Vietnam freight transport report q1 2014

... affect Vietnam' s freight transport sector © Business Monitor International Page 12 Vietnam Freight Transport Report Q1 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam. .. continue to so © Business Monitor International Page 22 Vietnam Freight Transport Report Q1 2014 Table: Vietnam Transport Network Length (km) Vietnam Transport Network Road Length (km) 180,549 km Railway... Vietnam Freight Transport Report Q1 2014 Taking Off Vietnam Air Freight, '000 tonnes e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam BMI expects the increase of air freight

Q1 2014 www.businessmonitor.com

VIETNAM

FREIGHT TRANSPORT REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Q1 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2013

Business Monitor International

© 2013 Business Monitor International

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International, and as such no part of this

BMI Industry View 7

SWOT 10

Freight Transport 10

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

Road Freight 19

Table: Road Freight 2011-2018 20

Inland Waterways 20

Table: Inland Waterway Freight, 2011-2018 22

Rail Freight 22

Table: Vietnam Transport Network Length (km) 23

Table: Rail Freight, 2011-2018 24

Air Freight 24

Table: Air Freight, 2011-2018 26

Maritime Freight 26

Table: Maritime Freight, 2011-2018 28

Trade 28

Table: Trade Overview, 2011-2018 28

Table: Key Trade Indicators, 2011-2018 29

Table: Top Import Destinations, 2004-2011, US$mn 30

Table: Top Export Destinations, 2004-2011, US$mn 30

Market Overview 32

Industry Trends And Developments 38

Maritime 38

Multimodal 38

Air 39

Road 40

Company Profile 42

Long-Term Political Outlook 54

Oil Price Outlook 58

Global Oil Products Price Outlook 58

Methodology 58

Crude Price Forecasts 58

Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) 59

Variance Across Product Markets 60

Narrower US Market Crude-Product Spreads 62

Weak Demand Persists 64

Risks To Outlook 65

Table: BMI's Refined Products Forecasts, US$/bbl 65

Supply: Supported By Global Refining Capacity 66

Naphtha: US Gas Hits Demand 70

Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement 72

Jet Fuel: Limited Upward Movement 74

Table: Total Air Freight And Passenger Volumes 76

Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest 76

Macroeconomic Forecasts 80

Table: Vietnam - Economic Activity 83

Demographic Forecast 84

Demographic Outlook 84

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 85

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 86

Table: Vietnam's Key Population Ratios, 1990-2020 87

Table: Vietnam's Rural And Urban Population, 1990-2020 87

Methodology 88

Industry Forecast Methodology 88

Sector-Specific Methodology 89

Sources 90

BMI Industry View

Although we expect the Vietnamese economy to record yet another quarter of sub-par growth in Q4

2013 (at the time of writing), we are beginning to see potential for upside surprises to domestic demand over the coming quarters, providing potential comfort to the country's freight mix Recent data on foreign direct investment inflows, remittances, passenger car sales, and property market launches, suggests to us that domestic demand is on a nascent recovery, setting the stage for stronger 2014 growth.

The general consensus is expecting the Vietnamese economy to suffer yet another quarter of sub-par growthmainly due to subdued external demand and the lack of progress on banking sector reforms This is closely

in line with our view that real GDP growth will come in at just 5.3% in 2013, a slight improvement from5.2% in 2012 Looking ahead to 2014, however, evidence of improving macroeconomic fundamentals inVietnam (especially with regards to the outlook for domestic demand) suggests to us the balance of risks toour growth forecast of 6.0% is gradually tilting towards the upside

Total foreign direct investment (FDI) inflows are also set to surpass the government's full-year target of US

$13bn, after data released by the Ministry of Planning and Investment showed that inflows surged by 19.5%year-on-year (y-o-y) growth over the first eight months of the year The strong reading chimes with ourview that the country's solid long-term growth story should continue to attract foreign investors over thecoming years

In terms of the Vietnamese freight industry, 2014 is set to see healthy growth across the board, albeitslightly slower than 12 months previous for most modes Leading the way for year-on-year growth will beroad freight with impressive double digit increases expected (11.90%) The air freight sector will see annualtonnage growth of 5.11% in 2014, while the ports of Da Nang and Ho Chi Minh City will both perform well(7.00% and 6.06% respectively Rail freight lags a little in y-o-y growth terms, with 3.12% annual growthpencilled in for 2014

