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Viewing cable 08HANOI1206, GVN CUTS RATES ON FEARS OF SLOWDOWN

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Reference ID Created Released Classification Origin
08HANOI1206 2008-10-24 07:26 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Hanoi
VZCZCXRO3076
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1206 2980726
ZNR UUUUU ZZH
P 240726Z OCT 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8652
INFO RUEHHM/AMCONSUL HO CHI MINH 5237
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
UNCLAS HANOI 001206 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS MBROWN 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
USTR FOR DBISBEE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EAID VM
SUBJECT: GVN CUTS RATES ON FEARS OF SLOWDOWN 
 
Ref: A) Hanoi 1196 
 B) Hanoi 1095 
 C) Hanoi 1158 
 
1.  (U) In a surprise move on October 21, the State Bank of Vietnam 
(SBV) issued Decision 2316 lowering the base interest rate to 13 
percent from 14 percent. The SBV also cut the discount rate to 12 
percent from 13 percent and the re-financing rate to 14 percent from 
15 percent.  The base interest rate is used by the SBV to determine 
the maximum lending rates in the country.  According to Vietnam's 
civil code, lending rates cannot exceed 1.5 times the base rate, so 
the new official cap for lending rates now will be 19.5 percent from 
21 percent previously.  At the same time, the SBV also injected some 
liquidity into the system by implementing Decision 2321, doubling 
the interest rate paid on compulsory reserves by financial 
institutions to 10 percent from 5 percent, and Decision 2317, 
pre-paying compulsory bills issued on March 17, 2008 worth VND 
20,300 billion (approx. $1.2 billion). 
 
 
2.  (SBU) In the announcement issued on the 21st, the SBV states 
that its actions follow the GNV's instructions to "contain 
inflation, proactively limit the negative impacts of the global 
economic recession and financial crisis, ensure macroeconomic 
stability and sustain reasonable growth."   The SBV expects that 
lower lending rates will ease the credit crunch faced by most 
businesses, especially small and medium enterprises (reftel A), and 
therefore lead to economic growth.  The SBV attributes the rate cut 
to recent declines in the Consumer Price Index, which showed a 0.2 
per cent monthly increase in September and is expected to fall 
further in October.  The SBV's Monetary Policy officials, however, 
noted to the Embassy that "the base rate is not fixed. SBV will 
adjust and determine the base rate in line with market conditions". 
They also said that "currently there's no change" to the 30 percent 
credit growth target set by the GVN earlier this year. 
 
3.  (SBU) Most analysts and economists were surprised by the move in 
light of recent GVN promises about tight monetary policy through the 
end of the year (reftel B).  The PM recently reinforced those 
messages in his remarks to the National Assembly on October 16, 
identifying the GVN's "core task as controlling inflation, 
stabilizing the macro-economy, ensuring social security and rational 
and sustainable growth, of which inflation control is the top 
priority." Both ADB and IMF representatives in Hanoi called the 
measures "premature" but understandable given easing inflationary 
pressures and increasing downside risks for both exports and FDI 
(reftel C). 
 
4.  (SBU) Comment:  Privately,  some local economists are saying 
that these liquidity measures run the risk of sending the wrong 
signal to the market - that some may see them as another wild swing 
in Vietnam's economic policy or as a sign of panic by the GVN. 
Following the SBV's announcement, the dong depreciated to the top of 
the official trading band and continues to hover there, perhaps 
indicating that immediate market reaction is not as positive as 
hoped.  Given the global downturn, the GVN's monetary policy will 
have to continue to walk the increasingly fine line between 
mitigating external risks to growth and combating inflationary 
pressures. 
 
MICHALAK