Cablegate: Vietnam's Bank System Reform Plan: Time to Implement

This record is a partial extract of the original cable. The full text of the original cable is not available.

140052Z Jun 00

2000HANOI01299 - UNCLASSIFIED

UNCLASSIFIED PTQ7980

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ACTION EB-00

INFO LOG-00 NP-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00
ITCE-00 DOTE-00 ANHR-00 SRPP-00 EAP-00 EXME-00 E-00
FAAE-00 FBIE-00 UTED-00 VC-00 FRB-00 H-01 TEDE-00
INR-00 ITC-01 L-00 VCE-00 MOFM-04 MOF-03 AC-01
NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 IRM-00 SSO-00
STR-00 USIE-00 FMP-00 R-00 DRL-02 G-00 FDIC-01
NFAT-00 SAS-00 /016W
------------------627D8E 140054Z /38
FM AMEMBASSY HANOI
TO SECSTATE WASHDC PRIORITY 0117
INFO USDOC WASHDC
ASEAN COLLECTIVE
AMEMBASSY BEIJING
AMCONSUL HONG KONG
DEPTTREAS WASHDC
NSC WASHDC
AMCONSUL HO CHI MINH CITY

UNCLAS SECTION 01 OF 05 HANOI 001299

SIPDIS

SENSITIVE

STATE FOR EB/IFD/OMA, EB/IFD/ODF, EAP/BCLTV
STATE PAS USAID/ANE/D SOULES/DMCCLUSKEY
DEPTTREAS ALSO FOR OASIA/SURBANA
USDOC ALSO FOR 4431/MAC/AP/OKSA/VLC/HPPHO
UNCLASSIFIED

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NSC ALSO FOR R HUSO

E.O. 12958: N/A
TAGS: ECON EFIN EAID VM FINREF SOE
SUBJECT: VIETNAM'S BANK SYSTEM REFORM PLAN: TIME TO IMPLEMENT

REF: A) 99 HANOI 3358; B) FBIS 2813114Z FEB 00

-------
SUMMARY
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1. (SBU) THE IMF/WORLD BANK ENHANCED STRUCTURAL
ADJUSTMENT FACILITY (ESAF) AND STRUCTURAL ADJUSTMENT
CREDIT (SAC) AGREEMENTS FOR VIETNAM HAVE BEEN
SUSPENDED FOR THE PAST TWO YEARS DUE TO DISAGREEMENTS
OVER THE PACE AND EXTENT OF THE GOVERNMENT OF
VIETNAM'S (GVN) ECONOMIC REFORMS IN THE AREAS OF
TRADE, STATE-OWNED ENTERPRISES (SOE'S), AND BANKING.
ON JUNE 7 THE IMF'S RESIDENT REPRESENTATIVE TOLD
EMBASSY THE GVN RECENTLY URGED THE IMF AND BANK TO
REDOUBLE EFFORTS TO CONCLUDE THE AGREEMENTS. A MAJOR
COMPONENT OF THE REFORM AGENDA WILL BE TO REVAMP
VIETNAM'S WEAK, ILL-MANAGED BANKING SYSTEM.

2. (U) THE LATEST DRAFT PLAN BY THE STATE BANK OF
VIETNAM (SBVN) FOR BANKING REFORM INVOLVES A
RESTRUCTURING OF ALL VIETNAMESE BANKS, ESPECIALLY THE
FOUR STATE-OWNED COMMERCIAL BANKS (SOCB'S) THAT
DOMINATE THE SECTOR. IT IS INTENDED TO CREATE A
`LEVEL PLAYING FIELD' FOR ALL BANKS, INCLUDING
UNCLASSIFIED

PAGE 03 HANOI 01299 01 OF 05 140054Z
SOCB'S, J-S, AND FOREIGN. THE MAIN POLICY GOALS ARE
REMOVAL OF THE RESPONSIBILITY FOR `POLICY LENDING'
FROM THE SOCB'S, WHICH WILL BE REQUIRED TO OPERATE ON
A PURELY COMMERCIAL BASIS; RESTRUCTURING OF
NONPERFORMING LOANS, REPORTEDLY AS MUCH AS 27-28
PERCENT OF TOTAL DEBT, THROUGH CREATION OF AN `ASSET
MANAGEMENT COMPANY'; AND, ENHANCEMENT OF THE
INSTITUTIONAL AND MANAGEMENT CAPABILITIES OF THE
SOCB'S AND THE SBVN.

