US embassy cable - 04HANOI1918

UNCLAS SECTION 01 OF 02 HANOI 001918 
 
SIPDIS 
 
STATE PASS USTR FOR EBRYAN 
STATE ALSO PASS USAID ANE 
TREASURY FOR OASIA 
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO 
BANGKOK FOR USAID 
 
E.O. 12958:  N/A 
TAGS: EFIN, ECON, VM, FINREF 
SUBJECT:  VIETNAM RESPONDS TO INFLATIONARY PRESSURE 
 
1.  SUMMARY.  Vietnam's CPI has registered an increase of 
7.2% so far this year.  While the GVN attributes this rise 
to external forces such as oil prices, the CPI is also 
heavily weighted to reflect rises in the price of food and 
foodstuffs.  Credit growth has also rapidly increased by 33% 
this year.  The inflationary pressures resulting from these 
developments have prompted the State Bank of Vietnam to 
follow the IMF's advice and raise the compulsory reserve 
ratio for both Vietnam Dong and U.S. Dollar deposits. END 
SUMMARY. 
 
SERIOUS INFLATION OR FAULTY CPI? 
-------------------------------- 
 
2.  (U) In recent months, inflation has been on the rise in 
Vietnam.  The Government Statistics Office (GSO) estimates 
Vietnam's Consumer Price Index (CPI) to have increased 7.2% 
from December 2003 - June 2004.  The monthly CPI for June 
continued to rise 0.8% compared to May.  The year-to-date 
increase surpassed the GVN target by nearly 1.5 times. 
According to the IMF, Vietnam's year-on-year inflation (June 
03 - June 04) is 8.3%. 
 
3.  (U) Explanations for the rate increase vary.  The GSO 
cites the increase in oil prices as the main factor, but the 
IMF sees a domestic explanation.  The IMF rep contends that 
droughts caused food prices to rise and the large weight of 
this component in the CPI (nearly half) was the primary 
factor in the increase.  The IMF contends that if Vietnam 
only calculated "core" inflation (i.e. without foodstuffs 
and fuel prices) the situation would appear more benign. 
Vietnam's CPI basket includes 400 goods and services in 10 
basic categories.  Food and foodstuffs account for nearly 
half of the total.  Of the other 9 categories, the other 
primary areas are: transportation and communication 
(including energy) at 10%, housing and building materials at 
8%, and household appliances at 9%.  The food and foodstuffs 
component has risen dramatically in the past year by 13-14% 
while the other components have only risen by an average of 
about 2%.  The price of pharmaceuticals has also been on the 
rise lately, but the category only accounts for 2.41%.  The 
local World Bank office points to increases in the prices of 
steel and fertilizer, as well as temporary price shocks from 
the outbreak of Avian Influenza earlier this year and the 
subsequent ban on the sale of poultry meat and eggs. 
 
EXPECTATIONS 
------------ 
 
4.  (U) GVN officials from various ministries have made 
predictions about the eventual year-end inflation rate to 
include worst-case scenarios should government actions not 
succeed in reducing inflation.  According to press reports, 
Vice Minister of Finance Nguyen Ngoc Tuan anticipates that 
the monthly CPI for July will increase by 0.8% or more and 
that the annual CPI for this year may reach 9%.  The press 
also reported that the Ministry of Trade, following a recent 
inter-agency meeting, predicted a 10-12% CPI at year's end 
as the worst-case scenario. 
 
5.  (U) Many newspapers have also carried commentary by non- 
governmental observers, some of it echoing the government's 
worst-case scenarios.  In an article in the newspaper Tuoi 
Tre dated June 24, Vietnamese-American Pham Do Chi, a 
regional economic expert who is frequently interviewed by 
the paper, believes that if the GVN can manage a "soft 
Landing" and cool down economic growth to about 6.5 - 7% 
then the annual inflation rate might be curbed at 7 - 8%. 
However, should the GVN fail to cool down the economy, he 
predicts inflation could reach 10% by the end of the year. 
 
EFFECT ON CONSUMERS 
------------------- 
 
6.  (U) While the local IMF rep believes that the 
inflationary pressures primarily resulted from an imbalance 
in the CPI and would have likely proved to be transitory, 
she and new IMF Managing Director Rodrigo de Rato (who was 
in Hanoi June 26) urged the GVN to act to stem the 
development of an inflationary psychology among consumers. 
They feared that transitory price increases might eventually 
combine with an increase in civil service wages scheduled 
for this October to create real inflationary pressures. The 
resulting consumer behavior would then begin to fuel the 
inflation rate. 
 
7.   (U) Recent Vietnamese press reports on inflation   have 
been fairly accurate, but they may still have a negative 
impact on consumer behavior.  Several recent articles 
pointed to a trend among Vietnamese of moving their savings 
from VND deposits to USD deposits.  In an effort to calm the 
fears of the public, SBV Governor Le Duc Thuy and several 
senior officials at large, state-owned commercial banks have 
made themselves available for interviews with various 
newspapers.  However, the mere appearance of headlines on 
inflation has probably already increased consumer anxiety. 
SBV ACTS TO STEM CREDIT GROWTH 
------------------------------ 
8.  (U) To relieve inflationary pressure, the State Bank of 
Vietnam (SBV) raised the compulsory reserve rate for Vietnam 
Dong (VND) and U.S. Dollar (USD) deposits.  SBV raised the 
reserve requirement for VND short-term and at-call deposits 
from 2% to 5% and doubled the rate for VND medium and long- 
term deposits to 2%.  The rate for USD short-term and at- 
call deposits was doubled to 8%, and the rate for USD medium 
and long-term deposits was also doubled to 2%.  The Bank of 
Agriculture and Rural Development raised rates for VND short- 
term deposits from 1.5% to 4%, but the rate for VND medium 
and long-term deposits remained unchanged at 1.5%.  The SBV 
hopes these actions will stem the rapid growth of credit. 
So far this year, according to the IMF, credit has expanded 
at a rate of 33%, compared with 28.4% in 2003.  State-owned 
enterprises or state-directed development projects receive 
the majority of these loans that generally prove to be 
underperforming loans.   According to reports in the July 1, 
2004 newspaper Lao Dong, many large commercial banks say 
that they do not plan to raise interest rates in the coming 
weeks. 
BURGHARDT