US embassy cable - 05HANOI579

UNCLAS SECTION 01 OF 03 HANOI 000579 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR EBRYAN 
STATE ALSO FOR E, EB AND EAP/BCLTV 
STATE ALSO PASS USAID FOR CHAPLIN/ANE 
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, ETRD, VM, FINREF, SOE, WTO 
SUBJECT: VIETNAM: ECONOMIC REFORM SITUATION 
 
Sensitive but Unclassified -- Please protect accordingly. 
 
1.  (SBU) Summary: The Ambassador hosted a breakfast on 
March 4 for a number of Ambassadors as well as 
representatives of the UNDP, IMF and World Bank to discuss 
the economic reform situation in Vietnam in advance of the 
mid-term Consultative Group (CG) meeting in early June.  IMF 
Representative Susan Adams expressed concern that Vietnam's 
rapid credit growth (43 percent in 2004 versus 28 percent in 
2003) would mask the amount of current non-performing loans 
(NPLs), and lead to future problems as more poor qualify 
loans were approved.  Adams also argued that reforming the 
financial sector is key to solving the SOE reform issue. 
World Bank (WB) chief Economist Martin Rama shared much of 
this assessment and noted that the WB intends to work with 
the GVN on a financial sector reform roadmap.  Competition 
in public works procurement would help reduce the 
possibility for corruption, he noted.  To address a number 
of issues, the Ministry of Finance (MOF) is considering 
forming an investment consortium along the lines of Temasek 
in Singapore. Noting that nothing had been set yet for the 
CG agenda, Rama said that the Ministry of Planning and 
Investment (MPI) had suggested corruption as an item for the 
agenda.  Other likely topics were the financial sector, 
equitization, privatization of infrastructure projects and 
the next five-year plan.  Danish Ambassador Peter Hansen 
recommended harmonization and judicial reform as good agenda 
items.  He added that at the December CG, there had been a 
good dialogue with DPM Vu Khoan, but otherwise everyone had 
been reading from talking points.  End summary. 
 
2. (U) The Ambassador hosted a breakfast on March 4 for a 
number of Ambassadors as well as representatives of the 
UNDP, IMF and World Bank to discuss the economic reform 
situation in Vietnam in advance of the mid-term consultative 
group meeting in early June. 
 
IMF: Rapid Rise in Credit Growth Will Hide NPLs 
--------------------------------------------- -- 
 
3. (SBU) In opening comments on the current situation, IMF 
Representative Susan Adams said that the IMF and the World 
Bank would be assessing the commercial and private banking 
situation in Vietnam in coming weeks.  She added that the 
GVN was starting to show momentum on trying to address 
financial sector reform through the Poverty Reduction 
Support Credit (PRSC).  The rate of credit growth had been 
quite rapid with a rise from 28.5 percent at the end of 2003 
to 43-45 percent at the end of 2004.  While this rise alone 
was not troubling and was having no impact on inflation, it 
was affecting the quality of economic growth since many 
loans are being granted for projects with no viable economic 
basis.  Credit growth varies on a sector-by-sector basis, 
Adams observed.  Of particular concern was the Development 
Assistance Fund, which she considered to be a "black box," 
but which the IMF was seeking to examine carefully in 
particular because it has funding links to the postal 
savings plan. 
 
SOEs: Fix the Financial Sector and Stop the Numbers Game 
--------------------------------------------- -------- 
 
4.  (SBU) To achieve effective SOE reform, Vietnam must 
ensure efficient resource allocation, Adams observed.  For a 
long time, the IMF and World Bank had been engaged in a game 
with the GVN of counting the number of SOEs equitized. 
However, if the financial sector were effectively reformed 
so that credit was priced accurately and banks measured 
their performance by their rates of return, not by the rise 
in the amount of credit, there would be more rational 
lending and the credit available to SOEs would decline. 
Slow and steady financial sector reform would lead to 
rationalized SOEs, though this would not mean that all SOEs 
would be eliminated.  Having some profitable SOEs would 
probably be acceptable. 
 