3. (U) THE SBVN'S PLAN ALSO AFFECTS OPERATIONS OF THE
J-S AND FOREIGN BANKS IN VIETNAM. SOME OF THE J-S
BANKS WILL BE MERGED AND THE SBVN WILL DEVELOP NEW
MANAGEMENT AND REPORTING CRITERIA TO ENSURE THEIR
FINANCIAL HEALTH. AS PART OF THE GVN'S OVERALL
PROCESS OF INTERNATIONAL ECONOMIC INTEGRATION IT
PLANS TO MINIMIZE THE CURRENTLY `LARGE' NUMBER OF
RESTRICTIONS ON FOREIGN BANK OPERATIONS IN VIETNAM TO
MOVE TOWARD CREATION OF A `LEVEL PLAYING FIELD'.
ONE SBVN OFFICIAL SAID THE GVN MIGHT EVEN ATTEMPT TO
MAKE THE `DOMESTIC ROADMAP' FOR REFORM FASTER THAN
THE SCHEDULE AGREED IN THE UNSIGNED BILATERAL TRADE
AGREEMENT. END SUMMARY.

----------
BACKGROUND
----------
4. (U) REF A REPORTED RESULTS OF SEPTEMBER 1999
NEGOTIATIONS BETWEEN A JOINT INTERNATIONAL MONETARY
FUND (IMF)/WORLD BANK (WB) TEAM AND THE GVN ON NEW
ENHANCED STRUCTURAL ADJUSTMENT FACILITY (ESAF) AND
UNCLASSIFIED

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STRUCTURAL ADJUSTMENT CREDIT (SAC) AGREEMENTS FOR
VIETNAM. BOTH FINANCIAL SUPPORT PROGRAMS HAVE BEEN
SUSPENDED FOR NEARLY TWO YEARS DUE TO DISAGREEMENTS
OVER THE PACE AND EXTENT OF THE GVN'S ECONOMIC
REFORMS. IN PARTICULAR, THE WB AND IMF HAVE
TARGETTED THREE AREAS FOR REFORM -- THE TRADE REGIME,
SOE'S, AND THE BANKING SYSTEM. THE SEPTEMBER ROUND
OF TALKS BROUGHT SIGNIFICANT PROGRESS ON THE FIRST
TWO BUT LESS ON THE THIRD. TWO MORE COMPONENTS OF
THE AGREEMENTS WILL ADDRESS THE MACROECONOMY AND
SUPPORT FOR THE PRIVATE SECTOR.

5. (U) PERHAPS THE MOST DIFFICULT ASPECT OF THE
REFORM AGENDA CONCERNS VIETNAM'S WEAK, ILL-MANAGED
BANKING SYSTEM. WORLD BANK PRESIDENT JAMES
WOLFENSOHN RAISED THIS ISSUE WITH HIS SBVN
INTERLOCUTORS AND OTHER HIGH-LEVEL OFFICIALS DURING
HIS FEBRUARY 21-24 VISIT TO VIETNAM. HE WAS QUOTED
IN THE PRESS AS SAYING `IF YOU HAVE STATE-OWNED BANKS
LENDING TO STATE-OWNED ENTERPRISES, YOU DON'T
TYPICALLY GET VERY GOOD REPAYMENTS.' SBVN GOVERNOR
LE DUC THUY RESPONDED THAT `VIETNAM SHARES ... THESE
CONCERNS AND CHALLENGES'.

6. (U) ON FEBRUARY 28, THE COMMUNIST PARTY'S DAILY
NEWSPAPER `NHAN DAN' (THE PEOPLE), IN A REMARKABLY
CRITICAL EDITORIAL ENTITLED `LET'S RESTORE ORDER AND
RENOVATE THE BANKING SYSTEM' (REF B), CHARACTERIZED
VIETNAM'S FINANCIAL AND BANKING SYSTEM AS `FULL OF
WEAKNESSES AND DISCREPANCIES'. IT SAID `URGENT
MEASURES' WERE REQUIRED TO RENOVATE THE SYSTEM AND
PREVENT `MORAL DEGENERATION' OF BANKING PERSONNEL.

