Vietnam freight transport report q3 2009

... of any information hereto contained Vietnam Freight Transport Report Q3 2009 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2009 CONTENTS Executive Summary ... leave Vietnam a second-rate economy for an indefinite period © Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2009 Business Environment Ratings The freight transport. .. International Ltd Page 23 Vietnam Freight Transport Report Q3 2009 Transport Outlook Table: Transport And Communications Data And Forecasts, 2005-2013 2005 2006e 2007e 2008e 2009f 2010f 2011f 2012f

Including 5-year industry forecasts

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Vietnam Freight Transport

Business Monitor International

© 2009 Business Monitor International

All rights reserved

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DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

Report Q3 2009

Including 5-year industry forecasts by BMI

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Publication date: June 2009

CONTENTS

Executive Summary 5

SWOT Analysis 6

Vietnam Road Haulage SWOT 6

Vietnam Political SWOT 6

Vietnam Economics SWOT 7

Vietnam Business Environment SWOT 7

Business Environment Ratings 8

Table: Asia Pacific Freight Business Environment Ratings 8

Freight Industry Ranking 9

Vietnam Logistics Performance Index (LPI) 9

Economics – Long-Term Risk 10

Politics – Long-Term Risk 10

Freight Transport Growth 10

Transport Infrastructure Growth 10

Regulatory Environment 11

Competitive Environment 11

Transport Intensity Index 11

Political Risk Summary 11

Economic Risk Summary 12

Business Environment Risk Summary 12

Legal Code/Corruption 12

Red Tape 13

Labour Force 13

Industry Trends And Developments 14

Road 14

Rail 15

Air 15

Sea 16

Pipelines 17

Industry Forecast Scenario 18

Quarterly Oil Products Price Outlook 18

Table: Oil Product Price Assumptions, Q408-Q409 (US$/bbl) 20

Table: Oil Product Price Forecasts, 2006-2013 (US$/bbl) 21

Macroeconomic Outlook 21

Table: Vietnam – Economic Activity, 2006-2013 23

Transport Outlook 24

Table: Transport And Communications Data And Forecasts, 2005-2013 24

Table: Freight Carried, Domestic, 2005-2013 26

Trade Environment 27

Trade Agreements 27

Tariffs/Non-Tariff Barriers 27

Table: Value Of Imports By Category, 2005-2013 (US$mn) 28

Table: Top Export Destinations, 2001-2006 (US$mn) 30

Table: Export Trade, 2002-2006 (% growth y-o-y) 31

Table: Import Trade, 2002-2005 (% growth y-o-y) 31

Table: Top Import Sources, 2001-2006 (US$mn) 32

Market Overview 33

Multi-Modal 33

Competitive Landscape: Multi-Modal 33

Road 35

Infrastructure 35

Competitive Landscape: Road 35

Rail 37

Infrastructure 37

Competitive Landscape: Rail 37

Air 38

Infrastructure 39

Competitive Landscape: Aviation 39

Vietnam Airlines 41

Water 44

Infrastructure 44

Competitive Landscape: Maritime 45

Vietnam Petroleum Transport Jsc (VIPCO) 48

Table: Vietnam Petroleum Transport Jsc (VIPCO) Financial Performance 49

Doan Xa Port 50

Table: Doan Xa Port Financial Performance 51

Competitive Landscape: Pipelines 52

Country Snapshot: Vietnam Demographic Data 53

Section 1: Population 53

53

Table: Demographic Indicators, 2005-2030 53

Table: Rural/Urban Breakdown, 2005-2030 54

Section 2: Education And Healthcare 54

Table: Education, 2002-2005 54

Table: Vital Statistics, 2005-2030 54

Section 3: Labour Market And Spending Power 55

Table: Employment Indicators, 1999-2004 55

Table: Consumer Expenditure, 2000-2012 (US$) 55

BMI Forecast Modelling 56

How We Generate Our Industry Forecasts 56

Transport Industry 56

Sources 57

Executive Summary

According to the Saigon Times Daily, Deputy Director Duong Van Hoa said that Vietnam National

Coal-Mineral Industries Group (Vinacomin) would build a US$250mn deepwater port at Khe Ga Cape, in Binh Thuan province Khe Ga Seaport will be utilised to import coal, and export aluminium and minerals The port will be able to handle ships up to 80,000 deadweight tonnes (DWT) The Ministry of Transport’s Vinamarine International Co-operation Department has stressed that the investments necessary in

Vietnam’s port sector are considerable if the sector is to keep up with the wider economy The key for Vietnam is to sustain investor interest in the sector Thus far, there has been little evidence that investors have lost interest in Vietnam’s infrastructure sector

Taking this and other developments such as the downturn in the global economy into consideration,

BMI’s newly released Vietnam Freight Transport Report concludes that shipping traffic will increase by

an annual average of 6.7% in 2009-2013, measured in tonnes per km A number of factors underpin this forecast One is the still-realistic prospect of a long, export-led boom in Vietnam, with annual GDP growth likely to average 6.1% in 2009-2013, only a little slower than the 7.8% rate achieved in the preceding five-year period Infrastructure plans are also ambitious, with many new ports under

development

Our overall outlook for the nascent freight transport industry across the different modes is bullish despite the recession Although the next two years will be tough, air freight will grow by an annual average of 7.6% over the next five years In road haulage, we have trimmed our forecast to take account of the economic slowdown, but we still see turnover running ahead of the general rate of economic expansion in Vietnam We see road freight growing by an annual average of 7.5% over the next five years, followed closely by pipeline throughput (7.0%), maritime freight (6.7%, as already mentioned) and rail (6.6%) Full World Trade Organization (WTO) membership, achieved in early 2007, can be seen as supportive of greater freight transport turnover relative to GDP across all modes, particularly so for shipping We now expect total freight carried growth across all modes, measured in million tonne-km (mntkm), to average 6.8% per annum in 2009-2013