Headline Industry Data

■ 2014 rail freight tonnage is set to increase by 3.12% to 7.52mn tonnes

■ 2014 air freight tonnage is forecast to rise by 5.11% to 198,700 tonnes

■ Tonnage handled at the Port of Ho Chi Minh City in 2014 is forecast to grow 6.06%, whereas tonnagehandled at the Port of Da Nang is forecast to increase 7.00%

■ 2014 road freight tonnage is forecast to grow by 11.90% to 902.64mn tonnes

■ 2014 total trade is forecast to rise by 5.30%

Key Industry Trends

Vinashinlines Completes Sale Of 90% Of Fleet - Vinashinlines, the Vietnamese shipping company, has

sold off 90% of its vessels, according to Hellenic Shipping News in October 2013 The firm added that anumber of the carriers had been purchased for prices above their original valuation Vinashinlines' bankrupt

parent company Vinalines has revealed plans to reduce its operations, after reaching agreements with

crediting organisations and assessing industry demand

Vanguard Opens New Vietnamese Offices - Vanguard Logistics Services announced that it had extended its

reach in Vietnam with the establishment of new offices in Hanoi and Haiphong, following on from theopening of its inaugural office in Ho Chi Minh City six years ago

Airport Clears Cargolux 747-8 Operations - The first Boeing 747-8 freighter flight has been operated by

Luxembourg-based cargo airline Cargolux at Tan Son Nhat International Airport in Ho Chi Minh City itwas reported at the end of July 2013 The move comes after the aircraft secured certification from theairport The first-ever Boeing 747-8 freighter revenue flight was operated by the airline to Hanoi's Noi Bai

Key Risks To Outlook

Vietnam's transport ministry has announced that it will not issue any licenses for the construction of newcontainer ports in Ba Ria-Vung Tau, Ho Chi Minh City and Dong Nai until 2015 This comes as ports inCai Mep-Thi Vai have been carrying out operations at far below capacity This forms part of measures bythe government to enhance operation efficiency of the port system in the three localities Meanwhile, thegovernment has also decided not to expand existing ports in Ho Chi Minh City to move goods to Cai Mep-Thi Vai The ministry will consider granting permission for new ports only after 2015 depending on marketdemand

Headwinds are expected in the short term for coffee exports in Vietnam The country's coffee exports arelikely to stagnate over the coming quarters due to lower robusta prices and a coffee export sector crisis.Coffee prices in Vietnam have been on a declining trend for the past two years, and have averaged US

$1,918/tonne since the start of 2013, down 3.8% y-o-y As a result, coffee farmers have been hoardingbeans in order to obtain better prices later on Meanwhile, of the 127 local coffee export firms that operated

in Vietnam a year ago, 56 have ceased trading, as the industry is plagued by insolvency, and a creditsqueeze, according to industry reports

Freight Transport

SWOT Analysis

Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for

thousands of kilometres on a north-south axis, creates a need for long-distancefreight haulage

the mid-term to 2018

inter-Asian shipping routes, as well as access to the developing land transport links withASEAN countries, allowing the country scope to develop its trade logistics

Weaknesses ■ The generally poor state of the road network Despite new highway construction, only

13.5% of the network is considered to be in good condition Just 26% of the networkhas two or more lanes and only 29% is tarred

being underutilised

that is poor by international standards Overcapacity is a growing problem

access to infrastructure financing means that we remain very conservative on thegrowth potential of Vietnam's freight sector

SWOT Analysis - Continued

sector

International Airport in order to develop infrastructure facilities Under a plansubmitted to the government, 21,000 hectares in three communes in Cam My Districtand seven communes in Long Thanh are to be cleared for establishing new residentialand urban areas, industrial zones, research institutes and international service

centres

Vietnam trade lane across a range of industries, including IT hardware and garments,

in 2012, reported JOC at the end of February 2013

in the construction of a new rail line in southern Vietnam will come in at more than US

$2bn Speaking to IA Prime, Vladimir Yakunin said that 'it is difficult to talk about itnow, because there is no project', but as it stands, an agreement of intent was signed

on March 11 2013 between RZD, Vietnamese Railways and the mineral depositcompany An Vien, also from Vietnam

line between the country and its Asian neighbours, Vietnam and Thailand The 220kmline will run from Laos's Western border with Thailand to the Lao Bao border gate inVietnam Construction will commence in August 2013 with an expected completiondate of the second half of 2017

terminal project will entail a total investment of US$1.2bn and is likely to become

operational in 2015 The terminal, likely to ease port congestion in Haiphong, will beable to accommodate vessels with a capacity ranging between 8,000TEUs and9,000TEUs

Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its

infrastructure to keep up with the pace of demand

SWOT Analysis - Continued

the sensitive South China Sea, subject to competing sovereignty claims

transport sector

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

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

Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

control 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

policies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the

one-party system, and street demonstrations to protest economic conditions coulddevelop into a full-on challenge of undemocractic rule

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

assertive 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

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.1% annually between 2000 and 2012

poverty rate in the country falling from 58% in 1993 to 14.0% in 2010

Weaknesses ■ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit isdominated by substantial spending on social subsidies that could be difficult towithdraw

exports, and also keeps import costs high, contributing to inflationary pressures

Opportunities ■ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

forward with market reforms, including privatisation of state-owned enterprises, andliberalising the banking sector

urban population rising from 29% of the population to more than 50% by the early2040s

Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growth

Business Environment

SWOT Analysis

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

- 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

Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123out 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

liberalisation of the banking sector This should offer foreign investors new entrypoints

Threats ■ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

levels could leave Vietnam a second-rate economy for an indefinite period

Industry Forecast

Latest data published by the General Statistics Office (GSO) showed that the Vietnamese economy

expanded by 5.1% in the first nine months of 2013, closely in line with our forecast for real GDP growth tocome in at 5.3% for 2013 We note that the final quarter has traditionally been the strongest for the

Vietnamese economy over the years This is partly due to seasonal factors such as the timing of businessspending and the implementation of government-led investment projects that typically pick up in the finalquarter Accordingly, we expect economic activity to have accelerated as we head into 2014

The latest figures published by the General Statistics Office (at the time of writing in October 2013) showedthat headline consumer price inflation (CPI) slowed from 7.5% year-on-year (y-o-y) in August to 6.3% inSeptember, despite concerns that fuel price hikes in July could generate inflationary pressures The latestreading is closely in line with our expectations that over the medium term, stable commodity prices andsubdued credit growth will continue to keep headline CPI anchored around our full-year average forecast of7.0% for 2013

GDP To Enjoy Healthy Mid Term

Vietnam Real GDP growth, % change y-o-y

5.5 6 6.5 7 7.5

To keep pace with growth, Vietnam will continue to need to invest in its logistics sector, but BMI expects a

lot of this investment to come from outside logistic and freight transport companies which will be keen toenter and expand into this high growth market We have already witnessed this to some extent in Vietnam'sport sector, with considerable investment being made by container shipping lines and global port operators

in the development of modern box terminals at Vietnam's ports

This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can beachieved with greater links between the country and its main export partner the US Direct containershipping links between Vietnam and the US have been in operation since 2009, which have cut both timeand cost, as previously Vietnamese shipments had to be transhipped via Singapore

Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam'sexports set to benefit from the slow, but steady recovery in the US economy

China And The US To Drive Export Growth

LHC: Vietnam's Main Export Partners By % 2011 RHC: China and US Real GDP growth, % change

y-o-y

*2012 data is a BMI estimate f = BMI forecast Source: CIA World Factbook, National Bureau of Statistics and

BEA

Vietnam's export outlook will also continue to be bolstered by China's growth outlook Although we projectChina's economic growth to slow over the medium term, the country's real GDP growth outlook remainsrobust.

Vietnam plays a key role in China's coal supply chain Vietnam is China's fifth-largest coal supplier

providing the country with the thermal coal it requires for its power stations Vietnam's role in this supply

chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors'

reliance on coal While we believe that the percentage supplied by coal fired power plants within China'soverall energy mix will slip over the medium term, it will nevertheless remain above 70%

Playing A Major Role In China's Coal Supply Chain

China Coal Imports By Partner 2012 (tonnes)

Source: China Custom

Road Freight

Road Dominates And Offers Best Links Into China

Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at

123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logisticsneeds are primarily met by road

In 2013, we predict that road freight volumes in Vietnam will account for the majority of freight carried inthe country

There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road

freight expertise expand in Vietnam Recently, both FedEx and DHL have been expanding their role in

Vietnam While some companies are breaking into Vietnam by developing their own operations in thecountry, others are getting a head start by acquiring and joining up with domestic freight operators This is

the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group.

Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's exportsupply chain Road is the main form of transport linking Vietnam's factories to the country's ports and alsoplays a key role in linking Vietnam with its second-largest export partner China

Vietnam's northern border links the country's with the south of China Road links continue to be developed

between the two and with them trucking services Kerry Asia Road Transport (Kart), for example, offers

a twice-weekly trucking link connecting Shenzhen and Hanoi

Table: Road Freight 2011-2018

Mekong Offers Trade Connections

Map of the Mekong River

Source: BMI

The country's inland waterways stretch for 17,702km, of which 5,000km is navigable for vessels with adraught of up to 1.8m Vietnam's dense network of waterways ranks its seventh in the world in terms oflength

The country's inland waterways include the Mekong River, which enables freight connections with

Vietnam's neighbours Although we highlight that the River's full potential has not been reached and sodevelopment in the River is an area for potential investment

Table: Inland Waterway Freight, 2011-2018

Network Lacking And No Impetus To Develop It

Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in thecountry's freight transport sector remains small In 2013, we estimate Vietnam's rail freight volumesaccounted for just 1.8% of the total with the country's rail network transporting just 7.29mn tonnes offreight

Although like the other freight modes, we expect volumes to increase in line with Vietnam's economicgrowth outlook, rail freight volumes (while forecast to grow by around 18% over the next five years) willonly be handling 8.54mn tonnes in 2018; this is still way below that which we forecast for the nation's othermain freight modes, road and inland waterways

There are two key factors that we believe have held back Vietnam's rail freight development and willcontinue to do so

Table: Vietnam Transport Network Length (km)

Source: CIA World Factbook

The first is the quality of Vietnam's railway infrastructure The Global Economic Formula gives Vietnam'srail infrastructure a low ranking, placing it 71st globally out of 123 countries measured This ranking places

it 12th out of its 13 Asian peers A major problem for Vietnam's rail freight development is the relativeshortness of the country's rail network Vietnam's railway lines extend for just 2,632km; this compares withthe country's 180,549km network of roads and 17,702km network of inland waterways

The second drawback for freight rail development in Vietnam is its gauge incompatibility with China.Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total While the countryhas some standard gauge track, this system only accounts for 20% of the total

This means that rail freight trade between Vietnam and China is slowed by gauge changes, making roadfreight a more cost- and time-effective alternative; this stymies potential rail-freight projects between thetwo nations

BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused

on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam andLaos)

Table: Rail Freight, 2011-2018

On Growth Trajectory As Vietnam Gets Better Connected

Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector;although this is not expected to change there is a lot of growth potential in this sector As intra-Asia airfreight routes develop, Vietnam is becoming better connected with air freight routes internationally Thekey sectors that are demanding air freight as a transport option, include consumer electronics and

pharmaceuticals

In line with Vietnam's economic growth and the projected pick up in international air freight, BMI forecasts

the country's air freight volume growth to remain healthy in 2014 We forecast Vietnam's air freight

volumes to increase by 5.11% to reach 198,700 tonnes in 2013 Over the medium term (2014-2018), weforecast Vietnam's air freight levels to grow on average per annum by 5.95% to reach 252,350 tonnes

There are upside risks to these forecasts stemming from the continued interest of international air freightoperators in Vietnam Throughout 2012, Vietnam's Ho Chi Minh City airport became better connected with

more air freight routes and BMI expects this trend to have continued in 2013 and beyond.

Taking Off

Vietnam Air Freight, '000 tonnes

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam

BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi Minh City Vietnam is also becoming globally better connected by air In 2012, Emirates added a link with the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi.

While still at the development stage, Vietnam is seeking to play a greater role in the electronics supplychain, a key source of demand for air freight transport options One example has been the impact the localproduction of iPhones has had on China's air freight sector Plans are in place for Vietnam-based facilities toproduce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand

Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot Vietnam'strade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term.The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, withthe sector offering savings in transport time, along with environment controlled options, which are vital forthe transport of some medicines and vaccinations

Table: Air Freight, 2011-2018

Box Role To Continue Expanding

Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector As

highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulkcommodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao Vietnam is anoil-producing nation, but its consumption needs have come to outweigh its supply and so the country ismaking use of the liquid bulk shipping sector to import oil

It is in the container shipping sector that Vietnam has seen the most development, a trend which is expected

to continue As Vietnam has become the factory of Asia, with an emphasis on the development of clothingand shoe exports, the country's ports and shipping links have had to keep up As mentioned, considerableinvestment was ploughed into Vietnam's container terminal sector over the past five years, with

international players participating This investment is now starting to yield results, with Vietnam nowdirectly connected to the key demand market of the US (in 2009) and Europe (in 2010)

Getting Better Connected

UNCTADstat Liner Connectivity Index For Asia 2004 and 2013

Source: UNCTADstat

The development of Vietnam's liner connections has been highlighted by data from UNCTAD's linerconnectivity index In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container lineconnectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours

Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho ChiMinh's box throughput In 2013, we expect container volumes to have increased by 7.2% and over themedium term by an annual average of 8% For more information on data and analysis of Vietnam's shipping

sector, please see BMI's Vietnam Shipping Report.