-----------
REFORM PLAN
-----------
7. (SBU) ON JUNE 7 THE IMF'S RESIDENT REPRESENTATIVE
TOLD EMBASSY THE GVN, IN PARTICULAR DEPUTY PRIME
MINISTER NGUYEN TAN DUNG, WAS URGING THE IMF AND
WORLD BANK TO ACCELERATE THEIR NEGOTIATIONS AND
CONCLUDE THE LONG-STALLED AGREEMENTS. HE HOPED TO
HAVE MORE DETAILS OF THE GVN'S PLANS BY JUNE 9, BUT
THE FINAL FORM OF THE PROGRAM PROBABLY WILL REQUIRE
SOME ADDITIONAL NEGOTIATION. EMBASSY HAS NOT YET
SEEN THE GVN'S LATEST PROPOSAL, BUT BASED ON RECENT
DISCUSSIONS WITH DIRECTOR XUAN NGHIA LE OF THE
BANKING STRATEGY DEPARTMENT AND OTHER SBVN OFFICIALS
WE BELIEVE IT WILL INCLUDE THE FOLLOWING ELEMENTS.
UNCLASSIFIED

PAGE 03 HANOI 01299 02 OF 05 140054Z

8. (U) THE PLAN WOULD INVOLVE A RESTRUCTURING OF ALL
VIETNAMESE BANKS, ESPECIALLY THE FOUR SOCB'S THAT
DOMINATE THE SECTOR. IT IS INTENDED TO CREATE A
`LEVEL PLAYING FIELD' FOR ALL BANKS, INCLUDING STATE-
OWNED, J-S, AND FOREIGN. THIS, SAID MR. LE, WAS THE
ONLY WAY TO ENSURE A SOUND AND SAFE BANKING SYSTEM.

-------------------------
SEPARATE "POLICY LENDING"
-------------------------
9. (U) THE SBVN PLAN INCLUDES FOUR MAIN POLICY GOALS.
FIRST, RESPONSIBILITY FOR `POLICY LENDING' SHALL BE
REMOVED FROM THE SOCB'S, WHICH WILL BE REQUIRED TO
OPERATE ON A PURELY COMMERCIAL BASIS. THE TASK OF
POLICY LENDING WOULD BE TRANSFERRED TO A NEW AND
SEPARATE AGENCY, SUPERVISED BY THE SBVN. DIRECTOR LE
EMPHASIZED THIS POLICY LENDING WOULD INCLUDE LOANS
FOR STUDENTS, POOR PEOPLE, AND VICTIMS OF NATURAL
DISASTERS, RATHER THAN COMMERCIALLY UNSOUND LOANS TO
SOE'S.

10. (U) LE SAID `IN PRINCIPLE' THE SOE'S WOULD HAVE
TO BORROW FROM BANKS ON A COMMERCIAL BASIS. IN THE
PAST THE GVN HAS CHANNELLED STATE FUNDS THROUGH THE
SOCB'S TO SELECTED SOE'S TO INCREASE THEIR PRODUCTIVE
CAPACITY. TO REPLACE THIS MECHANISM, THE NEW PLAN
WOULD PROVIDE FOR AN `INVESTMENT ASSISTANCE FUND'
COMPLETELY OUTSIDE THE BANKING SYSTEM. THIS FUND
ALSO WOULD BE USED FOR WORLD BANK AND ASIAN
DEVELOPMENT BANK PROJECTS CO-FUNDED BY THE GVN.
UNCLASSIFIED

PAGE 04 HANOI 01299 02 OF 05 140054Z

-------------
BAD BANK DEBT
-------------
11. (U) THE SECOND POLICY GOAL IS TO RESTRUCTURE
NONPERFORMING LOANS EXTENDED BY THE SOCB'S WITHIN A
RELATIVELY SHORT TIME. ALTHOUGH SBVN AND MINISTRY OF
FINANCE OFFICIALS REPEATEDLY HAVE REFUSED TO DIVULGE
THE TOTAL AMOUNT OF BAD DEBT IN VIETNAM'S BANKING
SYSTEM, ON FEBRUARY 17 THE VIETNAMESE PRESS REPORTED
TOTAL BAD DEBT HAS REACHED 9.92 TRILLION DONG (U.S.
$708 MILLION), EQUIVALENT TO 27-28 PERCENT OF TOTAL
DEBT. SEVERAL FOREIGN BANKERS, HOWEVER, ESTIMATE THE
ACTUAL AMOUNT IS SIGNIFICANTLY LARGER.