5. (SBU) Asked how a firm might react to having its loan 
application rejected, Adams said that the loan applicant 
might use political connections or turn to the Development 
Assistance Fund for credit.  She noted that the GVN was 
seeking to rationalize debt in order to improve its 
international credit rating.  Since the stock of non- 
performing loans has always been muddled, the IMF is seeking 
an accurate picture.  The State Bank of Vietnam (SBV) had 
recapitalized some of the banks three years ago, but this 
had been a "band-aid" as the SBV now recognizes.  In 
addition, the issue of how to classify loans as non- 
performing is a complex one as is how to provide for loan 
losses.  Deputy SBV Governor Tran Minh Tuan agrees with the 
need to change the classification system as called for in 
Decision 1627 of December 31, 2001, but believes it should 
take place gradually. 
 
6. (SBU) By the end of 2005, the IMF expects that Vietnam 
will be closer to international accounting standards, but 
this shift should be gradual to avoid antagonizing the GVN. 
Banks are starting to put systems in place to get data to 
the SBV on the same basis.  EU Ambassador Markus Cornaro 
noted the need for the GVN to measure the current and 
investment budget on the same basis and combine the 
analysis.  Ambassador Marine asked when should one worry 
about the rapid rate of credit growth.  Adams replied that 
20 percent annual credit growth had been the target under 
the old IMF program.  Already there was pressure in the real 
estate market, but there was no inflationary "blowout" 
though there was a poor quality loan portfolio, which could 
affect important decisions on Official Development 
Assistance (ODA) and sovereign finance.  While there was no 
need for alarm yet, there was a need to tell the GVN the 
risk of this credit policy long term and the potential 
fiscal liabilities it could create for the government. An 
IMF staff team will be in Vietnam in March to provide 
technical assistance on statistics such as the consumer 
price index and the producer price index, she added. 
 
World Bank View 
--------------- 
 
7. (SBU) Martin Rama, World Bank Senior Economist in 
Vietnam, then provided his view on the situation.  He began 
by noting that the World Bank agrees on the credit situation 
and the inability to verify the stock of non-performing 
loans (NPLs). Credit growth should be below 40 percent.  One 
positive note was that the fastest growing segment of 
lending was by the joint stock banks, though they had the 
lowest base.  (Note: They account for less than five percent 
of the credit market. End note.)  Vietcombank had the 
fastest growth among state owned commercial banks (SOCBs). 
Rama noted that the (November 16, 2004) Decision 184 on 
transparency had led to the full disclosure of the budget 
and a requirement that public investment not take place 
unless there was adequate disclosure.  Ministries have to 
repay these loans themselves and have been asking donors for 
funds for such purposes.  More competition in public works 
projects would help reduce corruption, he opined.  The World 
Bank has not seen evidence of financial mismanagement, which 
could indicate corruption, but has seen evidence of 
collusion. 
 
8. (SBU) The MOF is shifting to international accounting 
standards, but the SOEs and banks, which it owns, are not 
keen on changing quickly in these areas, Rama noted.  The 
MOF will seek to reform fiscal loan assessment to SOEs as 
well as the NPL classification system and the amount loan 
loss provisions required.  The World Bank hopes to work with 
the GVN on a road map for financial sector banking reform. 
Rama cited the case of the fertilizer sector where SOCBs 
refused to do a syndicated loan since the loan amount was 
too large and the project returns were not good.  The 
provincial banks do not have this level of sophistication. 
To address this, the MOF is considering forming an 
investment consortium along the lines of Temasek in 
Singapore.  This change would enable them to eliminate many 
small SOEs and resolve NPLs, but might take five years. 
 
9.  (SBU) Ambassador Marine asked the World Bank when the 
roadmap of financial sector reform would be completed.  Rama 
responded that the government had different views on this. 
The Prime Minister and Office of the Government were 
committed to it, but needed a green light from the Party. 
Should this approval come before the mid-term CG, it would 
be possible to discuss at that time. 
 
