Cablegate: Vietnam Economic Highlights: U.S. Fdi at Breakneck Speed,

VZCZCXRO0969
RR RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #1108/01 2690025
ZNR UUUUU ZZH
R 250025Z SEP 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 8533
INFO RUEHHM/AMCONSUL HO CHI MINH 5157
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 001108

SIPDIS

SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR DBISBEE
STATE FOR EEB/IFD

E.O. 12958: N/A
TAGS: EFIN EAID ECPS ECON EAGR ETRD VM
SUBJECT: VIETNAM ECONOMIC HIGHLIGHTS: U.S. FDI AT BREAKNECK SPEED,
PLUG PULLED ON POWER PLANTS, TRADE DEFICIT NARROWS

REF: A) Hanoi 975 (Oil Production Down Revenues Up);
B) Hanoi 738 (Focus on U.S. Business: Luxury Taxes);
C) Hanoi 1072 (Pharma, IPR and Market Access Top TIFA)

HANOI 00001108 001.2 OF 002

1. (U) This cable is part of an ongoing series on developing
economic stories in Vietnam.

U.S. INVESTMENT ROLLING IN AT AN UNPRECEDENTED PACE
---------------------------------------------

2. (U) U.S. investment in Vietnam in the first eight months of 2008
grew at an unprecedented pace. Authorized U.S. FDI from January to
August 2008 ($1.37 billion) already equals a quarter of all U.S.
investment during the previous nine years ($2.8 billion from
1988-2007), according to Government of Vietnam (GVN) figures. The
U.S. is out of Vietnam's top ten investors' list (at 11st place) in
part because investment from other countries is accelerating even
faster. Taiwan, Vietnam's top investor, has pumped $8.61 billion
this year alone, a number accounting for 79% of all Taiwanese
investment from 1988 to 2007. Investment from Japan, second on the
overall list, is coming in almost as fast, with 2008 commitments
($7.26) equal to 75% of the previous nine years' commitments.

STATE-OWNED EVN SHORT-CIRCUTS POWER GENERATION DEVELOPMENT
-------------------------------------------

3. (U) In early September Electricity of Vietnam (EVN), the
state-owned (SOE) power monopoly and the sole electricity
distributor in the country, canceled 13 power generation projects
with a total output capacity of 13,800 megawatts, citing difficulty
in obtaining commercial financing. Most of EVN's partners in these
projects, including other SOEs, have pulled out. Before interest
rates topped 20% in mid June, EVN had been borrowing for real estate
speculation rather than power plant production. The GVN's failure
to keep up with power production demands is threatening to slow
infrastructure development in Vietnam. For instance, last August,
China Steel (Taiwan) was unable to go ahead with a $5 billion steel
plant in Ba Ria-Vung Tau Province because the area lacked the power
infrastructure to support the plant.

VIETNAM ALLOWS GAS RETAILERS TO SET MARKET PRICES
--------------------------------------------- ----

4. (U) On September 18, the Ministry of Finance (MOF) authorized
fuel retailers to set gas prices based on market rates. The MOF
also introduced a 5% import tax on imported gasoline to reimburse
retailers for losses incurred on the sale of fuel during the time
when prices were capped below market rates. All distributors and
nearly all retailers are state-owned. In order to set new prices,
retailers and distributors must apply to an inter-ministerial team
made up of MOF and the Ministry of Industry and Trade, which must
adjudicate the request within three days; if the applicant does not
receive an answer in that period it can go ahead and set gas
prices.

TRADE DEFICIT NARROWS, $20 MILLION TARGET NOW SEEMS DOABLE
--------------------------------------------- ----

5. (U) Vietnam's trade deficit is finally narrowing after almost
doubling during the first nine months of the year, according to GVN
figures. Although the deficit has already exceeded the deficit for
all of 2007 (at $12.44 billion, the largest ever recorded), the GVN
now expects that the year's total deficit will be from $18.5 to
$19.5 billion, under the $20 billion target which the GVN had set
earlier this summer. The deficit has stood at less than a billion
dollars during the last four months, while after averaging $2.70
billion from January to May. September's projected numbers are the
lowest so far this year, at $500 million. Strong export growth is
believed to be one of the main factors, as imports have remained
relatively constant during the year.