Under BMI’s freight transport rating system, Vietnam achieves a composite score of 54.3 out of a

potential maximum of 100 Vietnam’s stronger points are freight growth, transport infrastructure growth

and the transport intensity index, which measures the dynamism of the country’s foreign trade BMI

views Vietnam as being weaker in the other four categories: economic and political long-term risks, and the country’s regulatory and competitive environment (corruption is a particular problem)

According to our latest estimates, the total value of transport and communications GDP will rise to US$6.6bn in nominal terms by 2013, representing 4.5% of Vietnam’s GDP

SWOT Analysis

Vietnam Road Haulage SWOT

Strengths ƒ Vietnam’s strong domestic growth rate coupled with its geography; a long country

stretching for thousands of kilometres on a north-south axis creates a need for distance freight haulage

long-Weaknesses ƒ The generally poor state of the road network Despite new highway construction, only

13.5% of the road network is considered to be in good condition, only 26% has two or more lanes and only 29% is tarred Construction of the second north-south highway may be a waste of resources given the pressing need for improvement of secondary roads

Opportunities ƒ The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies

Threats ƒ The attractiveness of other modes of freight transport, particularly inland waterways

and coastal shipping If progress towards a better-integrated national road network is too slow, freight growth will divert away from the trucking industry

Vietnam Political SWOT

Strengths ƒ The Communist Party government appears committed to the market-oriented reforms

necessary to double 2000’s GDP per capita by 2010, as targeted The one-party system is generally conducive to short-term political stability

ƒ Relations with the US are generally improving and Washington sees Hanoi as a potential geopolitical ally in South East Asia

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

ruling Communist Party

ƒ There is increasing (albeit still limited) public dissatisfaction with the leadership’s tight control over political dissent

Opportunities ƒ The government recognises the threat that corruption poses to its legitimacy and has

acted to clamp down on graft among party officials

ƒ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system

Threats ƒ Vietnamese dissidents are seeking external help, especially from the US This could

complicate Vietnam-US relations, with Washington having criticised Hanoi over its restrictions on religious freedom

ƒ 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 be unsustainable

Vietnam Economics SWOT

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

averaging growth of 8.0% a year

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

Weaknesses ƒ Vietnam suffers from substantial trade, current account and fiscal deficits, leaving the

economy vulnerable to external shocks The fiscal picture is clouded by considerable

‘off-the-books’ spending

ƒ The heavily managed and weak dong currency reduces incentives to improve the quality of exports, and also serves to keep import costs high, thus contributing to inflationary pressures

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

while making Vietnamese enterprises stronger through increased competition

ƒ The government will continue to move forward with market reforms, including privatisation of the state-owned enterprises sector and liberalising the banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s

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

upbeat view of Vietnam If the government fails to curb inflation, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country

attractive to foreign investors

ƒ 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 and beyond

Weaknesses ƒ 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

ƒ Vietnam remains one of the world’s most corrupt countries Its score in Transparency

International’s 2008 Corruption Perceptions Index was 2.7, lower than the regional

average of 4.6

Opportunities ƒ Vietnam is attracting investment from key Asian economies, such as Japan, South

Korea and Taiwan This offers possibility of transfer of high-tech skills and know-how

ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

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

which will remain a concern

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

Business Environment Ratings

The freight transport sector in the Asia Pacific region offers one of the most attractive business

environments for the industry worldwide There are various reasons for this First, the region offers a powerful combination of future growth and economies of scale It contains arguably the two most

significant of the four BRIC (Brazil, Russia, India and China) economies, which, it is argued, are the powerhouses of future global growth China and India combine vast geographical size, large populations, globally competitive labour costs and as yet untapped infrastructure potential To this must be added the

‘third BRIC’, Russia, which, although outside the region, has critically important trade and transport links

to Asia (such as crude oil exports to China) Second, at a ‘big picture’ level, most of the regional power centres are committed to reasonably pragmatic and relatively stable, market-based policies Countries that

in the past were either fervently communist (China, Vietnam) or capitalist (Malaysia, Taiwan) share a much wider non-ideological common ground focused on how to achieve a sustainable rise in living standards This is not to say, of course, that the area is free of tensions and flash points (North Korea, China-Japan, India-Pakistan to name just a few)

Table: Asia Pacific Freight Business Environment Ratings

Limits of potential returns Risks to realisation of returns

Freight transport

market

Country structure Limits

Market risks

Country risk Risks

Overall rating

Regional ranking

Strong freight transport growth rates are combined with a very encouraging infrastructure investment picture across most of the region

By mode, road haulage will grow as road infrastructure and vehicle density is extended and as the shift to smaller/higher value loads continues Rail freight will benefit from long-distance economies of scale, whether from the opening up of the Australian hinterland or big projects such as the new Silk Road route Shipping is being lifted by the surge in trans-Pacific commodity and manufacturers’ trade routes, while air freight is growing on the back of liberalisation and the budget airline boom While the freight transport industry in the region suffers from patchy regulation and in some areas there are ongoing issues with corruption and cronyism, it is on the whole much more open and competitive than in the past A strong positive factor is the dynamic and outward facing role played by foreign trade