Table: Maritime Freight, 2011-2018

Port of Ho Chi Minh

City (Saigon New)

Nominal

Imports, US$bn 112.40 118.98 137.19 155.11 173.89 194.64 219.24 242.54

- % change y-o-y 24.17 5.86 15.30 13.06 12.11 11.93 12.64 10.63 Exports, US$bn 106.84 124.43 140.42 160.57 182.06 205.40 232.45 261.80

- % change y-o-y 31.49 16.46 12.85 14.35 13.39 12.82 13.17 12.63 Total trade, US$bn 219.24 243.41 277.61 315.67 355.95 400.04 451.69 504.35

- % change y-o-y 27.63 11.03 14.05 13.71 12.76 12.39 12.91 11.66

Table: Key Trade Indicators, 2011-2018

Imports, US$mn 3,732 4,359 4,928 5,646 6,412 7,254 8,210 9,274

- % change y-o-y 39.98 16.79 13.06 14.56 13.56 13.15 13.17 12.96 Exports, US$mn 3,394 3,609 4,202 4,785 5,397 6,173 6,905 7,756

- % change y-o-y -1.23 6.31 16.43 13.88 12.78 14.39 11.86 12.31

Exports, US$mn 794 935 1,064 1,226 1,398 1,585 1,803 2,036

- % change y-o-y 33.63 17.79 13.72 15.21 14.09 13.32 13.76 12.94 Imports, US$mn 4,378 4,656 5,425 6,182 6,976 7,806 8,876 9,821

- % change y-o-y 32.66 6.35 16.52 13.95 12.83 11.90 13.72 10.64

Exports, US$mn 2,000 2,392 2,747 3,196 3,674 4,239 4,811 5,494

- % change y-o-y 23.25 19.56 14.87 16.32 14.96 15.37 13.49 14.20 Imports, US$mn 75,011 79,418 91,612 103,606 116,183 129,903 146,492 161,938

- % change y-o-y 23.89 5.88 15.35 13.09 12.14 11.81 12.77 10.54

Manufactured goods

Exports, US$mn 54,310 63,656 72,150 82,857 94,278 106,540 121,002 136,440

- % change y-o-y 33.09 17.21 13.34 14.84 13.78 13.01 13.57 12.76 Imports, US$mn 74,001 78,335 90,328 102,124 114,493 128,060 144,326 159,592

- % change y-o-y 24.18 5.86 15.31 13.06 12.11 11.85 12.70 10.58

Fuel

Exports, US$mn 17,073 19,771 22,223 25,314 28,610 32,280 36,370 41,043

- % change y-o-y 54.01 15.80 12.40 13.91 13.02 12.82 12.67 12.85 Imports, US$mn 14,085 14,936 17,291 19,607 22,035 24,721 27,900 30,946

- % change y-o-y 45.81 6.04 15.77 13.40 12.39 12.19 12.86 10.92

e/f = BMI estimate/forecast Source: UNCTAD, BMI

Table: Top Import Destinations, 2004-2011, US$mn

China, Mainland, US$mn 4,595 5,900 7,391 12,710 15,974 16,441 20,019 24,594 China, Mainland, US$mn, % of

total 14.37 16.05 16.46 20.25 19.79 23.50 24.01 23.53 Korea, Republic Of, US$mn 3,359 3,594 3,908 5,340 7,255 6,976 9,761 13,176 Korea, Republic Of, US$mn, % of

total 10.51 9.78 8.71 8.51 8.99 9.97 11.71 12.61 Japan, US$mn 3,553 4,074 4,702 6,189 8,240 7,468 9,016 10,400 Japan, US$mn, % of total 11.11 11.08 10.47 9.86 10.21 10.68 10.82 9.95 Singapore, US$mn 3,618 4,482 6,274 7,614 9,378 4,248 4,101 6,391 Singapore, US$mn, % of total 11.32 12.19 13.98 12.13 11.62 6.07 4.92 6.11 Thailand, US$mn 1,859 2,374 3,034 3,744 4,906 4,514 5,602 6,384 Thailand, US$mn, % of total 5.81 6.46 6.76 5.97 6.08 6.45 6.72 6.11 TOTAL 31,969 36,761 44,891 62,765 80,714 69,949 83,365 104,510