12. (U) BECAUSE THIS ISSUE IS INTERCONNECTED WITH THE
PROBLEM OF SOE BAD DEBT, THE GVN INTENDS TO CREATE AN
`ASSET MANAGEMENT COMPANY' (AMC), SUBORDINATE TO THE
SBVN BUT FUNDED FROM THE STATE BUDGET, TO PURCHASE
SOE AND OTHER CORPORATE DEBT. THE OBJECTIVES ARE TO
INSURE THE SOCB'S BECOME FINANCIALLY HEALTHY AS SOON
AS POSSIBLE, WHILE AT THE SAME TIME EXPEDITE
LIQUIDATION OF COLLATERAL ASSETS OF CORPORATE
BORROWERS.

13. (U) LE EXPECTED THE AMC TO BEGIN OPERATIONS LATER
IN 2000 AND CONTINUE FOR UP TO 5-7 YEARS, OR UNTIL
THE BAD DEBT PROBLEM IS SOLVED. WHILE UNWILLING TO
SAY HOW MUCH BAD DEBT WAS ON THE BOOKS, LE SUGGESTED
THE AMC'S INITIAL BUDGET WOULD BE INSUFFICIENT TO
PURCHASE ALL OF IT. INSTEAD, THEY WOULD CHOOSE THE
MOST URGENT COMPANIES FOR THE FIRST TRANCHE OF THEIR
OPERATIONS. HE SAID IF, FOR EXAMPLE, THE TOTAL SOCB
BAD DEBT WAS ONE BILLION DOLLARS, THEN AMC'S LIKELY
BUDGET WOULD BE ABOUT 300 MILLION, WHICH OBVIOUSLY
WOULD NOT BE SUFFICIENT TO PURCHASE ALL THE
COLLATERAL AT ITS ORIGINAL VALUE.

14. (U) LE CLAIMED NATIONAL ASSEMBLY APPROVAL FOR
CREATION OF THE AMC IS NOT REQUIRED, ALTHOUGH SOME OF
ITS OPERATIONS MIGHT BE LIMITED IF THEY CONTRADICTED
ANY EXISTING LEGISLATION, SUCH AS THE LAND LAW OR THE
ENTERPRISE LAW. HE SAID THERE ALSO MAY BE LEGAL
RESTRICTIONS ON DISCLOSURE AND LIQUIDIZATION OF
COLLATERAL. IF, FOR EXAMPLE, AN ITEM OF COLLATERAL
INITIALLY WAS VALUED AT ONE BILLION DONG, THEN WAS
ACQUIRED BY THE AMC AND SOLD FOR JUST 500 MILLION,
UNDER VIETNAMESE LAW `SOMEONE' WOULD HAVE TO BE
UNCLASSIFIED

PAGE 03 HANOI 01299 03 OF 05 140055Z
RESPONSIBLE FOR THE LOSS. DIRECTOR LE SAID THE GVN
WAS `FRIGHTENED' BY THIS POSSIBILITY, AS THE SOCB'S
WOULD BE AFRAID TO SELL COLLATERAL ASSETS TO THE AMC
IF THEY MIGHT HAVE TO TAKE RESPONSIBILITY FOR LOSSES.

