Vietnam pharmaceuticals healthcare report q4 2014

22 Table: Prescription Drug Market Indicators, Historical Data And Forecasts Vietnam 2010-2018.. 24 Table: Patented Drug Market Indicators, Historical Data And Forecasts Vietnam 2010-201

Q4 2014 www.businessmonitor.com

VIETNAM

PHARMACEUTICALS & HEALTHCARE REPORT

INCLUDES 10-YEAR FORECASTS TO 2023

Healthcare Report Q4 2014

INCLUDES 10-YEAR FORECASTS TO 2023

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2014

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BMI Industry View 7

SWOT 9

Political 11

Economic 12

Business Environment 14

Industry Forecast 15

Pharmaceutical Market Forecast 15

Table: Pharmaceutical Sales, Historical Data And Forecasts (Vietnam 2010-2018) 16

Healthcare Market Forecast 17

Table: Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018) 20

Table: Government Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018) 20

Table: Private Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018) 21

Prescription Drug Market Forecast 22

Table: Prescription Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 23

Patented Drug Market Forecast 24

Table: Patented Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 25

Generic Drug Market Forecast 26

Table: Generic Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 27

OTC Medicine Market Forecast 28

Table: Over-The-Counter (OTC) Medicine Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 29

Pharmaceutical Trade Forecast 30

Table: Pharmaceutical Trade Data And Forecasts (Vietnam 2012-2018) 31

Table: Pharmaceutical Trade Data And Forecasts Local Currency (Vietnam 2012-2018) 32

Other Healthcare Data 32

Key Risks To BMI's Forecast Scenario 33

Macroeconomic Forecasts 34

Economic Analysis 34

Table: Economic Activity (Vietnam 2009-2018) 40

Industry Risk Reward Ratings 41

Asia Pacific Risk/Reward Ratings 41

Vietnam Risk/Reward Ratings 47

Rewards 47

Risks 47

Market Overview 49

Industry Trends And Developments 51

Epidemiology 51

Healthcare Financing 53

Hospital Sector 55

Private Healthcare Sector 58

Healthcare Insurance 59

Healthcare And Pharmaceutical Reform 60

Research And Development 61

Biotechnology Sector 62

Clinical Trials 64

Regulatory Development 67

Regulatory Regime 67

Pharmaceutical Advertising 68

Intellectual Property Environment 69

Corruption 72

Pricing Regime 73

Reimbursement Regime 78

Pricing And Reimbursement Developments 79

Competitive Landscape 82

Pharmaceutical Sector 82

Domestic Industry 83

Foreign Industry 84

Traditional Medicines 85

Pharmaceutical Distribution 87

Pharmaceutical Retail Sector 87

Table: Key Aspects Of Good Pharmacy Practice In Developing Countries 89

Company Profile 90

DHG Pharmaceutical 90

Traphaco Pharmaceutical 92

Vietnam Pharmaceutical Corporation (Vinapharm) 94

Vietnam OPV Pharmaceutical Co 97

Vietnam Pharmaceutical Joint Stock Company (Ampharco) 99

Vidipha Central Pharmaceutical Joint Stock Company 101

Pfizer 103

Sanofi 105

Novartis 108

Merck & Co 110

GlaxoSmithKline 112

Demographic Forecast 114

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 115

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 116

Table: Vietnam's Key Population Ratios, 1990-2020 117

Table: Vietnam's Rural And Urban Population, 1990-2020 117

Glossary 118

Methodology 120

Pharmaceutical Expenditure Forecast Model 120

Healthcare Expenditure Forecast Model 120

Notes On Methodology 121

Risk/Reward Ratings Methodology 122

Ratings Overview 123

Table: Pharmaceutical Risk/Reward Ratings Indicators 123

Indicator Weightings 124

BMI Industry View

BMI View: The attractiveness of Vietnam's pharmaceutical market is steadily increasing While structural

challenges remain, such as the country's increasingly ageing population and under-capacity in terms of healthcare infrastructure and personnel, growth in expenditure is supported by a significant disease burden, the new insurance law, introduction of new products, more corporate investments and better regulations.

Headline Expenditure Projections

■ Pharmaceuticals: VND69,297bn (USD3.30bn) in 2013 to VND80,680bn (USD3.92bn) in 2014; +16.4%

in local currency terms and +19.1% in US dollar terms Forecast unchanged from previous quarter.

■ Healthcare: VND222,374bn (USD10.57bn) in 2013 to VND254,491bn (USD12.37bn) in 2014; +14.4%

in local currency terms and +17.0% in US dollar terms Forecast unchanged from previous quarter

Risk/Reward Rating:

Vietnam's Pharmaceutical Risk/Reward Rating (RRR) score for Q413 is 49.1 out of the maximum 100 inour newly improved RRR system The country scored above average for some indicators and sub-

indicators, including overall market expenditure, sector value growth and pensionable population

Consequently, with this moderate score, Vietnam is ranked 11th behind India out of the 19 key markets inAsia Pacific

Key Trends And Developments

■ In July 2014, data from the General Statistics Office shows that the consumer price index (CPI) for'medicines and health services' increased by 5.65% for the 12 months to June 2014 While this figure isstill above the 4.98% for 'all goods and services', it represents a return to equivalence that will bewelcomed by manufacturers, wholesalers, retailers, regulators and consumers Between mid-2012 andmid-2013, the prices of medicines in Vietnam experienced extreme price rises, sometimes more than 60%higher than the same month in the previous year The two-year period of extraordinary medicine pricerises in Vietnam is over

■ In June 2014, Vietnam's National Assembly passed amendments and supplements to the Law on HealthInsurance Minister of Health Nguyen Kim Tien stated that the legislation will enable the entirepopulation to have access to health services, as insurance is now mandatory The insurance will bepurchased in family packages, and fees will be lower for larger families All families on low incomes andfamilies living in remote areas will be able to access healthcare services by 2016 Tien added that throughthe amendments the insurance scheme should cover up to 70% of the population by 2018 and over80% by 2020

BMI Economic View: We have downgraded Vietnam's growth forecast from 5.9% to 5.7% in 2014 on the

back of weaker-than-expected H114 growth numbers, combined with the risk of an economic backlash fromChina That said, we have maintained our forecast for growth to come in at 6.4% in 2015, and we continue

to believe that the economy will be driven by growth supportive government policies, as well as a strongoutlook for foreign investment and exports