Freight Industry Ranking

Our overall freight transport rating for Vietnam stands at 54.3 (out of a theoretical maximum score of 100) This is composed of a score of 54.6 for potential returns (reflecting factors such as market size, growth and the competitive environment), which gets a 70% weighting, and a lower score of 53.5 for risks to those returns (reflecting factors such as market orientation, regulatory environment and other country-risk issues), which gets a 30% weighting

Vietnam Logistics Performance Index (LPI)

In 2007, the World Bank launched its Logistics Performance Index (LPI), intended as ‘the first in-depth cross-country assessment of the logistics gap among countries.’ The LPI was calculated on a five-point scale and based on survey responses from over 800 logistics professionals Countries were given an aggregate LPI score, which was in turn made up of seven sub-categories, covering criteria such as the quality of customs, infrastructure and international shipments; logistics competence; tracking and tracing; domestic logistics costs; and timeliness

In the 2007 survey, Vietnam was ranked 53rd in the world with an LPI score of 2.9 For comparison with the major OECD economies, the Netherlands was ranked 2nd in the world with an LPI of 4.2; followed

by Germany (3rd with an LPI of 4.1), the UK (9th, LPI of 4.0) and the US (14th, LPI of 3.8) In

comparison with other Asian economies, Singapore was the world number one with an LPI score of 4.2, followed by Australia (17th, LPI of 3.8) and Taiwan (21st, LPI of 3.6) Then came South Korea (25th, LPI of 3.5), Malaysia (27th, LPI of 3.5), China (30th, LPI of 3.3), Thailand (31st, LPI of 3.3) and

Indonesia (43rd, LPI of 3.0) Vietnam was therefore close to the bottom end of the regional LPI ranking, ahead of Papua New Guinea (95th, LPI of 2.4) and Laos (117th, LPI of 2.3) In terms of the different components of the index, Vietnam’s best performing areas, ranked in order, were domestic logistics costs, timeliness, international shipments, and tracking and tracing Weaker areas in descending order were customs, logistics competence, and infrastructure

Economics – Long-Term Risk

We foresee both economic and political risks rising in 2009 as global demand for Vietnam’s

manufactured exports falls and factories lay off workers The global recession will shake the foundations

of the Vietnamese growth story, as it has been reliant on strong demand for manufactured products from G3 markets With demand from developed markets slumping, Vietnam will be heavily reliant on

remittances and FDI inflows to stimulate domestic demand and keep GDP growth in positive territory

We are expecting growth of 2.9% in 2009, rising to 5.0% in 2010 as an improving world economy and a weaker dong bolster exports With Prime Minister Nguyen Tan Dung’s economic reform agenda intact, although currently on the back burner, we expect GDP growth to return to around 8% from 2011

onwards

Vietnam is in line to take a hard hit in 2009 as exports to G3 economies contract sharply We have revised down our GDP growth forecast for 2009 from 5.0% to 2.9% as the construction and manufacturing sectors contract With domestic demand far from sufficient to fill the gap and Hanoi lacking the

wherewithal to implement any sizeable fiscal stimulus, we believe the government will opt for the easy way out by devaluing the dong to increase the price competitiveness of Vietnamese exporters We are currently expecting an 8.0% devaluation of the currency in 2009 to VND19,000/US$ by year-end, which should help growth recover to 5.0% in 2010

Politics – Long-Term Risk

While public discontent with the government is likely to rise as the economy slows rapidly, we see no major risk of mass protests or political turmoil This is because the ‘Doi Moi’ economic reform agenda championed by the Communist Party of Vietnam since 1986 has brought considerable material gains for the wide majority of the population and diminished the support for pro-democracy activists However, the government will not take any risks, and has imposed tighter curbs on journalists and stepped up its

surveillance of online media On the foreign policy front, we expect a continued rapprochement with the

US under the new Obama administration, while intensified competition between Chinese and Vietnamese manufacturers may cause some tension with Beijing

Freight Transport Growth

Vietnam’s freight transport traffic, measured in mntkm, rose by an annual average of 10.7% in 2004-2008 and, according to our projections, will decelerate to an annual average of 6.8% in 2009-2013

Transport Infrastructure Growth

According to official information, there is a wide range of transport sector investment projects in the pipeline, across road, rail, air and sea Work is under way to develop the Mekong basin area, and new

seaports are planned While there is no doubt that Vietnam’s transport infrastructure is expanding, our rating for this category is constrained by poor planning and limited project management experience

Regulatory Environment

Vietnam is moving towards a full market economy, but is doing so at a relatively slow pace, given that the reform process started nearly two decades ago The country gained access to the WTO in 2007 In the transport sector, state-owned enterprises (SOEs) continue to be dominant in many areas There is not yet a clear legal framework for the protection of passenger and freight customer rights

Competitive Environment

Freight transport competition remains limited, with SOEs dominating key transport modes There are few foreign entrants, although we expect more to arrive during the forecast period To be able to operate in the country, significant negotiations and procedures are required Although the government favours attracting more foreign direct investment (FDI), the local environment is not yet fully supportive of competitive markets