% from top 5 trade partners 53.28 55.69 56.49 56.80 56.75 56.75 58.24 58.36

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

Table: Top Export Destinations, 2004-2011, US$mn

United States, US$mn 5,025 5,924 7,845 10,105 11,887 11,356 14,238 16,928 United States, US$mn, % of total 18.97 18.26 19.70 20.81 18.96 19.85 20.39 18.23 China, Mainland, US$mn 2,899 3,228 3,243 3,646 4,850 4,909 7,309 11,125 China, Mainland, US$mn, % of

total 10.95 9.95 8.14 7.51 7.74 8.58 10.47 11.98 Japan, US$mn 3,542 4,340 5,240 6,090 8,468 6,292 7,728 10,781

Top Export Destinations, 2004-2011, US$mn - Continued

% from top 5 trade partners 49.78 47.11 46.85 47.33 46.45 46.42 49.82 50.56

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

Market Overview

Signs of Strong Momentum Abound

We have witnessed some highly positive data at the time of writing that indicate strong momentum forgrowth over the coming months, and potentially into 2014 We highlight the rebound in manufacturingproduction activity, with the HSBC Purchasing Managers' Index (PMI) recording a robust 51.5 reading inSeptember, the strongest reading since April 2011 (see 'PMI Surprises To The Upside, VNI Testing

Resistance', October 3 2013) More importantly, foreign direct investment (FDI) inflows into the countryhave accelerated significantly in recent months and are expected to surpass the government's full-year target

of US$13bn - usually an indication of improving business sentiment, and a precursor for an acceleration inprivate sector investment We believe that the positive ripple effects from the factors above will serve asstrong tailwinds for 2014 growth

Chinese and US demand remain integral factors influencing the performance of the Vietnamese freightpicture over the mid term In terms of the former, the import picture was slightly stronger in September,with imports growing by 7.4% y-o-y versus expectations of 7.0% growth Oil imports hit an all-time high in

a signal that domestic demand is bouncing back That said, as we have previously argued, it seems asthough the main growth driver continues to be unsustainable infrastructure and housing-related spending,which we believe will begin to fade as we head into 2014 While we recently become more upbeat about onthe direction of the yuan, essentially calling for stability as opposed to weakness, we expect relative

weakness versus the rest of the region We also believe that we could see a potentially rapid collapse in thecurrent account surplus over the coming quarters as past currency strength continues to support imports andhurt exports

In terms of the US, at the time of writing the country had only just sorted out the government shutdowndebacle Gallup's three-day tracking poll of economic confidence has collapsed in recent days, in line withour view that the first government shutdown in 17 years and contentious debates about the debt limit could

weigh heavily on the US economy (see 'Shutdown Illustrates Political Risks To Economy And Markets',

forecast for real GDP growth to average 2.4% per year from 2013-2018, up from 0.8% per year from2008-2012 The labour market recovery, while well under way, has further to go, meaning that modestincreases in job creation will prove to be a boon to spending over the medium term Consumer deleveragingcontinues, meaning that a future upswing in credit will also accelerate private consumption Furthermore,the cyclical components of GDP remain quite low as a share of the economy but have begun to turn higher,and improving trade dynamics will help reduce the drag of net exports on growth A marked uptick in thePMI manufacturing index starting in summer 2013 confirmed many of these trends had begun to take hold

(see 'PMI & Employment Data Point To Further Strength', August 5).

