US embassy cable - 05HOCHIMINHCITY1238

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 001238 
 
SIPDIS 
 
STATE FOR EAP/MLS AND EB/TPP/BTA/ANA 
STATE PASS USTR ELENA BRYAN AND GREG HICKS 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, ETRD, EINV, VM, WTRO, BTA, WTO, SOE, FINREF 
SUBJECT: FOREIGN BANKER EVALUATES VIETNAM'S FINANCIAL SECTOR 
 
REF: Hanoi 3028 
 
1.  SUMMARY:  Vietnam's financial markets are evolving, but the 
pace of evolution is slow and access to capital is limited for 
all except state-owned enterprises (SOEs), according to one of 
the leading foreign bankers in the country.  At a recent 
investment conference hosted by the Ho Chi Minh City People's 
Committee, the chief executive of Hong Kong Shanghai Bank (HSBC) 
in Vietnam told an audience of local and international business 
representatives that investors need to think long-term and keep 
up with Vietnam's changing regulatory environment when planning 
investment in Vietnam.  END SUMMARY. 
 
2.  As part of the November 8-9 HCMC Investment Mart, Alain 
Cany, CEO of HSBC Vietnam and chairman of the European Chamber 
of Commerce in Vietnam, provided conference participants with a 
valuable overview of Vietnam's financial sector, which is small 
but growing.  Banks are the main form of financial institution, 
though less than two percent of Vietnam's 82 million citizens 
have bank accounts.  Vietnam is still primarily a cash-based 
society; only 60 to 70 percent of business transactions go 
through the banking system.  There is as much as USD 5 billion 
in savings outside the banking system, which is equal to 25 
percent of GDP, Cany said.  While only 120,000 credit cards have 
been issued in Vietnam, there were no credit cards available 
three years ago and the number of bank accounts have doubled in 
the same time frame. 
 
3.  Cany noted that Vietnam's five state-owned commercial banks 
continue to dominate the banking sector, accounting for 80 
percent of total lending, most of which goes to SOEs.  Private 
joint stock banks account for another 10 percent of lending, 
while foreign and joint venture banks account for the remaining 
10 percent.  According to Cany, the lack of an effective 
clearing system and an uneven playing field between domestic and 
foreign banks are two of the main disadvantages of the 
Vietnamese banking sector.  Movement of funds within the banking 
system is inefficient; clearing is done manually via messengers. 
 Clearing between institutions in different provinces takes 
three to four days.  Foreign banks still face restrictions on 
access to domestic deposits and foreign currency funds from 
local residents and restrictions on branches and off-site 
automatic teller machines (ATMs). 
 
OTHER FINANCIAL INSTITUTIONS 
 
4.  Securities markets in Vietnam are also small, but growing, 
Cany reported.  The Ho Chi Minh Securities Trading Center has 30 
listed companies, and the Hanoi over-the-counter market had six 
listed companies as of July.  Secondary market trading 
activities are limited, and the reporting and transparency 
requirements of the official markets make some companies 
hesitant to list.  However, Cany said company shareholders are 
beginning to understand how listing can increase liquidity.  In 
October, the GVN raised the limit on foreign ownership in listed 
companies from 30 to 49 percent. As a result of these positive 
developments, Cany predicted the markets could double or triple 
their size in the coming year, albeit from a low level. 
 
5.  Other capital markets, including the bond market, are 
predominantly short-term in nature, according to Cany.  Banks 
are relied on to provide medium- and long-term capital, and 
since most Vietnamese bank deposits are short-term, Cany said 
there is a danger of foreign currency mismatch, particularly 
because hedging mechanisms are limited in Vietnam.  Vietnam has 
an underdeveloped bond market; while the GVN has been an active 
bond issuer, corporate bond issuance is almost non-existent. 
 
REGULATORY ENVIRONMENT 
 
6.  While there have been positive regulatory developments in 
the last five years, the environment is still evolving, Cany 
observed.  On the positive side of the ledger, the State Bank of 
Vietnam is beginning to allow certain types of derivative 
instruments, including interest rate options, which permits 
hedging against foreign exchange and interest rate risk.  The 
GVN has also begun to reform its personal income tax structure. 
It has lowered the personal income tax rate from 50 percent to 
40 percent, with further reforms planned.  Cany said tax rates 
must be lowered further because tax evasion is widespread; 
foreign-invested enterprises and SOEs are virtually the only 
taxpayers in Vietnam. 
 
7.  The U.S.-Vietnam Bilateral Trade Agreement and Vietnam's 
impending accession to the World Trade Organization have 
provided and will provide a roadmap for further improvement in 
the legal system, Cany said.  Other improvements include a new 
Enterprise Law, currently being considered by the National 
Assembly, and plans to raise the maximum foreign ownership stake 
in commercial banks to 30 percent in 2006.  However, the new 
Unified Investment Law, also under consideration by the National 
Assembly, will have a negative impact on the regulatory 
environment if it is passed in its current form.  According to 
Cany, the law could set Vietnam "back by 20 years." 
 
COMMENT 
 
8.  Cany's assessment of Vietnam's financial sector mirrors the 
views of many other HCMC businesspeople.  He did not pull any 
punches, even with top HCMC government leaders sitting in the 
front row of the audience.  His assessment of the draft 
Investment Law follows on the submission to the GVN of a letter 
from the American, European, and Australian Chambers of Commerce 
that strongly criticizes the current draft of the law (reftel). 
WINNICK