10. (SBU) EU Ambassador Cornaro commented that the lack of 
foreign direct investment (FDI) in infrastructure could 
indicate that there had been little change in the GVN's 
attitude on the need to shift from reliance on ODA to FDI as 
ODA gradually declined.  Rama responded that there had been 
a change in the regulatory framework in power generation. 
The new electricity law and the decision to equitize several 
power plants held promise in this area.  The WTO 
negotiations had led to some liberalization in telecom, Rama 
opined.  Many provinces were also creating infrastructure 
funds and issuing their own debt for infrastructure 
projects.  The key steps for greater private sector 
involvement in infrastructure were improved transparency, 
integration of the capital and recurrent budgets, he added. 
 
11. (SBU) Danish Ambassador Hansen remarked on the need to 
make legal and judiciary reform a more important issue for 
the donors.  UNDP Representative Jordan Ryan said that on 
March 7 UNDP would review with the Ministry of Justice the 
strategy for judicial reform as well as the strategy on 
legal reform.  This issue was currently under consideration 
by the Party Politburo where the judicial part was 
reportedly encountering more difficulty.  Ryan added that on 
public administration, the GVN appeared to be making 
progress.  Public administration reform was slow and hard, 
though there were signs that it was moving in the right 
direction. 
 
Foreign Direct Investment 
------------------------- 
 
12. (SBU) Swiss Ambassador Benedict De Cerjat observed that 
although Switzerland had a significant stock of existing 
FDI, there were very few new investments.  Some structural 
factors are holding back new investment.  Ambassador Marine 
noted that U.S. FDI certainly had not flooded into Vietnam, 
but rather trickling in with no recent, significant new 
projects.  In part, this was because potential investors 
were waiting for WTO accession and in part, because although 
the GVN professes that it wants FDI, it is not yet willing 
to be as open and transparent as it needs to be. 
 
WTO Accession 
------------- 
 
13. (SBU) De Cerjat also asked about the Minister of Trade's 
recent remark that WTO accession might take place after 
2005.  Ambassador Marine noted that the GVN is now realizing 
how much work needs to be done for WTO accession.  A meeting 
is set for March 4 to give a green light to accession in 
time for the Hong Kong Ministerial or to go slower.  EU 
Ambassador Cornaro remarked that it was not impossible for 
the GVN to accede in December, but in particular on the 
rules side, the GVN would need to begin sharing drafts of 
WTO required legislation in advance of passage.  French 
Ambassador Jean-Francois Blarel opined that Vietnam might 
want to get rid of the WTO issue before the Party Congress 
when a change in Prime Minister and government was possible. 
The current leadership risked losing credibility if it did 
not succeed in WTO accession. 
 
14. (SBU) Australian Ambassador Joe Thwaites noted that 
progress in their market access bilateral was proving slow 
and tough.  In a recent bilateral in Geneva, Vietnam had put 
no new offer on the table.  When the meeting ended after two 
hours, Vietnam agreed to provide a new offer.  Ambassador 
Marine noted that the United States would have a bilateral 
in Washington in mid-March and that the GVN had put forward 
a new offer, which was still under review.  Swiss Ambassador 
De Cerjat noted that the President of Vietnam's National 
Assembly would be going to Geneva as well as Brussels along 
with 20-30 parliamentarians and 70 businessmen in mid-March. 
 
Consultative Group Agenda 
------------------------- 
 
15. (SBU) Ambassador Marine also asked what would be on the 
CG agenda.  Thwaites said that the mid-term CG tended to 
have a more operational focus.  Rama noted that the Ministry 
of Planning and Investment had suggested corruption as an 
item for the agenda, but said nothing had yet been set. 
Danish Ambassador Hansen said that harmonization and 
judicial reform would be good agenda items.  He added that 
at the December CG, there had been a good dialogue with DPM 
Vu Khoan, but otherwise everyone had been reading from 
talking points.  Rama listed financial sector as the next 
priority as well as equitization, privatization of 
infrastructure projects, corruption and the next five-year 
plan. 
 
 
MARINE