Transport Intensity Index

This index is derived by calculating the average annual growth rate for total trade (imports plus exports) over a 10-year period running from 2004 through to 2013 As such, it is a mix of actual performance (the five-year 2004-2008 period) and projected performance (2009-2013) In Vietnam’s case, actual average annual trade growth in 2004-2008 was a very strong 31.3%, which in our projections will ease

substantially to 10.1% per annum in 2009-2013 The annual average across the 10 years as a whole is 20.9%

Political Risk Summary

State Moves To Restrict Blogging Sector

Five months after a group of internet companies including Google, Microsoft and Yahoo agreed to uphold privacy and freedom of expression in repressive markets, they are being challenged by Vietnamese-American activists for their failure to do so As the number of Vietnamese internet users nears a quarter of the population (according to estimates by the International Telecommunications Union), the activists claim that the Vietnamese state is stepping up efforts to curb the expansion the blogging sector Such claims are also supported by a cohort of twelve members of US congress, who wrote a letter to the CEOs

of the companies in question demanding that they respect privacy rights The dispute underscores the Vietnamese state’s strict control over the media, whose activities it fears can be unnecessarily

destabilising

Economic Risk Summary

PM Pressures Central Bank To Lower Rates

In a report released on April 1, Prime Minister Nguyen Tan Dung requested that the State Bank of

Vietnam (SBV) reconsider its key lending rates to bring them into line with inflation expectations (his own) of around 6% Although inflation has come down to around 11.25% year-on-year (y-o-y) in March since peaking at over 28% in August 2008, we have repeatedly warned of lingering price pressures, and the inherent risks of the rapid monetary easing effected by the SBV in H208 could see inflation

entrenched in the double digits, thereby creating even greater pressure for a devaluation of the dong

Business Environment Risk Summary

The sharp deterioration in economic conditions both domestically and globally has prompted the

Vietnamese government to shift its attention from economic reforms to devising measures to support growth in the short term in the face of slumping global demand Only 73 out of a planned 262 SOEs were equitised in 2008 (i.e transformed into shareholder-owned companies) and initial public offerings of SOEs like Bao Viet have been unsuccessful, largely due to the high pricing of shares While continued delays in the equitisation process are expected, we are not predicting any shift in the government’s

economic reform agenda, which will continue to support economic activity

Efforts Under Way To Improve Capital Markets

According to an announcement made on March 31, the International Finance Corporation (IFC) signed a memorandum of understanding with the Hanoi Securities Trading Center (HASTC) to work jointly on improving dissemination of information and market transparency Their efforts will be focused on the domestic bond market as well as UPCOM, a newly organised equity market for unlisted public

companies A statement by Nguyen Phuong Quynh Trang, an official from the IFC, emphasised that one

of the main objectives of the project was to grant Vietnamese companies greater access to domestic

Vietnam has a bad record on transparency The state was ranked 121st (out of 180) in Transparency

International’s Corruption Perceptions Index in 2008, with a score of 2.7

Red Tape

Vietnam compares favourably with its regional peers in terms of bureaucracy, and about the same as developed states According to World Bank data, 28 separate procedures are required to enforce a

contract, which takes an average of 120 days The East Asia and Pacific average is 24 and 193,

respectively, while the process involves 18 procedures and 213 days in high-income OECD states

Conversely, World Bank data state that it takes 11 procedures and 56 days to start a business in Vietnam, compared with an average of 9 and 61 in East Asia and Pacific and 6 and 25 in high-income OECD states

Labour Force

Size

Reliable data on the labour force in Vietnam are difficult to find However, it is estimated that the

working age population in the country is 42.1mn, approximately 61% of the total An estimated 10.2mn live in urban areas, with the remaining 31.9mn in rural areas ‘Technically skilled workers’ form an estimated force of 8.84mn, accounting for 20.99% of the total The south-east region has the highest rate

of skilled workers (30.13%), followed by the Red River delta (27.99%) and Coastal South Central

(20.85%) The lowest rate was reported in the north-west region

Education

The adult male illiteracy rate was estimated at 4% for males and 9% for females in 2000, with the youth illiteracy rate 3% for both genders

Regulation

The Vietnam labour force is comparatively heavily regulated, according to World Bank’s Employment

Laws Index Its score of 56 indicates that regulations are tighter than the East Asia and Pacific average,

and a bit tighter than OECD high-income states Disaggregating the data, the regulations for hiring workers are looser than those for firing workers, with scores of 43 and 48, respectively, the combination

of which suggests a more regulated workforce than regional peers

Issues

Fears of growing unemployment and rising social unrest in the cities is slowing down the reform of SOEs The SOEs are an inefficient and loss-making legacy of a different era, and would have gone bankrupt a long time ago if the market had had its way However, the fear of creating mass

unemployment in the cities by laying off surplus labour has prevented meaningful reform As a result, the SOEs continue to crowd out the more productive private sector, while adding to the government’s fiscal woes by forcing the state to absorb their losses