BMI Political View: The Vietnamese government will continue to face a myriad of challenges over the

coming years, and despite China's recent decision to move its oil rig out of the disputed waters, the

relationship between Hanoi and Beijing will remain at the centre of foreign policy Meanwhile, we expectVietnamese authorities will continue to focus on economic and business environment reforms in an effort tostimulate growth and attract foreign direct investment

SWOT Analysis

■ The government's commitment to developing the health sector

■ Sizeable local generic drugs sector, which is being encouraged by the government

■ Strong traditional medicines segment with potential to improve the non-prescriptiondrugs market in the longer term, as long as sufficient investment in extractiontechnologies can be found

spending on drugs

■ Counterfeit drugs account for a significant amount of market consumption

■ No bioequivalence requirement in place for locally made generic medicines

■ Little distinction made between prescription and over-the-counter drugs, with mostmedicines available without a prescription

■ Complex drug pricing policy biased towards local drug producers

■ Import-reliant market, especially in terms of high-tech products and activepharmaceutical ingredients, which makes it vulnerable to currency movements

■ Underdeveloped primary care services and a shortage of trained pharmacists arecontinuing to hamper access to medicines and product market penetration

■ Population concentrated in rural, rather than urban, areas, preventing access tomodern drugs and encouraging dependence upon traditional medicines

Opportunities ■ The Association of Southeast Asian Nations (ASEAN) harmonisation initiative,

including the adoption of Western regulatory standards such as InternationalConference on Harmonisation and World Health Organization guidelines

SWOT Analysis - Continued

■ Introduction of five-year exclusivity for clinical dossier data encouraging based multinationals

research-■ If investment can be found for technological improvements, then there is greatpotential in the traditional Chinese medicine market, in addition to fledgingbiotechnology

■ Full World Trade Organization membership improving the trading climate andpotentially, in the longer term, redressing pharmaceutical trade issues

■ Requirement for domestic companies to comply with international goodmanufacturing practices should boost exports

deterring multinational sector expansion

■ Need to resolve infrastructural and power supply issues, as well as higher educationprovision, before higher levels of foreign direct investment can be expected

■ The government is increasingly interfering in the industry, protecting indigenous firmsthrough the use of legal trade barriers, which will affect competitiveness

■ Pharmaceutical price inflation threatens to put medicines out of reach of poor andtherefore limit market volume growth

■ Legalisation of parallel imports negatively impacting performance of patented drugs

SWOT Analysis

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

one-■ Relations with the US have witnessed a marked improvement, and Washington seesHanoi as a potential geopolitical ally in South East Asia

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

system, and street demonstrations to protest economic conditions could develop into

a full-on challenge of undemocractic rule

■ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably beunsustainable

■ Relations with China have deteriorated over recent years due to Beijing's moreassertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,which could potentially cause wide-scale environmental damage

SWOT Analysis

GDP growth averaging 7.1% annually between 2000 and 2012

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 20.7% in 2012

■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports anddiversify its export sector

Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global

economic uncertainties The fiscal deficit is dominated by substantial spending onsocial subsidies that could be difficult to withdraw

■ The heavily-managed and weak currency reduces incentives to improve quality ofexports, and also keeps import costs high, contributing to inflationary pressures

greater access to both foreign markets and capital, while making Vietnameseenterprises stronger through increased competition

■ The government will in spite of the current macroeconomic woes, continue to moveforward with market reforms, including privatisation of state-owned enterprises, andliberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 29% of the population to more than 50% by the early2040s

on this front could result in a decline in investment

■ We see potential for political tensions with China could have a negative impact on theeconomy

SWOT Analysis - Continued

■ Any prolonged macroeconomic instability could prompt the authorities to put reforms

on hold as they struggle to stabilise the economy

Business Environment

SWOT Analysis

attractive to foreign investors

■ Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, andbeyond

Weaknesses ■ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

■ Vietnam remains a corrupt country According to Transparency International's 2013Corruption Perceptions Index, Vietnam ranks 116 out of 176 countries

Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-techskills and know-how

■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and theliberalisation of the banking sector This should offer foreign investors new entrypoints

protectionism, which will remain a concern

■ Labour unrest remains a lingering threat A failure by the authorities to boost skillslevels could leave Vietnam a second-rate economy for an indefinite period

■ The dispute with China in Q214 in the South China Sea suggests the potential forrenewed political tensions going forward

Industry Forecast

Pharmaceutical Market Forecast

Vietnam's pharmaceutical market was valued at

VND69,297bn (USD3.30bn) in 2013, a 17.0%

year-on-year increase in local currency terms Over the

forecast period to 2018, BMI expects

pharmaceutical consumption to reach

VND139,832bn (USD7.06bn), equating to a

compound annual growth rate (CAGR) of 15.1% in

local currency and 16.5% in US dollar terms Over

the extended forecast period to 2023, the CAGR will

be slightly lower, but will remain in double-digit

figures

Inflation will be a major factor in these high nominal

market growth rates However, we highlight that

there is considerable scope for increased

pharmaceutical consumption in a country where per

capita drug expenditure is just USD35.94 This,

combined with an expanding population, higher

levels of health awareness and increased access to

pharmaceuticals, creates a strong base for market growth assuming the required resources are put intohealthcare sector development However, pricing remains a concern, due to a lack of controls and regulatorybias against foreign products

Additionally, some have blamed unscrupulous practices by pharmaceutical companies and prescribers forpharmaceutical expenditure being higher than necessary However, it is not just companies that bribeVietnamese healthcare professionals Patients pay doctors and nurses to avoid waiting lists and receiveabove-average care Those on low incomes that cannot afford 'gifts' for staff members have to use

overcrowded facilities and rely on relatives to complement the provision of care

In fact, according to a survey by the Vietnam Union of Science and Technology Associations (VUSTA)published on the VietNamNet Bridge website in September 2009, gifts - which we interpret mostly as cash,but can also be physical goods - accounted for 9% of the cost of a health check-up The research was

Pharmaceutical Market Forecast

5 10 15

0 0.5 1 1.5 2 2.5

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press.

performed through interviews with 140 people in rural and urban areas who had visited public and privatehospitals over the previous six months Interestingly, 'medications/examinations/tests' only accounted for53% of expenditure It is not clear how the remaining funds were spent.

