Cablegate: Treasury Visit to Hanoi: Macroeconomic Uncertainty, Tax

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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #0168/01 0410926
ZNR UUUUU ZZH
R 100925Z FEB 10
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 0855
INFO ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHHM/AMCONSUL HO CHI MINH CITY 0460

UNCLAS SECTION 01 OF 04 HANOI 000168

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN EINV EINT VM ASEAN
SUBJECT: Treasury Visit to Hanoi: Macroeconomic Uncertainty, Tax
Treaty Negotiations and Chiang Mai Progress

1. (SBU) Summary. During Treasury Financial Attach???? Seth
Bleiweis'
January 21-22 trip to Hanoi, Vietnamese economic officials
acknowledged the recent policy shift towards fiscal and monetary
tightening that began in November 2009, focusing on the control of
inflation which has now risen for five consecutive months. There
was also acknowledgement that the political pressures of the coming
2011 Communist Party Congress may make it hard for policymakers to
chart the steady monetary policy course necessary to successfully
control inflation. Treasury's interlocutors suggested that
Vietnam's ongoing balance of payments problems are not yet
critical, but that economic officials do not have a clear policy
approach to resolve Vietnam's persistent macroeconomic imbalances.
Discussing possible double tax treaty negotiations, the General
Department of Taxation made a critical concession, asserting that
tax sparing would not be a part of any discussions on a double tax
treaty. The Ministry of Finance (MOF) also stated the Government
of Vietnam's (GVN) objective for full signing of the Chiang Mai
Initiative for bilateral swap arrangements by the end of March
2010. End summary.

A Clear Macroeconomic Shift, But an Uncertain Course

2. (SBU) The GVN will be focused on stabilization of the macro
economy in 2010, said Vice Chairman Vu Viet Ngoan of the National
Assembly (NA) Economic Committee. Ngoan stated that the NA spent a
lot of time reaching this consensus in October 2009 - when the GVN
began shifting from growth-focused macroeconomic policies to those
focused on controlling inflation - asserting that the NA was the
first to raise the need for stabilizing the economy. "Stability
provides the foundation for meeting Vietnam's growth target," said
Ngoan. However, the coming 2011 Communist Party Congress will
really challenge the GVN's ability to chart a steady monetary
course, according to International Monetary Fund (IMF) Regional
Representative Benedict Bingham. This concern regarding policy
consistency was echoed by Vice Chairman Ha Huy Tuan of the National
Financial Supervisory Commission (NFSC), who raised his worry
regarding the tension between Vietnam's growth and inflation
targets, stating that the GVN "wants the country to have
significant achievement before the party congress." Tuan suggested
that the implementation of economic policy will be a challenge and
that policy could "come back to the old times, with the government
intervening."

Rising Inflation the Chief Economic Risk

3. (SBU) Inflation is now broadly recognized as the chief risk to
Vietnam's economy. The State Bank of Vietnam (SBV) acknowledged
that the fiscal and monetary loosening of 2009 may cause inflation
in 2010. The SBV stated that inflation risks have risen lately,
along with the rising global economy. January inflation was 7.6
percent year-on-year, the highest in nine months and a sign that
double digit inflation is likely in 2010. NA Vice Chairman Ngoan
also said he expects increased price pressures in 2010, due in part
to global recovery, as well as to wage increases and credit growth
of almost 40%. Ngoan said the GVN will have to tighten monetary
and fiscal policy and "lessen the rate of loosening." He suggested
that keeping inflation within 7 percent will be difficult and that
"8 percent CPI growth rate will be acceptable." NFSC Vice Chairman
Tuan also said inflation is the "number one" focus, with the budget
deficit coming second. However, the GVN wants both growth and
price stability. As a result, he is concerned the GVN may
undertake month-by-month management of the inflation-growth
balance, tightening and loosening monetary and fiscal policy in
response to monthly inflation numbers. Vice President Nguyen Dinh
Cung of the Central Institute for Economic Management (CIEM) - the
think tank for the Ministry of Planning and Investment - stated
that his analysis shows that inflation in Vietnam is closely linked
with credit growth, with about a six-month lag, and that CIEM,
therefore, expects inflation to pick up around April or May 2010.