Industry Trends And Developments

According to a report by Bloomberg news agency in March, the Asian Development Bank (ADB)’s country director for Vietnam, Ayumi Konishi, had stated that the country needed to focus more on

infrastructure projects to ensure that its plan to build power plants, ports, roads and railways during the current tight economic period stayed on path He stated that funds were available from governments, international agencies and the private sector Vietnam’s construction and infrastructure industry had a difficult year in 2008 The first half of the year saw record high raw material prices that hindered the

timely development of projects, causing construction cost overruns and delays According to BMI’s

forecasts, the value of the construction – and by extension infrastructure – industry in Vietnam will keep rising quite strongly in the medium term, registering real growth of 12.3% between 2009 and 2013 This year will be as difficult for Vietnam as it will be for other countries, but in Vietnam’s case we view this as

a mere slowdown (indeed, many countries would envy Vietnam’s 5% forecast industry value growth for 2009), as the county has significant projects in the pipeline for building and upgrading infrastructure that

we believe will sustain the industry

Road

According to Vietnam’s VoV News, in early April the ADB and the French Development Agency (AFD)

offered a financial grant of almost US$7mn to assist Vietnam in upgrading infrastructure facilities in three districts The fund will be utilised to build 41km of rural road and for irrigation projects The projects are anticipated to commence in Q409 Vietnam’s road network is particularly underdeveloped and causes serious city congestion, as well as adding to road accident figures It is vital for the country to improve its transport infrastructure in order to realise its growth potential Vietnam’s Ministry of Transport and Communications disclosed estimates that it will require close to US$60bn up to 2020 to fund road

infrastructure projects

South Korea’s Posco Engineering & Construction (Posco EC) and state-run VN Express signed a

US$150mn contract for the construction of part of a highway in northern Vietnam Under the deal, for 40 months Posco EC will construct a 27km section of the 224km highway connecting the cities of Lao Cai and Noi Bai Infrastructure investments have seen a rapid rise since the Vietnamese government began efforts to attract FDI to boost economic development Vietnam is one of Asia’s fastest-growing emerging markets – largely due to the government’s policies of economic liberalisation - and therefore has attracted the attention of several international companies The country’s poor infrastructure has always been a hindrance for investors, and the government is making efforts to overhaul its roads, railways, airports and ports to address the challenges Vietnam is looking to build 5,900km of highways over the next decade The World Bank estimates that it will cost US$9mn to build 1km of highway in Vietnam; the total

funding required for the project is estimated at around US$53bn

The ADB will offer a US$410mn loan to Vietnam to build a 51km expressway, which will link Ho Chi Minh City, Vietnam’s economic hub, with Dong Nai province in the country’s southern region The project requires a total investment of US$932mn The Japan International Co-operation Agency and the Vietnam Expressway will offer the remaining investment required for the project By improving transport

infrastructure, BMI believes that Vietnam can unlock its growth potential and become a key player in

South East Asia

Deputy Prime Minister Nguyen Sinh Hung gave orders in March to launch package No.3 of the Nhat Tan

Bridge project in Hanoi’s Dong Anh District, as reported by Saigon Times Daily Project Management

Unit 85, which lists the construction ministry as the investor, has stated that the package will be

completed in 34 months The package aims to build over 4,600m of the road, as well as two interchanges for the bridge project The Nhat Tan Bridge project is expected to be the longest multi-span cable-stayed bridge in Vietnam Once completed, Nhat Tan Bridge will help improve the flow of traffic in the capital city and northern provinces It will also help to serve economic development in the city’s industrial zones

of Bac Thang Long-Thanh Tri, Dong Anh-Co Loa and Gia Lam-Sai Dong-Yen Vien Vietnam is trying to invest in construction of infrastructure to keep up with a growing economy

Rail

The Vietnamese finance ministry will advance VND499bn (US$0.03bn) to Vietnam Railway Corp, as

reported by Intellasia The fund will be used to accelerate work on some significant and urgent projects The railway corporation declared that it would begin construction work on five of its vital projects, valued

at VND11.6trn (US$0.67bn), in 2009 The corporation plans to invest in the Hanoi-Lao Cai railway, the signal information system of Hanoi-Vinh railway Phase 2, Vinh-Nha Trang railway line, and Thong Nhat railway including 44 bridges

BMI View: In general, Vietnam’s transport infrastructure is set to receive investments in 2009 The

country is shifting its economic track in 2009, moving away from fighting inflation to attempting to stimulate growth Investments into the construction industry, in an attempt to stimulate growth and provide employment, have been adopted as a method to deal with the global economic crisis in many emerging and developed countries across the world

Air

In May it was reported that the Vietnamese government had given approval to a master zoning plan, drawn up by the Ministry of Transport, which proposes the development of 10 international airports across the nation, according to Asia Pulse The plan proposes both the expansion of the current airports and construction of new airports Under the plan, Noi Bai International Airport will be upgraded to handle larger aircraft and more passengers The government has given approval for expansion of Cam Ranh and

Chu Lai in the central region Furthermore, Tan Son Nhat International Airport in Ho Chi Minh City will

be upgraded and expanded for more passengers, cargo and aircraft Phu Quoc International Airport is under construction and is expected to open in 2012 Long Thanh International Airport, the country’s largest airport, will be built in Dong Nai Province Can Tho International Airport is constructing a

terminal and is expected to start operation in 2010

Sea

Ho Chi Minh City-based Trai Thien Sea Transport Investment and Development acquired a licence to

build a deepwater international trans-shipment port in Con Dao island, situated in Ba Ria Vung Tau province The total cost for the port project is estimated at US$300mn The new Con Dao port will be extended to 300 hectares to expand its capacity to handle heavy tonnage ships The total load capacity will be 10mn tonnes every year

According to the Saigon Times Daily, citing Bloomberg, Deputy Director Duong Van Hoa said that