Vietnam's regulators faced their greatest challenge with the country's entrance to the World Trade

Organization at the start of 2007 Foreign enterprises have been given the right to open branches in Vietnamand to import medicines directly, although they will still be barred from distributing their products As part

of its membership application, Vietnam pledged to set import duties at less than 5% for pharmaceuticalproducts and drug tariffs are expected to average just 2.5% within five years of accession

The liberalised environment could cause problems for Vietnam's small drug production sector

Nevertheless, while the government originally called on firms to adopt good manufacturing practice (GMP)standards by the start of 2010, the deadline was extended to the end of 2010 However, in August 2008, itwas revealed that companies that did not have accreditation could come up with provisory regulations.Firms not planning to establish GMP standards must either shift to other sectors or produce traditionalmedicines, the latter being an area with problems of its own, as many traditional drugs are incorrectly

labelled and dispensed by unqualified practitioners According to Savipharm, the country has 108 factories

compliant to GMP-WHO, few plants compliant to EU and Japanese GMP as of November 2011

Meanwhile in January 2012, United International Pharma Company became the first company with a

facility that is compliant with the Pharmaceutical Inspection Convention and Pharmaceutical Inspection operation Scheme (PIC/S) GMP standards

Co-Table: Pharmaceutical Sales, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Pharmaceutical

sales, USDbn 2.1 2.4 2.8 3.3 3.9 4.6 5.3 6.2 7.1 Pharmaceutical

sales, USDbn, %

y-o-y 20.2 17.9 17.0 16.2 19.1 17.3 16.1 15.5 14.5 Pharmaceutical

sales, VNDbn 39,316.0 50,081.5 59,213.7 69,297.5 80,679.8 93,548.9 107,959.6 123,341.6 139,832.4 Pharmaceutical

sales, VNDbn, %

y-o-y 29.1 27.4 18.2 17.0 16.4 16.0 15.4 14.3 13.4 Pharmaceutical

sales constant

exchange rate,

USDbn 1.9 2.4 2.8 3.3 3.8 4.4 5.1 5.9 6.7

Pharmaceutical Sales, Historical Data And Forecasts (Vietnam 2010-2018) - Continued

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Pharmaceutical

sales, USD per

capita 23.1 27.0 31.2 35.9 42.4 49.3 56.7 64.9 73.8 Pharmaceutical

sales, % of GDP 1.8 1.8 1.8 1.9 2.0 2.1 2.2 2.2 2.2 Pharmaceutical

sales, % of health

expenditure 28.6 29.0 30.5 31.2 31.7 32.2 32.6 32.8 32.8

f = BMI forecast Source: National sources/BMI

Healthcare Market Forecast

In December 2013, we upgraded our forecast for

private health expenditure due to the government's

plan to raise hospitals fees between 2014 and 2018

This quarter, we have slightly upgraded the

healthcare expenditure forecast due to the receipt of

actual 2012 data from the World Health

Organization (WHO) We now forecast that the

sector will reach a value of VND769,394bn

(USD40.18bn) by 2023 Through to 2018 and 2023,

the sector is projected to grow at local compound

annual growth rates of 13.9% and 13.2%

respectively (15.3% and 14.3% in US dollar terms)

Over the long term, Vietnam's healthcare sector is

forecast to grow in accordance with its strong

economic growth However, we highlight that rising

healthcare expenditure does not necessarily equate to

quality healthcare provision According to the General Statistics Office of Vietnam, the number of hospitals

in 2012 was 963 Meanwhile, the number of hospital beds and doctors per 1,000 people stayed flat - at 2.01and 0.65 respectively

Moreover, despite a double-digit growth in healthcare expenditure, the country has yet to address the risingburden of communicable diseases such as tuberculosis, AIDS and hand, foot and mouth disease Much of

Healthcare Expenditure Forecast

20 40 60

0 2 4 6 8

f = BMI forecast Source: BMI, WHO.

this increased expenditure will be on health infrastructure, which remains basic in many rural areas Overthe longer term, this is likely to result in greater access to basic medicines.

The country's low per capita health and pharmaceutical expenditure highlights the population's poor access

to healthcare services and low affordability levels for medicines - particularly high-value drugs Thisrepresents a short-term challenge for pharmaceutical firms, but over the long term we believe economicdevelopment will aid growth in the pharmaceutical and healthcare sector Our country risk team remainsbullish about the Vietnamese economy as it forecasts strong economic growth through to 2023

In the meantime, the government has outlined plans for the investment of up to USD1.5bn in the

pharmaceutical manufacturing sector over the next 10 years to reduce reliance on imports The money is to

be used for a variety of programmes, including upgrading technology to meet good manufacturing practicestandards, the development and expansion of the pharmaceutical supply network to poor and remote areas,the establishment of joint ventures with foreign players and achieving a greater percentage of domesticpharmaceutical demand

The government's intention to invest in the development of its biotechnology sector is likely to act as acatalyst for wider industry reform, in particular concerning patent protection However, local drug

production is still weak and incapable of meeting domestic demand, although local regulation reform on aconsiderable scale is expected to attract foreign investment In some sectors, such as vaccines, considerableprogress has been made to increase Vietnam's self-sufficiency, with the country now producing sufficientmeasles vaccines domestically to meet national demand

To help make further progress, the government has outlined plans to invest USD241mn in eight projectswithin the local drug manufacturing industry This will include the construction of four pharmaceuticalplants in the next four years The authorities aim to have 80% of domestic demand met by local producers

by 2020, up from around 50% currently

In a workshop help by Vietnam Ministry of Health in August 2013 in collaboration between MedicalExcellence Japan and Japan's Ministry of Economy, Trade and Industry, the two countries reiterated Japan'ssupport towards Vietnamese healthcare through investment in three hospitals including: Bach Mai Hospital,Hue Central Hospital and Cho Ray Hospital

In an interview with local media, Vietnam News, Pham Le Tuan, deputy minister of health, stated thatpublic hospital fees will increase progressively until 2018, in line with Decree 85/2012/ND-CP In 2012, thegovernment increased the prices of three out of seven cost elements incurred by patients, which include the

cost of medicines, chemicals, consumable materials, electricity, water, equipment maintenance and others.Under the plan developed by the Ministry of Health on increasing hospital fees, this will cover the

remaining four out of seven cost elements (beds, medical equipment, salaries, and other hospital operationcosts) These four elements were previously covered by the government

Timeline Of Hospital Fees Increments

■ 2014: Hospital fees charged to patients will include the bed cost for inpatient services and part of the cost

of their surgery

■ 2015: Fees will include medical equipment used for patient treatment, hospitals' management andoperating costs and 20-30% of hospital staff's basic salary at provincial hospitals in mountainous regions,central highlands and district hospitals in Ha Noi and Ho Chi Minh City

■ 2016-17: Part of the hospital fee will be used to pay basic salary cost for staff at provincial hospitals,central government hospitals and district hospitals in two major cities of Ha Noi and Ho Chi Minh City