Continuing Balance of Payments and Foreign Exchange Problems

HANOI 00000168 002 OF 004

4. (SBU) Vietnam's foreign exchange (forex) reserves likely now
stand around $15 - $16 billion, according to IMF's Bingham.
Because Vietnam's forex reserves are too low to effectively defend
the value of the currency, the success of Vietnam's recent shift in
monetary policy will be critical to stabilizing the dong, said
Bingham. On the upside, he noted that the margin of dong trading
in the "free" or black market has narrowed to as little as 100 dong
outside the official band in the interbank market, down from a
premium of over 1,000 dong. On the downside, the spread in the
gold market remains 3 to 4 percent above world gold prices, says
Bingham. He said that there are now some signs of people beginning
to sell foreign exchange to the banks, but the question is "whether
this is a lull in the storm or a fundamental shift." The current
lull may be temporary. Dollar demand is now off its peak as
businesses close for the Tet holiday, Tet remittances flow in from
abroad and SOEs sell forex into the market. The GVN's recent
directive instructing SOEs to sell dollars to the banks netted
about $700 million - $1 billion, according to the SBV. (Note:
Recent local press reports suggest that increased deposits amount
to only about $450 million.)

5. (SBU) Asian Development Bank (ADB) Country Economist Bahodir
Ganiev stated that Vietnam is still experiencing a persistent
shortage of forex, while Mr. Cung of CIEM foresees increasing forex
shortages. NA Vice Chairman Ngoan, however, suggested that a
rising global economy and increased foreign direct investment (FDI)
might resolve Vietnam's current balance of payments problem.
Deputy Director Nguyen Van Anh of the SBV Foreign Exchange
Department stated that the GVN is also targeting relieving the
trade deficit to reduce Vietnam's balance of payments problem. Anh
noted the SBV had also recently reduced dollar reserve requirements
for Vietnamese banks to reduce the pressure on dollar liquidity.
Anh added that the SBV doesn't see a substantial gap between dollar
supply and demand and suggested that if the GVN can fully mobilize
the dollars currently in the banking system there will not be a
shortage of dollars. The problem is that "people won't sell
dollars to banks and dollar borrowing is increasing," said Anh. He
expects an improved dollar supply in 2010, aided by the GVN's
recent successful $1 billion sovereign international bond issuance.

Possibility of Devaluation and Interest Rate Hikes

6. (SBU) NA Vice Chairman Ngoan suggested that Vietnam would need
to maintain forex flexibility in 2010, noting some calls for
further devaluation to support exports, following on the GVN's 5.4
percent devaluation of the dong in November 2009. Ngoan suggested
that some devaluation would be acceptable, but "strong devaluation"
is not, suggesting that a "strong devaluation" would create
pressure on inflation and would increase the dollar debt of VN
businesses. Further, Ngoan argued that many of Vietnam's key
commodity exports - including crude oil, minerals and certain
agricultural products - are not sensitive to exchange rates because
they are priced in dollars.

7. (SBU) Looking forward, IMF's Bingham sees economic malaise more
likely than monetary panic during the coming year, with continued
forex rationing and additional administrative measures likely to be
applied to address continuing forex shortages. Bingham is not
convinced of the need for depreciation, suggesting that the dong
exchange is not fundamentally misaligned -the dong is already
effectively depreciating against its regional partners because of
its peg to the depreciating dollar - but the GVN's monetary
policies are misaligned. For example, the GVN has recently allowed
interbank interest rates to fluctuate too broadly; up to 15%, then
down to 8% on monetary tightening. Bingham argued that the current
8% policy base rate is too low and banks can't mobilize capital
under the current rate cap. Stating that GVN's monetary policy is
out of step with the market, he said that there may soon be calls
for an increase in the policy base rate.