15. (U) THE NON-PERFORMING LOANS FROM THE SOCB'S
WOULD BE RESTRUCTURED IN THREE WAYS. FIRST, A
CERTAIN AMOUNT SIMPLY WOULD BE WRITTEN OFF, ALTHOUGH
BUDGETARY CONTRAINTS WOULD REQUIRE THIS PROPORTION TO
BE RELATIVELY SMALL. FURTHER, LE SAID THIS INABILITY
TO WRITE OFF AS MUCH OF THE DEBT AS NEEDED MAY LEAD
TO MORE BAD DEBT IN THE FUTURE AND TO CONTINUING
FINANCIAL ILL HEALTH FOR THE SOCB'S, BUT THE GVN HAD
NO CHOICE. SECOND, A SOMEWHAT LARGER PROPORTION OF
THE DEBT WOULD BE RESCHEDULED AND/OR RESTRUCTURED.
FINALLY, THE GVN WILL REPAY SOME OF THE LOANS,
ALTHOUGH LE WOULD NOT SAY HOW MUCH.

16. (U) IN A RELATED MOVE TO PROTECT BANK DEPOSITORS
FROM RISK, AND THEREBY ENTICE MORE VIETNAMESE PEOPLE
TO KEEP THEIR SAVINGS IN BANKS RATHER THAN GOLD OR
DOLLARS, THE SBVN ANNOUNCED INAUGURATION OF A
`DEPOSIT INSURANCE ORGANIZATION' (DIO). THE DIO WILL
BE RESPONSIBLE FOR INSURING DEPOSITS UP TO 30 MILLION
DONG (USD 2,100). ALL COMMERCIAL BANKS AND CREDIT
INSTITUTIONS WILL BE REQUIRED TO JOIN THE PROGRAM AND
PAY THE INSURANCE PREMIUM, REPORTEDLY TO BE SET AT
0.15 PERCENT OF THE DEPOSIT VALUE. SOME OF THE
LARGER SOCB'S BELIEVE, HOWEVER, THAT THE RISKIER
(JOINT-STOCK) BANKS SHOULD PAY A HIGHER PREMIUM.

UNCLASSIFIED

PAGE 04 HANOI 01299 03 OF 05 140055Z
---------------------
TIGHTEN UP THE SYSTEM
---------------------
17. (U) THE THIRD AND FOURTH POLICY GOALS OF THE NEW
REFORMS ARE TO ENHANCE THE INSTITUTIONAL AND
MANAGEMENT CAPABILITIES OF THE SOCB'S AND TO
STRENGTHEN THE SUPERVISORY FUNCTIONS OF THE SBVN OVER
THE SOCB'S. LE SAID THE SBVN ALREADY HAD RECEIVED
TECHNICAL ASSISTANCE FOR THIS FROM THE WORLD BANK,
IMF, ADB, AND SOME BILATERAL DONORS, BUT NEEDED MORE.
HE CLAIMED THERE HAD NOT BEEN MUCH PROGRESS IN THIS
AREA BECAUSE THE `CONCEPTIONS' OF THE DONORS WERE
`NOT SATISFACTORY'. IN PARTICULAR, SOME OF THE
SOCB'S WERE HAVING DIFFICULTY MEETING REQUIREMENTS
SET BY THE WORLD BANK FOR EACH SOCB TO FORMULATE ITS
OWN STRATEGY TO MEET INTERNATIONAL CRITERIA. THIS,
HE SAID, WAS SIMPLY BEYOND THE CAPABILITIES OF THE
SOCB'S. IT ALSO WAS DIFFICULT FOR THE SBVN ITSELF TO
EVALUATE THE SOCB PROPOSALS BECAUSE THE SOCB'S WOULD
NOT PROVIDE SUFFICIENTLY TRANSPARENT INFORMATION ON
THEIR OPERATIONS.

18. (U) THE PLAN ALSO REPORTEDLY INCLUDES A PROPOSAL
FOR A PILOT SOCB RESTRUCTURING PROGRAM FOR THE
AGRICULTURAL AND RURAL DEVELOPMENT BANK AND THE BANK
OF FOREIGN TRADE. IT WILL INVOLVE RESTRUCTURING AND
IMPROVING THEIR FINANCIAL AND ACCOUNTING SYSTEMS,
DEBT, PERSONNEL, AND STRATEGY. THE SBVN HOPES THEY
CAN BE UPGRADED TO INTERNATIONAL STANDARDS.