■ Post-2018: full cost recovery policy for medical services will be implemented across the board

The deputy health minister believes that with these increments in fees service quality will improve

considerably, as hospitals will be dependent on patients He added that 'more patients mean more money forhospital and their staff.' We highlight that this is potentially regressive as patients will have to shoulder theburden of healthcare costs due to low funding from the government In addition, we see a risk of

overcharging by hospitals if the implementation of these increments is not properly regulated Conversely,hospitals may also not generate sufficient revenues despite the implementation of the regulation In August

2013, Vietnam News reported that hospitals in Ha Noi ran into problems in applying new hospital fees due

to unclear regulations and staffing shortages

Nevertheless, as a result of these progressive increments, we have upgraded Vietnam's private healthcareexpenditure forecast, as the increased costs will be borne by patients rather than the government Through to

2018, we forecast that private health expenditure will increase at a compound annual growth rate of 14.4%(15.8% in US dollar terms) This growth rate is higher than government health expenditure (13.2%, 14.6%

in US dollar terms) We highlight that the government may spend savings generated elsewhere to boosthealth services, such as improving health infrastructure

Table: Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Health

spending,

USDbn 7.2 8.3 9.3 10.6 12.4 14.3 16.4 18.8 21.5 Health

spending,

USDbn, %

y-o-y 18.2 16.3 11.3 13.9 17.0 15.5 14.5 14.9 14.4 Health

spending,

VNDbn 137,256.2 172,398.0 193,834.4 222,374.1 254,490.9 290,606.1 330,955.5 376,048.7 426,029.2 Health

spending,

VNDbn, %

y-o-y 27.0 25.6 12.4 14.7 14.4 14.2 13.9 13.6 13.3 Health

expenditure

constant FX

rate, USDbn 6.5 8.2 9.2 10.6 12.1 13.8 15.7 17.9 20.3 Health

spending,

USD per

capita 80.6 92.8 102.3 115.3 133.7 153.1 173.8 198.0 224.8 Health

spending, %

of GDP 6.4 6.2 6.0 6.2 6.4 6.5 6.6 6.7 6.8

f = BMI forecast Source: World Health Organization (WHO), BMI.

Table: Government Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Govt health

spend, USDbn 3.3 3.8 4.0 4.5 5.2 6.0 6.8 7.8 8.9 Govt health

spend, USDbn,

% y-o-y 31.3 13.0 4.7 13.5 16.6 15.0 13.8 14.1 13.5 Govt health

spend, VNDbn 63,892.6 77,975.7 82,501.7 94,345.4 107,533.8 122,195.0 138,267.5 156,025.9 175,295.7 Govt health

spend, VNDbn,

% y-o-y 41.0 22.0 5.8 14.4 14.0 13.6 13.2 12.8 12.4 Govt health

spend, % total

health spend 46.6 45.2 42.6 42.4 42.3 42.1 41.8 41.5 41.2

f = BMI forecast Source: World Health Organization (WHO), BMI.

Table: Private Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Private health

spend,

USDbn 3.8 4.6 5.3 6.1 7.1 8.3 9.5 11.0 12.7 Private health

spend,

USDbn, %

y-o-y 8.8 19.1 16.7 14.1 17.4 15.9 15.1 15.4 15.1 Private health

spend,

VNDbn 73,363.6 94,422.3 111,332.7 128,028.7 146,957.0 168,411.1 192,688.0 220,022.8 250,733.5 Private health

spend,

VNDbn, %

y-o-y 16.8 28.7 17.9 15.0 14.8 14.6 14.4 14.2 14.0 Private health

Prescription Drug Market Forecast

The market figures for prescription and

non-prescription sectors are blurred by a lack of any

proper distinction between the two In fact,

according to some drugstores, only 20-30% of

patients buy drugs with a prescription Only

medicines that cause dependency, such as

benzodiazepines, are routinely refused sale without a

prescription Antibiotics are the most popular drug

sold without a prescription This has resulted in

worrying levels of antibiotic resistance For

example, nearly 70% of bacteria carried by people

living in urban parts of Vietnam are resistant to

penicillin

Nevertheless, the growth of the prescription

medicines market will outpace the growth of

over-the-counters (OTCs), mainly due to the influx of

expensive patented products from abroad and

increased demand for sophisticated drugs

Additionally, tighter regulations in the pharmaceuticals sector as a whole are likely to lead to the

introduction of stricter dispensing guidelines with the good pharmacy practice recommendations cominginto force in 2011

By 2018, we forecast that prescription medicines will be worth VND104,612bn (USD5.28bn) at consumerprices, posting a compound annual growth rate of 15.5% in local currency terms (thus somewhat above thewider pharmaceutical market) In percentage terms, at this point, prescription drugs will account for 74.8%

of the total market, up from 73.6% in 2013, driven by expanded access to formal healthcare in rural areas

Demographic and environmental trends will be some of the key drivers of the prescription market in

Vietnam Respiratory problems are on the rise, including asthma and chronic obstructive pulmonary

disease, partly due to the high prevalence of smoking and partly due to poor air quality Manufacturers ofdrugs in the respiratory therapeutic category will, therefore, have considerable room for expansion over thecoming years Similarly, increased incidence of cancer, diabetes and hypertension among the Vietnamesepopulation will provide scope for drugmakers to expand

Prescription Drug Market Forecast

2009-2023

Prescription drug sales, USDbn (LHS) Prescription drug sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

2.5 5 7.5 10

0 25 50 75 100

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press.

One therapeutic area that has strong potential is oncology At an international scientific conference in April

2013, Mai Trong Khoa, deputy director of Hanoi-based Bach Mai Hospital, stated that Vietnam reportsabout 110,000 new cases of cancer annually, with over 73% of patients dying from the disease - one of thehighest rates in the world He added that the average death rate in developing countries is 67.8% while thatfor developed countries is 49.4% In January 2014 a representative from the Vietnam Social InsuranceAgency stated that cancer drugs account for a large percentage of insurance expenses Moreover,

prescribing patterns seem to be influenced by economic considerations, with drug companies payingcommissions to doctors who promote certain types of product The Ho Chi Minh City authorities conducted

an investigation into the practice, with findings revealing that a number of doctors were in receipt of more

than VND500mn (USD26,300) each month The investigators looked into the prescribing of Merck & Co's

hepatitis drugs - namely PegIntron (interferon Alfa-2b) in 50mcg and 80mcg dosages, with commissions

reportedly being in the region of 10% to 30% of the drugs' cost Joint monthly revenues for the two drugsare reportedly in excess of VND6bn (USD315,000) In September 2012, Nguyen Thi Kim Tien echoedsimilar view stating that prescribers receive 'commission' from foreign pharmaceutical firms therefore manyprescriptions contain expensive medicines

