US embassy cable - 05HANOI1321

UNCLAS SECTION 01 OF 03 HANOI 001321 
 
SIPDIS 
 
STATE PASS 
STATE ALSO PASS 
 
E.O. 12958: N/A 
TAGS: ECON, VM, EB, AFLU, FINREF 
SUBJECT: VIETNAM'S ECONOMY IN 2004: HIGH GROWTH, INFLATION 
AND EXPORTS 
 
1. Summary: The Vietnamese economy achieved a growth rate of 
7.7 percent in 2004. Foreign direct investment and exports 
recorded the highest growth rates in the last seven years 
(37 percent and 28.9 percent respectively).  Nonetheless, 
the economy is faced with increasing inflation primarily 
resulting from external factors with the Consumer Price 
Index rising 9.5 percent. End Summary. 
 
GENERAL ECONOMIC PERFORMANCE 
---------------------------- 
2. Vietnam's real Gross Domestic Product (GDP) grew at 7.7 
percent in 2004, surpassing that of 2003 (7.24 percent) and 
ranking among the highest in the region. Vietnam's economy 
achieved this high growth rate despite adverse weather 
conditions, the avian influenza and higher prices of raw 
materials. 
 
3. The agriculture, forestry and fishery sector grew by 3.5 
percent, at the same rate as last year. Agriculture grew at 
only 2.9 percent due to unfavorable weather conditions just 
as the winter-spring crop began. Moreover, the avian 
influenza outbreak led to significant poultry losses.  The 
massive culling of poultry in early 2004 caused the loss of 
15 percent of the country's total poultry stock. The 
industry and construction sector was comparable to last 
year's at 10.2 percent. The services sector grew by 7.5 
percent, surpassing its 6.4 percent average growth from 2001- 
2003. 
 
4. The Consumer Price Index (CPI) rose sharply by 9.5 
percent compared to 2003. Prices for food and foodstuffs, 
which account for 47.9 percent of the price basket, were the 
main contributors to the rising CPI. Other items also rose: 
pharmaceuticals and medical services (up 13.9 percent) and 
housing and building materials (up 6.4 percent). Higher 
world oil prices also contributed to the CPI as 
transportation and postal services account for 10 percent of 
the price basket and petroleum price fluctuation affected 
the prices of almost all other goods and services. 
 
5. In an effort to curb inflation, the State Bank of Vietnam 
(SBV) raised the compulsory reserve ratio to control credit 
growth and limit money supply. The IMF welcomed this timely 
action to counter inflation. As a result the CPI increased 
at a slower pace in the second half of 2004.  The CPI 
increased 1.1 percent in January and 2.5 percent in 
February. Food and foodstuffs remain the driver of the price 
index. Medicine prices rose as much as 20 percent.  With 
prices of raw materials for production fluctuating 
unpredictably on local and world markets in 2005 and the 
return of avian influenza, Vietnam may have difficulty 
keeping its CPI below its target of 6.5 percent. 
 
6. Remittances by overseas Vietnamese residents and 
Vietnamese workers abroad have been rising steadily. State 
Bank officials estimated the total inward remittances 
through the banking system to be at USD 3 billion in 2004, 
surpassing the record figure USD 2.5 billion in 2003. 
 
FOREIGN DIRECT INVESTMENT 
------------------------- 
 
7. Foreign Direct Investment (FDI) was a bright spot in 
Vietnam's 2004 economic performance. There was USD 2.1 
billion worth of new FDI commitments, a 37 percent year-on- 
year increase and the highest level since the Asian 
Financial Crisis in 1997-1998. The average registered 
capital per project rose to USD 3.1 million in 2004 from USD 
2.5 million in 2003. In addition to USD 2.1 billion worth of 
FDI registered in 679 new projects, about USD 2 billion went 
to more than 400 existing operating projects. Most new FDI 
was still in the industry sector with 431 projects and USD 
1.24 billion in capital. This accounted for nearly two- 
thirds of the number of new projects and about 60 percent of 
the total registered capital. 
 
8. Most new foreign investment continues to flow to the 
southern region with 479 projects worth USD 1.34 billion, 
accounting for 70 percent of the number of new projects and 
64 percent of the total annual registered capital. Dong Nai, 
Binh Duong, Ho Chi Minh City and Ba Ria-Vung Tau received 
the most FDI. 
 
9. Taiwan was the largest foreign investor in Vietnam in 
2004 with 142 projects worth USD 424.5 million, accounting 
for 20.4 percent of the total new registered capital. 
Following Taiwan were South Korea, Japan, the British Virgin 
Islands, Canada, Singapore, Hong Kong, Malaysia, China and 
the United States. 
10. The Government has recognized the importance of foreign 
investment to economic growth and the increasing competition 
for foreign investment in the region. The Government is 
drafting a common investment law intended to create a level 
playing field for all companies doing business in Vietnam 
for submission to the National Assembly by fall of 2005. The 
Government is also drafting a proposal to decentralize state 
management in foreign investment. Under this proposal, Hanoi 
and Ho Chi Minh City would be given authority to grant 
licenses for foreign investment projects with capital up to 
USD 40 million. Other provinces and cities would be 
authorized to issue licenses for projects up to USD 20 
million, except for projects subject to Prime Ministerial 
approval. (Note: The list of FDI projects subject to Prime 
Ministerial approval is included in Vietnam's Investment 
Climate Statement. End Note.) 
 