Vinacomin would build a US$250mn deepwater port at Khe Ga Cape, in Binh Thuan province Khe Ga Seaport will be utilised to import coal, and export aluminium and minerals The port will be able to handle ships up to 80,000DWT The Ministry of Transport’s Vinamarine International Co-operation Department has stressed that the investments necessary in Vietnam’s port sector are considerable if the sector is to keep up with the wider economy The key for Vietnam is to sustain the investor interest in the sector Thus far, there has been little evidence that investors have lost interest

According to Saigon Times Daily, as cited by Hellenic Shipping News, Dubai Ports World (DP World)’s

Saigon Premier Container Terminal is likely to be ready for operations in September 2009 The terminal

is being built in two phases at a cost of US$305mn It will have a capacity of 800,000 twenty-foot

equivalent units (TEUs) annually, which will increase to 1.5mn TEUs after the completion of second phase UAE-based DP World has become one of the world’s largest port operating companies Focusing

on the container business, the company currently owns 45 terminals and 13 new developments in 29 countries Its capacity stands at 54mn TEUs and is expected to increase to around 90mn TEUs by 2017, when new terminals are ready

According to PortStrategy, the government of Vietnam in early March invited proposals from foreign investors for the development of a new trans-shipment port in Van Phong Bay The biggest investor in the

project is Vietnam National Shipping Lines, but further funding is required The project was scheduled

to start in 2008, but was delayed by alternative plans, now scrapped, to construct a steel plant and a power

plant in the same area Cargonews Asia reports that the new International Trans-shipment Port of Van

Phong will have between 36 and 42 berths and the capacity to handle vessels of between 9,000 and 12,000 TEUs The Ministry of Transport’s Vinamarine International Co-operation Department has

stressed that the country’s port sector requires significant investment if it is to keep pace with wider economic development

Pipelines

Vietnam oil and gas group PetroVietnam was preparing the construction of the US$1bn block B-O Mon

gas pipeline in southern Can Tho City for Q409 The 406km gas pipeline comprises a 246km offshore pipeline and a 160km onshore pipeline The pipeline will link more than five Mekong Delta localities, including Can Tho City, Hau Giang, Kien Giang, Bac Lieu and Ca Mau provinces The pipeline project is expected to be operational in July 2011 It will transmit about 18.3mn cubic metres (mcm) of gas per day

or, equivalently, 20bn cubic metres (bcm) of gas per year Vietnam’s gas consumption should move in line with rising gas supply Pipelines are being built with surplus capacity to accommodate new

discoveries and rising consumption later in the decade Overall natural gas demand is forecast to rise from

an estimated 10bcm in 2008 to 21bcm by 2013, with the proportion used in power generation set to reach around 40% by 2013, rising from 34% in 2008 We are forecasting gas use in power generation climbing from an estimated 3.4bcm in 2008 to 8.4bcm in 2013, with gas-fired power generation climbing from 24.9twh to 52.5twh

Industry Forecast Scenario

Quarterly Oil Products Price Outlook

Preparing For The Big Squeeze

Weaker demand for diesel in road transport use, gas oil for manufacturing and industrial applications, and falling jet fuel consumption have acted in concert to pull the rug from under the middle distillates market Gasoline prices and margins had, earlier in the first quarter, made some progress Since then, refiners have again struggled There is no clear pattern yet emerging for the oil products sector but, based on OPEC’s efforts to limit crude supply, the downstream segment may be in for a tough time if crude prices rally but product demand remains weak This is a recipe for ongoing margin weakness and refiners are preparing themselves for the big squeeze The start-up of new refineries in Asia and the Middle East will only exacerbate the situation by providing an ill-timed boost to global capacity that will lead to reduced plant utilisation rates if demand remains weak

Lower fuel prices may stimulate demand in certain markets but the trend towards higher fuels taxation and the overhaul of subsidies in some developing countries mean that a near-term rebound is far from certain In spite of some evidence that US drivers are migrating back to less fuel-efficient vehicles, the major shifts in patterns of consumption resulting from vehicle ownership changes are unlikely to be reversed simply because pump prices are temporarily lower The move in Europe away from gasoline and towards diesel is expected to continue for a while longer, in spite of steep price differentials However, advances in small petrol engine technology may mean these more economical units bring to an end the love affair with diesel

Over the longer term, expansion of the oil refining system is still needed, particularly as market growth is likely to accelerate as the world pulls clear of recession/depression However, refining margins are likely

to be under pressure for many months Coupled with weaker upstream economics and modest profits in fuels retailing, the downturn in refining profitability means that both international and national oil

companies may re-examine investment plans The downstream oils market needs to see continued high spending in new crude distillation capacity, improved plant upgrading capability and better storage and distribution logistics There will inevitably be reduced capital expenditure if industry earnings and cash flow remain under pressure This can only result in the market tightening once again as demand picks up – with a return to extreme price volatility and generally higher fuel prices

Moving Markets

The continued weakness of refined product prices has played into the hands of those countries wishing to revise or abandon regulated systems Many are seizing the opportunity and making sweeping changes that should bring prices more closely in line with the wider market This will have an appreciable impact on

demand patterns over the medium to longer term, but the likely effects are difficult to assess at such an early stage India’s fuel pricing policies are a case in point, where political issues are entwined with overall energy strategy In early February 2009, the government decided to deregulate the price of

gasoline, gasoil, liquefied petroleum gas (LPG) and kerosene, reflecting lower international oil prices A month later, it decided to defer the move, with the May elections providing the explanation Based on prevailing international prices, the liberalisation of the domestic products market would arguably result in another fall in retail prices, which are already down some 20% since December 2008 There is a risk, however, that more recent crude price strength may signal higher fuels prices to come This could boost pump prices at an unfortunate time for some politicians The government coalition, led currently by the Congress Party, which has been re-elected, will continue with the liberalisation policy