Local industry representatives claim that large firms can therefore gain an upper hand as they can afford topay higher commissions, although doctors' relationship with companies also have a role to play in theirdecisions Moreover, despite the existence of hospital medicine councils - which are in charge of makingprescribing suggestions and supervising prescribing patterns - many doctors can still suggest different types

of medicines to their patients Patients have also stated that commissions are widespread

Table: Prescription Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Prescription drug

sales, USDbn 1.5 1.8 2.1 2.4 2.9 3.4 4.0 4.6 5.3 Prescription drug

sales, USDbn, %

y-o-y 20.5 18.4 17.4 16.6 19.5 17.7 16.5 15.9 14.9 Prescription drug

sales, VNDbn 28,622.0 36,603.2 43,419.9 50,982.2 59,553.5 69,283.5 80,224.5 91,963.6 104,611.5 Prescription drug

sales, VNDbn, %

y-o-y 29.5 27.9 18.6 17.4 16.8 16.3 15.8 14.6 13.8 Prescription drug

sales, % of total

sales 72.8 73.1 73.3 73.6 73.8 74.1 74.3 74.6 74.8

f = BMI forecast Source: National sources, BMI

Patented Drug Market Forecast

Value development of the patented drugs segment

and consequently the overall prescription segment

-will be hampered by the government's plan to

contain pharmaceutical costs through restrictions on

advertising and the request that hospitals and

medical professionals give preference to

domestically produced drugs, as well as the fact that

most of the insured now incur some sort of

co-payment Moreover, a number of high-value drugs

are due to come off patent in the coming years

Nevertheless, the price increase evident since the

start of 2011 may take the value of the prescription

and patented markets beyond current estimates By

2023, we expect the patented drug sector to reach

VND42,723bn (USD2.2bn), but represent a lower

percentage of the total market (18.04% versus 22.3%

in 2013) Over the 2013-2023 period, patented drugs

are expected to post a compound annual growth rate

of 10.7% in local currency (11.8% in US dollar terms) - slightly below the rate of the overall market

development

Counterfeit drugs will continue to have a detrimental impact on patented drug sales over the forecast period,despite the government's efforts to the contrary The global economic slowdown has fuelled demand forcheaper drugs, and counterfeit medicines are prospering as a result Supported by the WHO, police, customsand regulatory officials in the country have begun to coordinate their activities, although little can be done

in terms of enforcement without greater commitment to intellectual property rights as well as more stringentpenalties for violators

Corruption also has a role to play in drug prices, with commissions paid to pharmacists and doctors by salesrepresentatives and distributors to persuade them to prescribe their product to push up the retail price ofmedicines Such practices can only damage the industry as a whole, putting many patented products beyondthe budgets of the majority of the Vietnamese population

Patented Drug Market Forecast

2009-2023

Patented drug sales, USDbn (LHS) Patented drug sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

1 2 3

0 5 10 15 20 25

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press.

Speciality medicines, such as central nervous system and cardiovascular drugs, are expected to be the keygrowth area, while an increase in cancer, diabetes and hypertension will also generate product demand.However, the basic nature of consumption is illustrated by the continued strong showing of antibiotics andalimentary/metabolism products The need to contain the HIV/AIDS epidemic and related health problemswill boost the antiretroviral sector, while the prevention of swine flu and similar diseases continues to drivethe growth of anti-flu drugs.

Table: Patented Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Patented drug sales,

USDbn 0.5 0.6 0.6 0.7 0.9 1.0 1.1 1.3 1.4 Patented drug sales,

USDbn, % y-o-y 18.3 16.2 15.0 14.3 17.0 15.2 13.9 13.2 12.2 Patented drug sales,

VNDbn 9,209.9 11,560.4 13,437.9 15,473.9 17,702.0 20,154.1 22,820.8 25,560.9 28,385.6 Patented drug sales,

VNDbn, % y-o-y 27.1 25.5 16.2 15.2 14.4 13.9 13.2 12.0 11.1 Patented drug sales, %

of prescription sales 32.2 31.6 30.9 30.4 29.7 29.1 28.4 27.8 27.1 Patented drug sales, %

of total sales 23.4 23.1 22.7 22.3 21.9 21.5 21.1 20.7 20.3

f = BMI forecast Source: National sources, BMI

Generic Drug Market Forecast

Although the overall generic drug market is sizeable,

standing at around VND35,508bn (USD1.69bn) in

2013, approximately 51% of the overall market's

value, most products were actually low-quality

copies of unproven bioequivalence The Ministry of

Health is stepping up its efforts to address the

problem by enlisting the help of medical

professionals in the country, in a bid to improve

generic usage and the utilisation of domestically

made products in hospitals and clinics

Additionally, entrance into the World Trade

Organization should in theory, result in dubious

copy products gradually being purged from the

market, as the country brings its intellectual property

(IP) regime in line with TRIPS However, given the

notoriously poor standard of IP enforcement in the

country, these illicit products will continue to have a

sizeable influence in the near future

Overall, generic products are likely to continue dominating the market in volume terms and we forecast thevalue of the sector should reach VND137,464bn (USD7.18bn) in 2023, accounting for 58.1% of the totalmarket (up from the calculated 51.2% in 2013) Vietnam offers strong prospects for generic market growthdue to low consumer purchasing power However, a number of obstacles still remain, such as a widespreadbelief that generic drugs are inferior to patented products and that in many cases, they are not that muchcheaper than patented counterparts They are also not as widely available as they could be

In an interview with local media VietNamNet Bridge, Vietnam's former deputy minister of health, Dr LeVan Truyen, stated in January 2014 that the population is still reluctant to use domestically producedpharmaceuticals Some of the key reasons mentioned include:

■ Several domestic pharmaceutical firms failing to 'provide enough evidence about the effects of theirdrugs compared with imported drugs', consequently 'deepening people's doubt on the effectiveness andreliability of local drugs'

Generic Drug Market Forecast

2009-2023

Generic drug sales, USDbn (LHS) Generic drug sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

2.5 5 7.5 10

0 15 30 45 60 75

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press.

■ Some drugs used in specialised and central hospitals are still protected by patents, preventing local firmsfrom producing them The situation is made worse by free trade agreements that may extend patent terms.