No Coming Independence for State Bank

8. (SBU) There now appear to be no short or mid-term prospects for

HANOI 00000168 003 OF 004

a more independent Vietnamese central bank. While Vietnam
previously had a "roadmap" for an independent central bank, the
global financial crisis led to its reconsideration and the GVN is
no longer pursuing plans for SBV independence, according to NFSC
Vice Chairman Tuan. The SBV agrees there is no medium term plan
for SBV independence, despite SBV staff desires to the contrary.
Further, according to the SBV, given that revisions to the SBV law
are just now in their final drafts, it will likely be another 3-5
years before there will be another push for further legislative SBV
reform. Echoing NFSC comments, SBV Deputy Director Nguyen Van Anh
stated the financial crisis has paused moves to further liberalize
Vietnam's capital markets and that the SBV still faces calls for
further tightening of currency controls. Mr. Anh suggested that,
as the economy grows, market forces will eventually dictate the
need for further currency flexibility. But while he sees further
currency flexibility as likely in the next three to four years, he
does not anticipate a full currency float.

General Department of Taxation Agrees to Treasury Precondition
Regarding Tax Sparing

9. (SBU) Following on earlier GVN diplomatic notes requesting tax
treaty negotiations, Bleiweis met with the General Department of
Taxation (GDT) of the Ministry of Finance to discuss possible
negotiations for a US-VN treaty on the avoidance of double
taxation. During the meeting, GDT Deputy Director General Le Hong
Hai stated that, while GDT believes the issue of tax sparing should
not be a precondition to US-VN tax negotiations, in order to
address the bottleneck in current discussions, "we assert that tax
sparing will not be a part of discussions on a double tax treaty."

10. (SBU) DDG Hai expressed her appreciation for US interest in
possible tax treaty negotiations. She suggested that, during
earlier tax treaty discussions in 2007, there may have been a
misunderstanding about GDT's position on tax sparing. At that
time, tax sparing was not raised as a demand, but only as a point
of discussion in seeking to understand each other's tax policies.
Bleiweis inquired regarding GDT's record on other key Treasury
issues of tax information sharing and treaty shopping. DDG Hai
opined that these issues should not be points for worry as, based
on prior US-VN tax discussions in 2007, GDT is not aware of any US
reservations regarding GDT's positions on either tax information
sharing or treaty shopping. Econoff offered to work with GDT to
clarify any outstanding Treasury questions regarding tax
information sharing, treaty shopping and quantifying the economic
benefits of a prospective US-VN tax treaty.

11. (SBU) In response to US questions regarding information sharing
and treaty shopping, DDG Hai raised GDT's concern that the US
seemed to be raising the bar on its preconditions to starting
negotiations. She said a tax treaty with the US is a priority for
GDT and asked whether the US is really interested in starting
negotiations, expressing her disappointment that GDT's concession
on tax sparing may not ensure the start of negotiations. Bleiweis
clarified that his questions sought to set realistic expectations
and maximize the possibility of an earlier start to negotiations.

Chiang Mai Initiative to be Signed by March 2010

12. (SBU) ASEAN has strengthened its financial cooperation over the
past year, stated Deputy Director General Nguyen Ba Toan of the
Ministry of Finance (MOF) International Cooperation Department.
According to MOF, the first stage of this cooperation will be the
signing of the Chiang Mai Initiative (CMI) to create a network of
bilateral swap arrangements among the ASEAN+3 countries. The
second stage will be the multilateralization of these arrangements.
MOF noted that Vietnam is currently the co-chair of ASEAN+3 and is
in favor of multilateralization. MOF suggested that the CMI would
not only help countries manage balance of payments crises, but
would also send a signal of stability during such crises.

HANOI 00000168 004 OF 004

13. (SBU) The GVN's objective is for full signing of the CMI by the
end of March and MOF is confident that all ten countries will sign.
The ASEAN+3 countries have already completed consultations and
reached consensus on the CMI, according to MOF. Vietnam has
already approved the CMI and only procedural approvals in other
countries remain outstanding. The MOF noted that the CMI had not
yet been drawn upon because it requires an effective monitoring
regime that is not yet in place. There is no timeline for
implementing a CMI monitoring mechanism as the member countries are
still waiting for final signatures and there will be some gap
between signing, full implementation and any funds transfers. MOF
added that the ASEAN financial ministers are in favor of the G20
Framework for Balanced Growth, and that the ASEAN financial
ministers appreciated their meeting with Treasury Secretary
Geithner on the margins of APEC. MOF encouraged further dialogue
with Treasury, suggesting a meeting this year on the margins of
ASEAN as a possibility.
Michalak

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