-----------------
JOINT STOCK BANKS
-----------------
19. (U) IN ADDITION TO THE ABOVE FOUR POLICY GOALS,
THE SBVN'S REFORM PLAN ALSO CONTAINS PROVISIONS
AFFECTING OPERATIONS OF THE JOINT STOCK (J-S) AND
FOREIGN BANKS IN VIETNAM. SOME OF THE 48 J-S BANKS
CURRENTLY OPERATING IN VIETNAM, PARTICULARLY THE
SMALLER ONES, WILL BE MERGED, WHILE IN GENERAL THE
SBVN WILL TRY TO INCREASE BOTH THE NUMBER OF
SHAREHOLDERS AND THE AMOUNT OF REGISTERED CAPITAL.
ADDITIONALLY, THE SBVN WILL DEVELOP NEW CRITERIA TO
ENSURE THE FINANCIAL HEALTH OF THE J-S BANKS. THESE
CRITERIA WOULD FOCUS ON `MANAGEMENT CAPABILITY' OF
THE BANKS AND ALSO INCLUDE STRICTER REQUIREMENTS FOR
SUPERVISION, INSPECTION, AND REPORTING. THE SBVN
WILL ASSIST THE BANKS TO RESTRUCTURE THEIR ASSETS AND
LIABILITIES BASED ON RISK ASSESSMENT.
UNCLASSIFIED

PAGE 03 HANOI 01299 04 OF 05 140055Z

20. (U) ACCORDING TO DIRECTOR LE, MANY OF THE J-S
BANKS ARE `RELUCTANT' TO MERGE AND THEREFORE THE SBVN
WILL HAVE TO INTERVENE IN THE MERGER AND ACQUISITION
PROCESS. HE SAID A NUMBER OF THEM ALREADY HAD BEEN
MERGED OR DISSOLVED, AND NONE HAD FAILED. THEIR
MANAGEMENT CAPABILITY, HOWEVER, REMAINED A MAJOR
WEAKNESS, AND THE SBVN WILL PROVIDE TRAINING IN THIS
AREA. LE ALSO HOPED SOME J-S BANKS WOULD FORM JOINT
VENTURES WITH FOREIGN BANKS, WHICH COULD TRANSFER
MANAGERIAL AND TECHNICAL EXPERTISE.

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FOREIGN BANKS
-------------
21. (U) ACCORDING TO LE, AS PART OF THE GVN'S OVERALL
PROCESS OF INTERNATIONAL ECONOMIC INTEGRATION IT
PLANS TO MINIMIZE THE CURRENTLY `LARGE' NUMBER OF
RESTRICTIONS ON FOREIGN BANK OPERATIONS IN VIETNAM.
IN PARTICULAR, HE SAID THE SBVN WOULD REDUCE
RESTRICTIONS ON MANAGEMENT OF ASSETS AND LIABILITIES
IN LOCAL CURRENCY AND ON ABILITY OF FOREIGN BANKS TO
ACCEPT DEPOSITS IN LOCAL CURRENCY. THIS, HE SAID,
WAS A PRECONDITION FOR CREATION OF A `LEVEL PLAYING
FIELD'.

22. (U) FURTHERMORE, LE SAID THE SBVN WOULD PROPOSE
TO PHASE OUT LIMITS ON FOREIGN BANK EQUITY SHARES AND
THEIR PERCENTAGE SHARES IN JOINT VENTURES WITH
VIETNAMESE BANKS, IN ACCORDANCE WITH THE SCHEDULE
AGREED IN PRINCIPLE UNDER THE BILATERAL TRADE
UNCLASSIFIED

PAGE 04 HANOI 01299 04 OF 05 140055Z
AGREEMENT. HE SAID THE SBVN WOULD ATTEMPT TO MAKE
THE `DOMESTIC ROADMAP' FOR REFORM FASTER THAN THE
SCHEDULE AGREED IN THE BTA, WHICH HE DESCRIBED AS
`REALISTIC' BUT IMPROVEABLE. HE ADDED THAT VIETNAM
ALREADY HAD AGREED TO A BANKING REFORM TIMETABLE FOR
THE ASEAN FREE TRADE AREA (AFTA) THAT WAS BOTH FASTER
AND STRONGER THAN PROPOSED COMMITMENTS TO THE U.S.
AND WORLD TRADE ORGANIZATION. FOR AFTA, VIETNAM
WOULD BEGIN TO OPEN ITS BANKING SECTOR BY THE YEAR
2006 AND COMPLETE THE PROCESS BY 2010, BUT HE
BELIEVED THE MORE DEVELOPED ASEAN MEMBERS HAD
PROPOSED THAT VIETNAM, MYANMAR, AND LAOS SHOULD
ACCELERATE THIS PROCESS. LE ALSO SAID THE SBVN WAS
CONSIDERING EQUITIZATION (PARTIAL PRIVATIZATION) OF
ONE OF THE STATE-OWNED COMMERCIAL BANKS, AND FOREIGN
BANKS MAY BE INVITED TO PARTICIPATE.