Table: Generic Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Generic drug sales,

USDbn 1.0 1.2 1.4 1.7 2.0 2.4 2.8 3.3 3.9 Generic drug sales,

USDbn, % y-o-y 21.6 19.4 18.5 17.6 20.5 18.8 17.5 16.9 16.0 Generic drug sales,

VNDbn 19,412.1 25,042.8 29,982.0 35,508.3 41,851.5 49,129.3 57,403.7 66,402.7 76,225.9 Generic drug sales,

VNDbn, % y-o-y 30.6 29.0 19.7 18.4 17.9 17.4 16.8 15.7 14.8 Generic drug sales, %

of prescription sales 67.8 68.4 69.1 69.6 70.3 70.9 71.6 72.2 72.9 Generic drug sales, %

of total sales 49.4 50.0 50.6 51.2 51.9 52.5 53.2 53.8 54.5

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press.

OTC Medicine Market Forecast

Despite the blurred distinction between prescription

and non-prescription products, over-the-counter

(OTC) healthcare has been achieving relatively

robust value growth in the last few years The value

of OTC sales is likely to reach VND56,611bn

(USD2.96bn) in 2023, up from VND18,315bn

(USD870mn) in 2013 At the same time, the sector's

share of the total market as a percentage is expected

to fall to 23.9%, from 26.4%, due to the rising value

of the prescription sector and more expensive

imports, and stricter dispensing controls

Key drivers of OTC market growth will be mostly

limited to volume, as consumers become better

educated and more confident about self-medication

OTC drugs will also benefit as consumers spending

power increases, and - in the case of the low income

population - they may well turn to OTCs and

traditional medicines to seek cheaper alternatives to

patented drugs

Another factor affecting the growth of the self-prescription market is that manufacturers import the bulk ofraw materials and active pharmaceutical ingredients, which disadvantages segments such as vitamins andanalgesics, especially given the local currency depreciation compared with key sources markets like China,Japan and South Korea

Nevertheless, despite these setbacks, vitamins and dietary supplements are one of the fastest growingsegments of OTC healthcare in Vietnam, with analgesics remaining the best sellers Single vitamin

supplements have become common household products in the country, while high generic penetration inthis area has helped to make the products affordable to the majority of consumers In fact, according to

survey conducted by market research firm AC Nielsen in partnership with the Association of the European

Self-Medication Industry (AESGP), consumers in Vietnam (at 45% of the total) are among the most likely

to take an OTC drug for a minor ailment as soon as symptoms are present

OTC Medicine Market Forecast

2009-2023

OTC medicine sales, USDbn (LHS) OTC medicine sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

1 2 3 4

0 6 12 18 24 30

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press.

Market research also established that it is common for people in Vietnam to ask the advice of unlicensedpharmacists or friends when choosing a medicine, rather than seeing a doctor and receiving a prescription.Concern surrounds pharmacists who offer customers prescription-only medicines over the counter, which inthe case of drugs such as antibiotics, can lead to resistance if they are overused Like many other Asiancountries, branding and advertising is becoming increasingly prevalent in Vietnam's OTC sector.

Meanwhile, BMI believes that there is great potential for Vietnam's traditional medicines (TM) sector as

long as the government can attract investment in extraction technologies, reduce Vietnam's reliance onimporting raw materials and in turn bring down the retail prices of such products With more than 4,000medicinal herbs and plants in the country, there could be myriad applications in the consumer health sector,which would boost the overall OTC market value

However, the government will also have to improve regulation of the sector It is estimated that up to 70%

of traditional medicines are fakes imported into the country Presently, the MoH only allows around 15

herbal brands to be sold in Vietnam, although the market is saturated with unlicensed offerings BMI

believes that in the coming years, the MoH will increase its reliance on TM and the cultivation of ThuongHoang, a mushroom that has been used traditionally to treat cancer, is a positive step in the right direction

In February 2011, Deputy Prime Minister Nguyen Thien Nhan stated that the government wants to continue

to nurture the traditional medicine sector and drafted a plan that aimed to modernise traditional medicine by

USDbn, % y-o-y 19.3 16.7 16.0 15.1 18.0 16.2 15.0 14.4 13.4 OTC medicine sales,

VNDbn 10,693.9 13,478.3 15,793.8 18,315.3 21,126.3 24,265.4 27,735.1 31,378.0 35,220.8 OTC medicine sales,

VNDbn, % y-o-y 28.2 26.0 17.2 16.0 15.4 14.9 14.3 13.1 12.3 Over-the-counter

(OTC) medicine sales,

% of total sales 27.2 26.9 26.7 26.4 26.2 25.9 25.7 25.4 25.2

f = BMI forecast Source: National sources, BMI

Pharmaceutical Trade Forecast

Vietnam is highly reliant on pharmaceutical imports

Latest data from UN Commodities Trade Database

(UNComtrade) showed that the country imported

USD1.8bn worth of pharmaceuticals in 2012 while

exporting USD77.1mn worth of products in the same

period Imported pharmaceuticals were mainly from

France (USD235.9mn), India (USD230.5mn), South

Korea (USD164.4mn), Germany (USD143.4mn) and

Italy (USD93.9mn) Meanwhile, the country

exported to countries such as Germany (USD9.7mn),

Nigeria (USD5.6mn), Cambodia (USD5.5mn), Japan

(USD4.2mn) and India (USD4.2mn) Given that the

pharmaceutical sector is still in its infancy, we

expect such reliance on imports to continue From

2013 to 2018, we forecast that pharmaceutical

exports and imports will see local compound annual

growth rates of 20.9% and 15.7% respectively in US

this reliance on imported products as a commercial opportunity for foreign drugmakers

However, while the pharmaceutical sub-sector may be growing at a double-digit rate, we caution that not allforeign drugmakers will be able to capitalise on this growth opportunity Doubts regarding drug quality andcounterfeit drug problems are two reasons why people prefer imported products in developing markets such

as Vietnam Consequently, we believe that careful branding and marketing is a vital method by which firmscan capture market share in Vietnam and other developing countries Companies that are able to engagephysicians (through their salesforces), initiate differential pricing policies and launch various corporatesocial responsibility programmes are likely to be seen in a more positive light than those that fail to do so - and are therefore more likely to succeed in Vietnam

Pharmaceutical Trade Forecast

2009-2018

Pharmaceutical exports, USDmn Pharmaceutical imports, USDmn

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f0

2,000 4,000 6,000

f = BMI forecast Notes: Comtrade Code = 3002,3003,3004 Source: United Nations Comtrade Database DESA/UNSD, BMI.