In March 2009 China surprised the market with a 3-5% increase in gasoline and diesel prices, its first in three months This effectively reversed a cut made in January and sent out a clear signal that Beijing wants to move pump prices in tandem with global markets The National Development and Reform Commission (NDRC) announced a 4.6% increase for gasoline and 3.2% for diesel, which was a reflection

of steady gasoline demand backed by strong car sales against reduced diesel use Diesel in China now costs almost the same as it does in Singapore, and gasoline has closed the gap to just 20% below the

Singaporean price, according to a report from Reuters In mid-2008, Chinese diesel prices were half the

level in Singapore

Revised Forecasts

In Q109 BMI estimates that the global wholesale price for premium unleaded gasoline was US$50.63 per

barrel (bbl) This compares with US$56.37 in Q408 and during the two quarters the price has ranged from

a monthly low of US$40.38 in December 2008 to the February 2009 US$53.29/bbl Gasoline prices in Q109 were down from US$102.15/bbl in Q108 (-50.4%) For Q209, we now forecast an average global gasoline price of US$55.78/bbl, a rise of 10.2% over the previous quarter, but a year-on-year (y-o-y) decline of more than 56% from the impressive US$127.92/bbl seen a year earlier For the whole of 2009,

the BMI assumption for gasoline is an average US$56.89/bbl, with the price peaking at a forecast

monthly average of US$64.75 in December 2009 The overall y-o-y fall in 2009 gasoline prices is put at 44.1%

In Q109 gasoil averaged US$56.83/bbl, based on a composite global price This represents a y-o-y fall of 51.0%, illustrating a slight relative weakening of diesel versus gasoline For Q209 our revised forecast is for global gasoil at an average US$66.81, representing a quarter-on-quarter (q-o-q) increase of 17.6% –

but a 56.4% y-o-y decline For 2009 as a whole, the BMI forecast is for an average price of

US$69.35/bbl, assuming a monthly high of US$94.48/bbl in December The full-year outturn is a 42.8% fall from the 2008 level

Jet prices averaged US$58.93/bbl in Q109, using the composite for New York, Singapore and Rotterdam The annual decrease was 50.4%, with jet matching the decline in gasoline prices The monthly low during the previous six months was US$60.34 in December 2008, with the price reaching US$61.83/bbl in January 2009 Volatility has been low in the jet market when compared with gasoline and diesel In Q209,

we are assuming an average global jet price of US$68.22, a q-o-q rise of 15.8% and a y-o-y fall of 56.4% For 2009, the monthly average price is forecast to range from US$53.75 in February to US$96.76/bbl in December, proving an annual level of US$71.78/bbl This compares with US$124.95/bbl in 2008

In 2008 naphtha was the weakest performer among the major refined products, gaining 31% to

US$87.40/bbl during 2008 In Q109, naphtha averaged an estimated US$42.91, compared with

US$93.70/bbl in Q108 and US$38.37 in Q408 The 2009 average naphtha price is put by BMI at

US$46.40/bbl, down 47% from the 2008 level

Table: Oil Product Price Assumptions, Q408-Q409 (US$/bbl)

e/f = estimate/forecast Source: BMI

Looking further ahead, we see gasoline prices recovering to US$63.45/bbl in 2010, rising further to US$71.11/bbl in 2011 and stabilising at around US$76.58/bbl from 2012 Gasoil is expected to rebound

to US$77.35 in 2010, reaching a plateau of US$93.35/bbl from 2012 The price of jet is forecast to average US$80.06/bbl in 2010 and US$89.72 in 2011, before levelling out at US$96.62/bbl from 2012

Table: Oil Product Price Forecasts, 2006-2013 (US$/bbl)

BMI’s 2009 Growth Forecast Cut To 2.9%

We have, in view of the rapidly deteriorating external outlook in Q109, downgraded our 2009 GDP growth forecast for Vietnam from 5.0% to 2.9% We are simultaneously bringing down our 2010 forecast from 7.0% to 5.0% on the back of our expectations of a more prolonged downturn in global demand

Vietnam looks set to take a hit this year as much of the developed world drops into recession, shaking the foundations of Hanoi’s export-focused growth model GDP growth slowed to 6.2% in 2008, the slowest pace since the 4.8% growth rate recorded in 1999, after growing at a 7.8% and above during the

preceding four years While we are confident Vietnam’s macroeconomic fundamentals will help it reach growth levels of around 8% again, we are expecting below-trend growth in the next few years Indeed, we have lowered our GDP growth forecast for 2009 from 5.0% to 2.9% and our growth projection for 2010 from 7.0% to 5.0% as the global economic downturn looks set to be more prolonged than expected Growth in 2008 was largely held up by the resilience of the export sector in the face of a domestic

economy plagued by spiralling inflation and fiscal and monetary tightening However, as for many other

Asian countries, H208 proved to be a quarter of reckoning for Vietnamese exporters, with exports falling from US$6.6bn in July to US$3.8bn in December While the sharp decline was largely due to the

collapsing oil price, which saw crude oil exports drop from US$1.24bn in July to US$0.42bn in

