreciate to take some of the pressure off rather than 
just rely on interest rates and administrative controls. 
However, fighting it with neither, as the export associations 
want is not a viable alternative, since inflation will continue 
to eat away at their costs, eventually making them 
uncompetitive, but with a very high cost on the poor. 
 
10. (SBU) Despite all their complaints, exporting industries as 
a whole are faced with the prospect of slimming profit margins 
and slowing growth, not decline.  The exchange rate losses 
exporters are suffering are as much a reflection of the lack of 
sophistication of the overall financial system (where there is a 
paucity of products available to help exporters mitigate 
 
HO CHI MIN 00000359  003.2 OF 003 
 
 
exchange rate exposure) as they are of long-term structural 
weaknesses in the major exporting industries.  Current 
conditions favor well-run companies with financial resources and 
business acumen but will be unkind to companies that are barely 
scraping by.  More importantly, woes at labor-intensive export 
companies are a litmus test for the GVN's commitment to tackling 
inflation.  Placating exporters may help those companies in the 
short term but will further fuel inflation.  End comment. 
 
11.  (U) This cable was coordinated with Embassy Hanoi and the 
Regional Financial Attache in Singapore. 
FAIRFAX