Free trade agreements are seen as an obstacle to the use of domestic drugs due to patent

conditions BMI notes that Vietnam is one of the member countries under the Trans-Pacific Partnership

(TPP) Interest groups from a number of countries such as Malaysia, Australia and New Zealand havewarned of potential increases in drug prices, as there could be an extension of intellectual property rightsinvolving pharmaceuticals Should member countries agree to extend patent terms, all generic drug

companies will be affected

At the same time, the Vietnamese government is keen to increase domestic drug use in the country InDecember 2013, the Drug Administration of Vietnam (DAV) launched a programme to raise awarenessamong doctors, hospital managers and the community on the use of locally produced drugs In addition topromoting local drugs consumption, the government is aiming to implement universal healthcare by the end

of 2014 The country may opt to subsidise more locally made drugs under the scheme, which would bringdownside risks to foreign drugmakers

Table: Pharmaceutical Trade Data And Forecasts (Vietnam 2012-2018)

2012 2013 2014f 2015f 2016f 2017f 2018f

Pharmaceutical exports, USDmn 77.14 93.77 116.47 141.94 170.53 204.33 242.54 Pharmaceutical exports, USDmn, % y-

o-y 22.17 21.55 24.21 21.87 20.14 19.82 18.70Pharmaceutical imports, USDmn 1,840.89 2,138.42 2,545.83 2,960.58 3,406.47 3,899.60 4,426.63 Pharmaceutical imports, USDmn, % y-

o-y 16.41 16.16 19.05 16.29 15.06 14.48 13.52Pharmaceutical trade balance, USDmn -1,763.75 -2,044.65 -2,429.37 -2,818.64 -3,235.94 -3,695.27 -4,184.09

f = BMI forecast Source: National sources, BMI

Table: Pharmaceutical Trade Data And Forecasts Local Currency (Vietnam 2012-2018)

2012 2013 2014f 2015f 2016f 2017f 2018f

Pharmaceutical

exports, VNDmn 1,610,215 1,971,853 2,395,170 2,885,633 3,447,230 4,086,539 4,802,311 Pharmaceutical

exports, VNDmn, %

Pharmaceutical

imports, VNDmn 38,425,213 44,968,828 52,355,067 60,188,602 68,861,822 77,991,928 87,647,320 Pharmaceutical

imports, VNDmn, %

Pharmaceutical trade

balance, VNDmn -36,814,998 -42,996,975 -49,959,897 -57,302,969 -65,414,592 -73,905,389 -82,845,009

f = BMI forecast Source: National sources, BMI

Other Healthcare Data

The vast majority of hospitals in Vietnam are large state-owned facilities that are frequently overcrowdedand generally offer only basic services A growing number of private facilities offer advanced services, butmany local people on high incomes still travel abroad for healthcare The most common destinations areSingapore, Thailand and Hong Kong It is estimated that approximately 30,000 Vietnamese citizens leavethe country for healthcare treatment each year, at a reported cost of over USD1mn

By May 2010, local press reported that the number of private facilities topped 30,000, including more than

100 private hospitals and more than 5,400 beds, according to a Ministry of Health official To date, some 70private healthcare projects have also received foreign investment Similarly, foreign investors have pouredcapital into the pharmaceutical industry (of more than USD300mn), although none of those projects involvepharmaceutical manufacturing

In 2012, the General Statistics Office put the number of state-run hospitals at 963, which equates to

approximately 11 hospitals for every one million of the population, low compared with other countries at asimilar level of economic development Meanwhile, the number of hospital beds and doctors per 1,000 ofthe population stayed flat - at 2.01 and 0.65 respectively Central hospitals in Vietnam are facing a shortage

of beds to the extent that in some hospitals a single bed is being shared by two or sometimes even threepatients The Ministry of Health says that demand for beds in provincial hospitals is 115%, while in majorcities it is 250%

According to the director of Viet Duc Hospital, Nguyen Tien Quyet, the main reason behind such

overloading at central hospitals is the low standard of health staff training at a community level, due towhich a large number of patients are transferred to these central hospitals Each year the health sector needsover 36,000 new health workers but the training system can only provide 24,000, according to the healthministry statements made in June 2008

A year later, in November 2009, overcrowding in hospitals returned to the headlines with Prime MinisterNguyen Tan Dung meeting with other ministers to address the problem Health Minister Hguyen QuocTriey announced that Vietnam has only 18 hospital beds per 10,000 citizens and the government wants toraise this ratio to 25 beds, in line with global averages The government views the creation of day centresand increasing the number of family practitioners as a solution to this overcrowding

In August 2013, in bid to tackle overcrowding in central hospitals, the Ministry of Health launched asatellite hospital programme Through to 2015, these hospitals will perform all techniques transferred bycentral hospitals Despite it being a positive aim to ease overcrowding, Nguyen Thi Xuyen, deputy Minister

of Health stated that the programme was already facing difficulties such as shortages of medical

professionals and facilities

Key Risks To BMI's Forecast Scenario

The existence of rampant corruption will continue to hinder the country's progress in the pharmaceuticaland healthcare sector, bringing downside risks to its business environment In August 2012, it was revealedthat Vietnam's social health insurance funds are running a deficit, in part due to mismanagement of fund aswell as a result of corruption In March 2012, Doan Van Cuong, an ex-employee of the Can Tho socialinsurance department, made fraudulent claims He used the names of pregnant women and asked forpostnatal assistance worth VND119.5mn (USD5,730), even though these women were not his employees

Risks to export forecasts are mostly to the upside, from the point of view of volumes produced A number

of foreign players have - or are in the process of establishing - export ventures in the country The fact thatsuch facilities comply with international norms will continue to stimulate export potential

The current trend for regional harmonisation provides the ideal background for progress of Vietnam'shealthcare and pharmaceutical industries However, whether such reform can be carried out successfully is amatter for much conjecture given the disorganised state of the sector Nevertheless, Vietnam's World TradeOrganization membership since early 2007 is expected to stimulate other similar deals in the region

Macroeconomic Forecasts

Economic Analysis

BMI View: We have downgraded Vietnam's growth forecast from 5.9% to 5.7% in 2014 on the back of

weaker-than-expected H114 growth numbers, combined with the risk of an economic backlash from China That said, we have maintained our forecast for growth to come in at 6.4% in 2015, and we continue to believe that the economy will be driven by growth supportive government policies, as well as a strong outlook for foreign investment and exports.