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COMMENT
-------
23. (SBU) REFORM OF VIETNAM'S BANKING SYSTEM CANNOT
SUCCEED WITHOUT A SIMULTANEOUS AND SEVERE ASSAULT ON
THE STATE-OWNED ENTERPRISES, A FORMIDABLE OBSTACLE,
AND PROBABLY NOT WITHOUT MAJOR LIBERALIZATION OF THE
TRADE REGIME. THIS IS WHY THE WORLD BANK AND
INTERNATIONAL MONETARY FUND HAVE LINKED THE THREE
ISSUES, AND ALSO WHY WE TARGETTED ALL THREE IN THE
BILATERAL TRADE AGREEMENT NEGOTIATIONS. YET WHILE
THIS IS TRUE, IT IS ALSO CRITICAL THAT VIETNAM BEGIN
THE PROCESS OF RESTRUCTURING IN A MEANINGFUL WAY.
THE TIME FOR PLANNING IS OVER, IT'S NOW TIME TO
IMPLEMENT.

24. (SBU) THIS CABLE INDICATES THERE ARE A NUMBER OF
OPTIMISTIC SIGNS THAT CHANGE IS IN THE AIR,
PARTICULARLY WITH REGARD TO BANKING AND FINANCIAL
SECTOR REFORM. MOREOVER, THE HANOI-BASED IMF
REPRESENTATIVE CONSIDERS THAT VIETNAM MAY NOW BE
CONSOLIDATING THE POLITICAL WILL NEEDED TO MOVE
FORWARD ON A MAJOR RESTRUCTURING EFFORT ALONG THE
LINES PROPOSED BY THE WORLD BANK AND THE IMF.
HOWEVER, HE, LIKE EMBASSY OFFICERS, REMAINS PERPLEXED
WHY VIETNAM WOULD CHOOSE THE PRESENT TIME TO PROCEED.
THIS IS A PERIOD OF POLITICAL INTROSPECTION, AS THE
PARTY PREPARES FOR THE WATERSHED EVENT OF ANOTHER
PARTY CONGRESS IN THE FIRST QUARTER OF 2001, NOT AN
IDEAL TIME TO TAKE RADICAL DECISIONS WHICH CAN
GENERATE CRITICISM. MOREOVER, IT IS AGAINST
UNCLASSIFIED

PAGE 03 HANOI 01299 05 OF 05 140055Z
VIETNAMESE CHARACTER TO UNDERTAKE BOLD MOVES UNLESS
THEY FEEL BACKED INTO A CORNER. THEY ARE NOT. WHILE
NEW FDI COMMITMENTS CONTINUE ON A DOWNWARD SPIRAL AND
EMPLOYMENT GENERATION IS NEGLIGIBLE, MANY GOVERNMENT
OFFICIALS ARE PLEASED WITH RECENT ECONOMIC DATA:
GROWTH (SIX PERCENT FOR THE FIRST HALF OF THE YEAR),
EXPORTS (ROBUST) AND INFLATION (NONE). THE ECONOMY
IS IN MANY WAYS IMPROVING ALONG WITH THE REST OF THE
ASIAN REGION. REGARDLESS OF THE REASONS WHY THE
VIETNAMESE MAY MOVE NOW, IF BANKING AND FINANCIAL
SECTOR REFORM PROCEEDS, IT WOULD GIVE FURTHER LIFT TO
THE ECONOMY. WE HOPE THIS HAPPENS SOON.
HARTER

UNCLASSIFIED

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