TRADE 
----- 
11. Exports were another bright spot in Vietnam's economic 
picture. Exports rose by 28.9 percent in value to USD 26 
billion, the highest annual growth in the last seven years. 
Export growth continued at a high rate because world 
commodity prices rose, some products achieved a higher 
export value (e.g., coal, coffee, tea and pepper), and 
exports entered new markets in Africa, Latin America and 
Eastern Europe. 
12. As a result of the continued rise in world oil prices, 
crude oil was the main contributor to export growth, 
generating USD 5.7 billion of income and recording 48.3 
percent growth. Other significant contributors to export 
growth included electronics components, wood products, rice, 
coffee and rubber. 
13. In addition to the four traditional key export products 
with export earnings above USD 2 billion (crude oil, 
textiles and garments, footwear and aquatic products), 
electronic components and wood products (furniture) emerged 
as new major exports. Electronics export earnings reached 
USD 1.08 billion in 2004, representing a surge of 60 percent 
over 2003. The export value of wood products soared to USD 
1.05 billion, up 85.9 percent compared to the previous year. 
The United States, Japan, the United Kingdom, Germany, 
Taiwan and France were major markets for wood product 
exports. 
14. Textile and garment exports continued to be strong with 
a value of USD 4.3 billion, representing 17.2 percent 
growth. The United States remains Vietnam's main market, 
accounting for 56 percent of Vietnam's export value. As 
exporters looked for new markets, textile exports to the 
European Union increased 32 percent over the 2003 level. 
15. Other traditional export products such as rice, coffee, 
rubber and coal achieved significant growth as a result of 
rising world prices. Rice exports were up by 6.3 percent in 
volume but surged 30.6 percent in value due to improved 
quality and higher prices. Similarly, rubber exports rose 
14.2 percent in volume, but soared 53.2 percent in value. 
16. A new development in Vietnam's 2004 trade picture was 
the ranking change of its trading partners. China emerged as 
its second largest trading partner with USD 7.2 billion 
total trade value following the European Union with USD 7.4 
billion. Vietnam's trade with China increased sharply by 
47.6 percent. Vietnam's exports to China rose 59 percent 
while Vietnam's imports increased 43 percent. China's 
emergence moved Japan and the United States down to 
Vietnam's third and fourth largest trading partners with 
total trade values of USD 7 billion and USD 6.1 billion 
respectively. 
17. Total imports to Vietnam were USD 31.5 billion, up 25 
percent compared to last year. The domestic sector spent USD 
20.5 billion (65 percent of total import value), up 25.2 
percent from last year and Foreign-invested enterprises 
imported USD 11 billion (35 percent of total import value), 
up 24.4 percent from last year. Machinery, equipment and 
materials for production accounted for 94.6 percent of the 
total import value and increased 26.3 percent over last 
year. Consumer goods only comprised 5.4 percent of total 
import value and rose only 5.3 percent compared to the 2003 
level. 
18. Since Vietnam still depends on imported materials for 
its production, world price fluctuations affect both 
Vietnam's exports and imports. Rising prices of some 
products such as petroleum, steel, fertilizer, plastic and 
wheat flour caused the import value of these products to 
increase while import volumes rose modestly or even declined 
(for example, petroleum imports grew only 9.2 percent in 
volume but increased 46.8 percent in value, and fertiliser 
decreased 1.9 percent in volume but rose 30.3 percent in 
value. 
19. Exports grew faster than imports. The trade deficit (USD 
5.5 billion in 2004), as a percentage of total export value, 
was down to 21.2 percent from 25.7 percent in 2003. 
20. According to United States International Trade 
Commission Data, Vietnam's exports to the United States 
continued to rise, generating USD 5.3 billion in 2004 (17.8 
percent year-on-year growth). Vietnam's major exports to the 
United States were textiles and garments, footwear, aquatic 
products and wooden products (furniture). However Vietnam's 
imports from the United States declined slightly to USD 1.2 
billion from USD 1.3 billion last year.  Major U.S. exports 
to Vietnam included aircraft and parts, machinery and 
equipment, cotton and plastics.  This resulted in Vietnam's 
widened trade surplus with the United States, to USD 4.1 
billion in 2004. Note: The preliminary data of Vietnam's 
General Statistics Office, however, show slightly different 
figures: Vietnam's exports to the United States were USD 
4.99 billion and Vietnam's imports from the United States 
were USD 1.13 billion. End note. 
21. Comment: Vietnam's impressive growth rate continued in 
2004.  Largely due to avian influenza, inflation was the 
most formidable challenge, but did not dampen export-led 
growth. As Vietnam's economy continues to open to global 
markets, the problems facing policymakers are becoming more 
complex. There is no accurate understanding of how interest 
rate changes affect the banking system. The FDI rebound 
reflects the government's continued efforts to remove 
obstacles to foreign investors as well as investors' 
confidence in Vietnam's business environment. However, 
foreign investors continue to urge the Government to make 
its policies and rules more transparent, to improve 
infrastructure and to stop corruption. 
MARINE