We believe secular improvements in the US external account picture will contribute to the stronger realGDP growth that we forecast over the medium term As US domestic energy production has increasedrapidly in the last few years, imports of oil and petroleum products have trended lower, a dynamic that willhelp narrow the country's substantial energy trade deficit and reduce a long-running drag on net exports.Our Oil & Gas team forecasts that domestic oil production will average 3.8% growth per year over the nextfive years and net oil imports will contract by an average of 6.5% per year over the same period

Domestically, over the longer term, imports will be boosted by Vietnam's young population, as youngerpopulations are generally more supportive of private consumption The country has a population of 90.7mn,

according to estimates for 2013 by BMI, 60% of which is under 35 We forecast that the population will be

94.1mn by 2017, with 57% under 35, and will rise to 97.7mn by 2022

Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in

terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a marketshare of around 75% of domestic cargo Few foreign companies are present in the market and there aremany small, family owned road freight companies operating informally

Investment Needed Across The Board

Vietnam Transport Infrastructure Rankings

* Rail infrastructure is measured out of 123 Source: Global Economic Forums Competitiveness Index

Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's

World Factbook BMI believes the sector requires substantial investment as the quality of Vietnam's road

infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142countries surveyed in its Global Competitiveness Report 2011-2012

Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC),

established in April 2003 as a state corporation operating railway transport and related services Vietnam'srail network totals 2,632km The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and527km of 1.435m gauge

Meanwhile, an airport development programme approved in 2009 is moving ahead as per the schedule,according to the Civil Aviation Authorities of Vietnam Vietnam is currently operating a state-owned airline

Vietnam Airlines as well as private airlines, namely Vietjet Air, Air Mekong and a foreign invested airline Jetstar Pacific Additionally, the government has also granted approval to the development of 25

airports

Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved Thistotal puts the country in a poor 97th place in comparison with other countries

Road Dominates Freight Mix

Vietnam Freight Transport Mode Breakdown (% of Total 2013e)

Source: General Statistics Office of Vietnam

Vietnam's dense river and canal network provides the country with a highly developed inland waterwaysystem of 17,702km This is the second largest sub-sector involved in domestic cargo transport, accountingfor 25-30% of total transport volumes

Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient

distribution Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited

depth at the entrance Some ports are located in big cities, thus making it difficult to connect with othermodes of transport for cargo transfer due to traffic congestion.

BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep

International Terminal (CMIT) since it opened in March 2011 as an important driver of growth In addition

to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011.

Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality

of Port Infrastructure As such, APMT's commitment to improving CMIT's facilities is an important stepboth for the terminal and the country's shipping sector as a whole

The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger

vessels to access the facility BMI notes that these works are badly needed, as we are seeing a growing

trend for shipping lines to order larger container vessels

The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping

sector State-owned shipbuilder Vinashin was bailed out in 2010 when its US$4.5bn debt threatened to

bring down the entire Vietnamese economy Widespread investment in the country's infrastructure isnecessary if Vietnam is to compete with regional peers

Investment And Development Outlook The Vietnamese transport sector requires vast levels of

investment The majority of infrastructure investment in Vietnam over the next 10 years will be in thetransport sphere, accounting for 65% by the end of 2021 Vietnam still suffers from a significant deficit intransportation infrastructure, and we believe the Vietnamese government will continue to develop thissector over the medium term This is reflected in our forecast for transport infrastructure industry value,which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016

The air freight sector will undoubtedly benefit from the planned construction work on a new passengerterminal at Long Thanh international airport Costing an estimated US$6.7bn, the work would also

incorporate a new runway, providing capacity for 100mn passengers a year A tender for investmentconsultancy work was under development as of December 2011

The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport

in order to develop infrastructure facilities, it was announced in April 2013 Under a plan submitted to thegovernment, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanhare to be cleared for establishing new residential and urban areas, industrial zones, research institutes andinternational service centres The airport, which was approved in 2011 at a cost of US$6.74bn, will be thecountry's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year afterbecoming operational in 2020

Meanwhile, Shipowners in Vietnam are expected to offload more vessels form their fleets by the close of

2013, according to the Hellenic Shipping News Firms planning to pare down their fleets include the

Vinashin Joint Stock Company and Northern Shipping Market analysts have previously warned that the

economic potential of the Vietnamese shipping market has been limited by an excessive focus on non-corebusinesses

Industry Trends And Developments

Maritime

Vinashinlines Completes Sale Of 90% Of Fleet

Vietnamese shipping company Vinashinlines has announced that 90% of its vessels, including Diamond

Way and Sea Eagle, have been sold The firm added that a number of the carriers had been purchased for

prices above their original valuation, Hellenic Shipping News reported in early October 2013

Vinashinlines' bankrupt parent company Vinalines has revealed plans to reduce it operations, after reaching

agreements with crediting organisations and assessing industry demand

Berths At Cai Mep-Thi Vai Up For Lease

Two berths at Vietnam's first state-built seaport, the Cai Mep-Thi Vai international port in Ba RiaVung Tauprovince, are set to be leased for 30 years, according to official sources The Vietnam Ports Association hasset the annual price at US$219.5mn for Cai Mep and US$130.5mn for the Thi Vai terminal

The search for qualified operators was under way at the berths built with help from the Japan OfficialDevelopment Assistance programme as of August 2013 and Le Tuan Anh, head of international cooperation

at the Vietnam Marine Administration, explained: 'This is the first time a state-invested infrastructureproject has been put up for a 30-year lease.'