VIETNAM TO INCREASE DUTIES ON MINING AND OTHER COMMODITIES
---------------------------------------------

6. (U) According to an August 15, 2008 draft proposal put forth by
the Ministry of Finance (MOF), the GVN plans to raise royalty duties
on oil, gas, minerals, water and other commodities. Under the
scheme, the GVN would increase the rate ceiling for metallic
minerals from five to 30%; for non-metallic minerals from five to
10% (except coal, which would rise from three to 20%); and for oil
and gas from 10 to 25%. In addition, the MOF is reportedly
considering to raise export duties on oil and gas from 20 to 50%,
and for metallic minerals from 20 to 30%. The GVN has already

HANOI 00001108 002.2 OF 002

raised the export tax for oil and gas once this year, from four to
20% in June. The Australian Chamber of Commerce has taken the lead
in drafting a paper for submission at the next Vietnam Business
Forum in December to express concern over the proposed tax increase
and the challenges that foreign investors face in Vietnam's mining
sector.

"BUSINESS AS USUAL" FOR AIG VIETNAM
-----------------------------

7. (U) AIG Vietnam executives dispelled concerns about the insurer's
business in Vietnam at a press conference in late September.
Although the company admitted cancellations from customers concerned
about its financial troubles (up to 90 a day), it said that new
business was brisk (up to 300 new contracts daily). "Still business
as usual," Jamie Rains, CEO of AIG Life Vietnam, was quoted as
saying in the press report. AIG added that it had 250,000 policy
holders, a number that it expects to grow by 30% over the next
year.

PETRO VIETNAM TEAMS UP WITH RUSSIANS AND VENEZUELANS
---------------------------------------

8. (U) Petro-Vietnam hopes to sign oil and gas
exploration/production contracts with two Russian forms
(Zarubezhneft and Gasprom), and Petroleos de Venezuela (PDVAS).
Petro-Vietnam will create two joint ventures with Venezuela to
supply and refine oil and gas in Venezuela and Vietnam. As local
production in Vietnam fell this year (REF A), the GVN is primarily
focused on expanding oil exploration and exploitation overseas.

INDUSTRY AND TRADE CHALLENGES FINANCE LUXURY TAX PROPOSAL
--------------------------------------------- ------

9. (U) In a rare development, two GVN ministries have presented, and
gone public with, competing legislative drafts before the National
Assembly. On September 8, the Ministry of Industry and Trade went
public with proposed changes to a Ministry of Finance draft on
luxury taxes to, among other things, extend the implementation date
for the automotive industry from the MOF's 2009 to 2010 (a key
demand, REF B) and lower the tax rates on some models. The National
Assembly has not indicated which version it prefers. Post has been
in consultations with Ford and GM, the GVN and the National Assembly
to promote the best possible outcome (REF C).

GVN ANNOUNCES PLAN TO PRIVATIZE RETAIL GAS DISTRIBUTOR
--------------------------------------------- ---

10. (U) Vietnam intends to partially privatize or "equitize"
state-owned gasoline importer and distributor Petrolimex, which
controls approximately 60 percent of Vietnam's market for refined
petroleum products. The move comes in the wake of the GVN's
decision to allow Japanese refiner Idemitsu and Kuwait Petroleum
International (KPI) to sell directly to Vietnam's downstream
gasoline market in exchange for the two firms' investment in
Vietnam's second oil refinery, Nghi Son. Deputy Prime Minister
Hoang Trung Hai, who made the announcement, did not say when
Petrolimex would begin to sell shares.

MICHALAK

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