US embassy cable - 03HOCHIMINHCITY268

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000268 
 
SIPDIS 
 
DEPARTMENT FOR EAP/BCLTV 
DEPARTMENT FOR OPS CENTER TFIZ01: IRAQ TASK FORCE PA/PD 
 
E.O. 12958: N/A 
 
 
TAGS: ECON, EPET, ETRD, PREL, VM 
SUBJECT: HCMC BUSINESSES SEE LIMITED ECONOMIC IMPACT FROM WAR IN 
IRAQ 
 
REF:  A) STATE 72824   B) HCMC 00196 C) HCMC 257 
 
Summary 
------- 
 
1.  As U.S. forces launched the first strikes against Iraq, 
government and business leaders in HCMC were still largely 
uncertain what effect the war would have on the local economy. 
Initial reports from some sectors, such as hotels, energy, and 
banking, appeared to indicate only short-term jitters, rather than 
long-term fears.  Companies that rely on trade with the Gulf 
States, on the other hand, had the most to lose, and were most 
concerned with the duration and severity of the conflict. 
 
2.  Government officials in HCMC hesitated to comment on possible 
effects of the war in Iraq, deferring questions to the central 
government in Hanoi.  However, representatives from two large 
state-owned companies said they thought the conflict wouldn't last 
long enough for them to worry about any prolonged impact.  That 
sentiment seemed to be echoed throughout much of the rest of the 
business community as well.  One prominent American businessman 
described the region as "well-insulated" from the conflict.  He 
hadn't heard of many people changing their business plans or 
operations, and hadn't changed his own plans to travel to Europe 
with a delegation of Vietnamese officials in April. 
 
OCCUPANCY DROPPING AS PEOPLE FEAR DROPLETS, NOT WAR 
--------------------------------------------- ------ 
 
3.  While the recent outbreak of Sudden Acute Respiratory Syndrome 
(SARS) in the region (ref A) was something of a concern for 
business and leisure travelers to HCMC, few were concerned that 
the war in Iraq would unsettle this otherwise stable tourist 
destination (ref B).  The hotel industry in HCMC has seen a 
decline in reservations and an increase in cancellations over the 
past two weeks.  However, the management at two of the city's 
leading hotels stated that a number of cancellations were due to 
fear of  contracting SARS, even though there have been very few 
suspected cases of the illness in HCMC.  Cancellations were having 
the most serious impact on hotels that catered to business 
travelers and conferences.  Occupancy at the New World Hotel this 
week fell from 98 to 60 percent, while rates at the Caravelle fell 
from 90 to 70 percent.  The impact on others was less significant. 
Occupancy at the Omni Saigon fell from 92 to 85 percent. 
 
HUMANITARIAN RICE EXPORTS HALTED 
-------------------------------- 
 
4.  Vietnam was expected to export up to one million tons of rice, 
valued at US$400 million, to Iraq this year under the UN's oil-for- 
food programs.  With annual rice export turnover of three million 
tons, this figure would have represented a full third of all rice 
exports from Vietnam.  The oil-for-food program has been suspended 
during the current military action.  According to Mrs. Cao Thi 
Ngoc Hoa, Deputy General Director of Vietnam Southern Food 
Corporation, her corporation was notified to suspend all rice 
shipments until further notice two days ago.  Ms. Hoa anticipated 
that if the program did not resume, her company would have to 
lower its sale price to sell the rice to another market. 
 
MILK EXPORTS TO IRAQ 
-------------------- 
 
5.  Vinamilk, the major state-owned producer of milk in Vietnam, 
normally exports 10 percent of its products to Iraq as powdered 
milk under the oil-for-food program, generating annual income of 
approximately US$60 million.  While these shipments have also 
stopped, officials at Vinamilk believe the conflict will be short- 
lived.  In the meantime, they felt there were several other 
foreign markets that would buy powdered Vinamilk products. 
 
PETROLEUM PRODUCTS PRICES RISING 
-------------------------------- 
 
6.  In reaction to the increase in the global price of crude oil 
in 2003 (from US$26.70 to US$37.66 a barrel by the end of 
February, an increase of US$10.96 a barrel, or 41 percent), the 
GVN reduced the automobile gas import tax from 10 percent to 0. 
Nevertheless, leaded and unleaded gas prices have still risen by 6- 
7 percent, affecting all industries that rely on fossil fuels for 
transportation.   According to Ms. Hai Ly, a reporter for the 
Saigon Times Group, the cost of shipping one ton of commodities 
from Vietnam to the Middle East and Africa has increased from 
US$56 to US$100.  Vietnam Airlines has increased its projected 
spending on gasoline from VND1,800 billion (approximately US$117 
million) to VND2,000 billion (US$130 million).  Vietnam Airlines 
has also had to reroute its regularly scheduled transit flights 
through Dubai on their way to Europe for the duration of the 
conflict, adding to flight times and fuel consumption. 
PROFITS, PAY AND POLYESTER RUNNING LOW 
-------------------------------------- 
7.  Along with an increase in the global price of crude oil, the 
costs of PP and PE, petroleum by-products used in the production 
of plastics and synthetic materials, have increased from US$1.60 
to US$1.90, an increase of 19 percent.  According to Mr. Le Quang 
Ngoc, Senior Officer of the Commercial Department of PetroVietnam, 
this rise should not affect total revenues for PetroVietnam 
because the profits from selling Vietnamese crude could be used to 
cover any losses from importing PP and PE.  Mr. Pham Gia Hung, an 
officer at Vinatex textile manufacturing company, noted that while 
the overall volume of textile exports to the Middle East was 
relatively small (approximately US$4.6 million, only 0.17 percent 
of the total market), the rise in shipping costs and synthetic 
fibers combined with other factors related to market instability 
could affect the industry overall. 
 
LENDERS WORRY 
------------- 
 
8.  Several banks that lend to companies that export to the Middle 
East were worried that the companies would not be able to make 
their payments, according to Ms. Ly and Mr. Nguyen Tran Khanh, 
General Director of InvestConsult.  A decline or interruption in 
trade as a result of the conflict could affect exports estimated 
at US$300-$400 million in footwear, garments, ceramic products, 
pottery, cooking oil, detergents, shampoo, soap, and agricultural 
products.  Banks and investors were also concerned about the 
effect of any potential fluctuations in the U.S. dollar. 
 
NO DEMONSTRATIONS TO TIE UP HCMC 
-------------------------------- 
 
9.  With the start of military action, the level of protest 
activity in HCMC dropped precipitously, just two days after a 
peaceful demonstration in the main tourist square downtown drew an 
estimated crowd of 10,000.  Confirming Post's belief that the 
earlier demonstrations were orchestrated to reflect support for 
official GVN positions, we received reliable reports that high 
school and university students in at least two different locations 
were given the choice of joining organized demonstrations or 
failing their courses (Ref C). 
 
COMMENT 
------- 
 
10.  Most ConGen contacts in the business community did not appear 
to have given much thought to the long-term impact the war could 
have on their businesses -- a possible indication that they were 
not overly concerned over any effects that might be felt here. 
Even among those who had considered the business consequences, 
most assumed the action would be over too quickly to make much of 
a dent in the local economy.  A prolonged war, however, does have 
the potential to reduce somewhat southern Vietnam's high 
expectations for continued double digit economic growth rates. 
 
YAMAUCHI