Meanwhile, the director of the administration, Nguyen Nhat, said: 'This is a solution to help the state tomore quickly recoup its investment capital Operators that offer the highest price and have the best businessplans will win the tender.'

Multimodal

has expanded its presence in Vietnam with the establishment of new offices in Hanoi and Haiphong,

With the extended presence, the company aims to improve its services in the country, offering as it doesmore than 20 direct export services from Vietnam to countries such as the USA, Singapore and Hong Kong.Lee added: 'By expanding our global coverage through extending our presence in Vietnam, we are able tooffer our customers greater visibility over a more seamless connection of our Vanguard-to-Vanguardnetwork.'

Air

Airport Clears Cargolux 747-8 Operations

The first Boeing 747-8 freighter flight has been operated by Luxembourg-based cargo airline Cargolux atTan Son Nhat International Airport in Ho Chi Minh City, Vietnam it was reported at the end of July 2013.The move comes after the aircraft secured certification from the airport The first-ever Boeing 747-8freighter revenue flight was operated by the airline to Hanoi's Noi Bai International Airport in March,thereby making this destination the 100th 747-8 certified airport worldwide Meanwhile, Cargolux has alsomanaged to raise its air cargo services destined to Hanoi to three times on a weekly basis

Cargolux's interim president and chief executive Richard Forson said: 'A lot of production is moving toVietnam and the country shows great determination in boosting its trade by approving its airports forB747-8F operations We are happy to now be able to offer advanced B747-8 freighter services to allCargolux destinations in Vietnam, a market that is of significant commercial importance to us.'

Rang Dong Seeks Airport Construction Approval

Vietnam-based Rang Dong Group has filed a petition to secure approval for developing Phan Thiet airport,reported the Daily in August 2013, citing the company's chairman Nguyen Van Dong The company'sestimated cost of the project is VND1trn (US$50mn) Rang Dong would also consider a plan to purchaseairplanes to serve local and international flights in the future, provided the approval is secured, Dong added.The project, which has been planned for both civil aviation and military services, would be able to serve500,000 passengers annually by 2020, according to a zoning plan drafted by the Civil Aviation Authority ofVietnam

PPP Momentum On The Express But Not Without Road Blocks

On September 19 2013, the Vietnam Ministry of Transport (MOT) and the World Bank completed thefourth and final investor conference for the US$757mn Dau Giay-Phan Thiet expressway project Theconference was aimed at showcasing the 98.7km expressway to international investors interested in

becoming the project's secondary investor In July 2013, the Vietnamese government had selected

Vietnam-based Binh Minh Import-Export Production and Trade Company (Bitexco) as the primary developer of

the 4-lane project, with Bitexco providing up to 60% of total equity investment and the remaining 40% bythe secondary investor

Applications for a Request for Qualification are due on November 29 2013, with the project to be awarded

in the fourth quarter of 2014 under a 30-year Design, Build, Finance, Operate, Maintain and Transferconcession The project is expected to start construction in June 2015 and be ready for commercial

operations in January 2019

Potential Not In DoubtThe project has garnered significant private-sector interest, with over 100

participants attending the final conference at Hanoi We find this unsurprising as the project has significantscope to achieve an impressive return on investment The Dau Giay-Phan Thiet expressway will serve anarea that includes some of Vietnam's major economic regions - namely, Ho Chi Minh City, Dong Nai, BinhThuan and Vung Tau provinces According to documents from the project's lead transaction advisor,

CRISIL Infrastructure Advisory, 47% of industrial zones in Vietnam are located in the expressway's

proximity, while figures from the World Bank in 2011 showed that the area that will be served by theexpressway accounted for 44% of total foreign direct investment (FDI) into Vietnam

The Dau Giay-Phan Thiet expressway project is also the first road project and the largest infrastructureproject to be developed under a public-private partnership (PPP) format in Vietnam As such, it serves as areflection of the country's ability to implement infrastructure projects under a PPP framework and any