Real GDP growth came in at 5.3% year-on-year (y-o-y) in Q214, according to the General Statistics Office(GSO), bringing growth for the first half of the year to 5.2% y-o-y This marks an acceleration whencompared to the 4.9% registered in the first half of 2013, and chimes with our view that the economy willcontinue to accelerate into 2014 and 2015 Growth was predominantly driven by strength in the servicessector as well as the industry and construction sectors, which contributed 2.6 and 2.1 percentage pointsrespectively to growth Although we see strong growth ahead, we have revised down our growth forecastfor 2014 from 5.9% to 5.7% on the back of a slightly weaker than expected first half of the year, combined

with the potential for an economic backlash from the ongoing political dispute with China (see 'Political Tensions Pose Downside Risks To Growth', June 10) That said, we have kept our 2015 real GDP growth

forecast unchanged at 6.4%

Slight Downgrade, But Powering Along

Vietnam - Real GDP Growth, % chg y-o-y

Source: GSO, SBV

The Vietnamese government will continue to promote progrowth policies, by running a fiscal deficit albeit a declining one - maintaining a dovish stance with regard to monetary and exchange rate policy,restructuring many state owned enterprises (SOEs), promoting foreign direct investment and exports as well

-as attracting developmental-type aid For the first six months of the year, we estimate that the governmentposted a fiscal deficit of approximately 4.3% of GDP, with spending rising by 9.7% y-o-y At the sametime, the State Bank of Vietnam (SBV) has maintained a dovish bias since the beginning of the year, cuttingits refinancing rate by 50 basis points in March to 6.5% in an effort to spur lending Indeed, the SBVrecently also devalued the Vietnamese dong by 1% in June, in what we believe is a pre-emptive move toboost exports in the event of a slowdown driven by the ongoing political spat with China Given lowinflationary pressures, we would not be surprised to see either another cut to the refinancing rate, or anotheradjustment to the currency before year-end in the event of a slowdown in growth, although it is not our coreview Combined, both accommodative monetary and fiscal policy will continue to support growth over thecoming quarters

Services Powering Ahead

Vietnam - Real GDP Growth By Category, % chg y-o-y & Share of GDP, %

Source: GSO

Manufacturing And Retailing To Help Support Growth

The industrial sector, which accounts for approximately 33% of the economy and includes manufacturing,mining, water management, and power generation accelerated by 6.1% y-o-y in June and 5.8% for the firsthalf of the year At 21% of GDP, manufacturing accounts for the lion's share, accelerating by a robust 7.8%y-o-y in H114, driven by textiles (21% y-o-y), leather goods (19.2%), and motored vehicles (22.9%), atrend we expect will remain in play given the continued strength in the country's domestic demand and

export markets Moreover, as we highlighted in previous articles (see Manufacturing To Remain Strong,

June 20), the manufacturing sector will continue to see strong growth, particularly as it moves up the valuechain into higher value sectors such as Information and Communications Technology (ICT) The retailsector expanded by 12.2% y-o-y in H114, with accommodation and catering services growing by 13.1% andtravel services by a whopping 20.5% over the period

Manufacturing To Remain Strong

Vietnam - Industrial Production, % chg y-o-y, 6mma

Source: Bloomberg

Exports Continue To Strengthen

Vietnam's export sector continues to be a driver of growth for the country, and we forecast this trend toremain in play over the coming months Exports for the first six months of the year expanded by a robust14.9% y-o-y, and saw the accumulated trade surplus rise to USD1.3bn in H114 Exports were primarilydriven by strong growth in textiles, telephones and footwear of 18.2%, 17.1% and 21.9%, respectively,which together account for approximately 35% of the total Moreover, we expect exports to continuedriving growth going forward given that the Vietnamese government has been making a concerted push tobuild diplomatic and trade ties with many countries and is negotiating several free trade agreements One ofthe most important ones is the Trans-Pacific Partnership (TPP), which could be signed by as early as 2015

Diversified & Picking Up

Vietnam - Exports By Category, % chg y-o-y & Share of Total

Source: GSO

Investment and Infrastructure Development To Drive Growth

The investment picture also remains very bullish in Vietnam as the country has been able to attract bothprivate investment as well as foreign aid, which will help underpin both short-and long-term growth Therewere a total of 656 investments in H114 with a total value of USD4.9bn, and although this figure marks a16.4% decline from last year, we do not believe that it highlights a lack of opportunities going forward Thelargest source of investment this year has been from South Korea at USD1.1bn, followed by Hong Kong(USD867mn), Singapore (USD559mn), Japan (USD438mn), and Indonesia (USD352mn).The Vietnamesegovernment continues to restructure many of their SOEs, and several companies, such as

Samsung, continue to be attracted to the country's lower labour costs, which suggests that foreign

investment will continue to flow to Vietnam Indeed, in July, Samsung received approval from the

government to build a USD1.0bn plant From a developmental perspective, the ASEAN Infrastructure Fund(AIF) approved a USD100mn loan for the power sector in May, and could provide another USD200mn inloans Moreover, the World Bank in June approved two credits worth USD500mn to support economicmanagement, reforms and infrastructure development in the northern region of the country

Investment To Remain A Driver of Growth

Vietnam - Foreign Direct Investment By Source, USDmn

Source: GSO

Risks To Outlook: China, From Friend To Foe

Although we have already downgraded our growth forecast slightly for this year, we continue to monitorrisks from trade policy with China Although we do not believe that the political tensions between Hanoiand Beijing will result in military conflict, there are non-negligible risks of an economic backlash Indeed,the Chinese government has temporarily stopped Chinese state-owned companies from bidding for newcontracts in Vietnam, which could see investment flows decline substantially over the coming quarters,posing downside risks to Vietnam's growth outlook China accounted for 21.3% of foreign investment inVietnam in 2013, approximately 14.5% of Vietnam's exports, and about 27% of all visitors this year Assuch, a sustained economic backlash could have a more severe impact on Vietnam's growth outlook

Table: Economic Activity (Vietnam 2009-2018)

2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP, USDbn 101.6 112.8 134.6 155.6 170.6 194.9 220.8 248.6 280.4 316.2 Real GDP growth, % y-o-y 5.4 6.4 6.2 5.2 5.4 5.7 6.4 6.6 6.4 6.4 GDP per capita, USD 1,152 1,266 1,496 1,713 1,860 2,105 2,364 2,639 2,952 3,303 Population, mn 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 95.7 Industrial production, % y-o-y, ave 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 Unemployment, % of labour force, eop 4.6 4.3 3.6 3.2 3.7 3.5 3.5 3.6 3.5 3.5

National Sources/BMI, e = Estimate, f = BMI Forecast