December, the final months of 2008 also saw a marked decline in the exports of electronics, garments and textile products, which now form the mainstay of Vietnam’s manufacturing sector

This decline turned into a slump in January, with the exports of textiles decreasing by 33.2% y-o-y to US$550mn, footwear exports falling 26.0% to US$350mn and overseas shipments dropping 34.4% to US$120mn We are expecting a further decrease in exports on the back of the adverse demand picture in key export markets such as the US, Japan and the EU, which we are currently forecasting to contract by 2.3%, 3.1% and 2.5%, respectively, in 2009 Moreover, the already dire demand outlook will in

Vietnam’s case be exacerbated by the expiration of preferential import tariffs on Vietnamese footwear exports to the EU under the General System of Preferences (GSP), while tariffs on Chinese garment products exported to the US will be removed Anecdotal evidence suggests export orders in the important textile sector have slumped by 20-40% going into Q109, with customers demanding 20-30% price cuts

With export orders slumping and domestic demand weak, garment manufacturers are now cutting their workforces or closing shop entirely We are currently expecting exports to decrease by 19.5% in 2009 to US$50.9bn, with falling prices for key commodities such as oil and coffee and the gradual initiation of the Dung Quat oil refinery, which will reduce the volume of crude oil exported, adding to the contraction

of manufactured exports Growth in the manufacturing sector fell to 6.43% y-o-y in Q408, a near halving compared with the 11.85% y-o-y expansion recorded in Q308

We are expecting worse to come in 2009, as the slump in external demand and intensified competition from Chinese competitors will bring a cull of less efficient producers in 2009 This process is already under way, judging from the sharp drop in industrial production in January 2009 The industrial output measure fell by 8.6% month-on-month (m-o-m) in January, bringing the y-o-y measure to -4.4% after having posted double-digit figures since February 2005 We were previously expecting a sharp slowdown

in real growth in the manufacturing sector from 10.1% in 2008 to 1.9% in 2009 However, in light of the appalling trade and IP data for January, we have now revised down manufacturing growth to -5.0%, with the construction sector also expected to post negative growth (-2.0%) in spite of the government pushing for increased spending on infrastructure projects

With the manufacturing sector constituting roughly a quarter of GDP and the construction sector around 8-9%, the negative figures will put heavy pressure on the remaining sectors of the economy to maintain positive overall growth We are expecting the agricultural sector to post real growth of 3.0% in 2009 as lower fuel and fertiliser prices reduce production costs, and both internal and external demand for rice is boosted as consumers substitute more expensive options such as meat and vegetables for the food staple

We also expect the service sector to post healthy growth We are expecting the trade sector to grow by 4.7% in 2009 after a 6.3% expansion in 2008 Similarly, we expect real growth in the transport and communications sector to slow from an estimated 14.0% in 2008 to 8.5% in 2009 The outperformer will

be the financial sector, where the rollout of the branch networks of foreign entrants ANZ, HSBC and Standard Chartered – and government measures to stimulate lending – will push growth higher

The bleak economic outlook is affecting domestic consumption, with many households reportedly cutting spending during the Tet lunar new year holidays in January 2009 Hikes in electricity and gas prices announced in Q109 will impair purchasing power further, offsetting the gains of lower food and fuel prices We are expecting private consumption to decrease by 4% in real terms in 2009 after an estimated 6.8% increase in 2008 The expected 8.0% increase in government consumption will pick up some of the slack, but this will be insufficient to spare Vietnam from its sharpest slowdown in growth since the 2.5% expansion recorded in 1987 at the dawn of the ‘Doi Moi’ economic reform era initiated in 1986

We see a risk economic reform will be put on the back burner in 2009, as the government focuses on stimulating domestic spending to cushion the effect of falling external demand The government agreed to

a VND17trn (US$1bn) stimulus package on January 15, focused on supporting small- and medium-sized companies through subsidised bank loans, corporate tax breaks and preferential trade tariffs in an effort to avoid a wave of bankruptcies in the sector Having said that, the launch of the Vietinbank IPO in

December 2008 is testament to a continued reform resolve within the Communist Party of Vietnam

Table: Vietnam – Economic Activity, 2006-2013

Nominal GDP,

VNDbn 1 974,266 1,144,015 1,478,695 1,711,601 1,899,604 2,136,870 2,394,841 2,689,382

Nominal GDP, US$bn 1 61.00 70.94 90.88 90.08 94.98 112.47 133.05 149.41 Real GDP growth, %

Transport Outlook

Table: Transport And Communications Data And Forecasts, 2005-2013

2005 2006e 2007e 2008e 2009f 2010f 2011f 2012f 2013f

GDP index, 1995=100 201.0 217.5 235.4 254.7 276.8 300.3 325.9 352.6 342.1 5-year average annual

Annual exports growth, % 22.5 22.4 22.1 20.0 18.0 22.0 20.0 20.0 12.0 Exports index, 1995=100 623.8 763.7 932.7 1,119.2 1,320.8 1,611.2 1,933.5 2,320.2 1,525.6 5-year average annual

Transport and

communications sector

Total transport sector

employment, ‘000 1,069 1,093 1,117 1,142 1,166 1,192 1,218 1,245 1,250

e/f = estimate/forecast Source: BMI

Since our last report we have broadly held our macroeconomic forecasts for Vietnam GDP growth in

2008 is now estimated at 6.2% and we are holding the outlook for 2009 to a slowed-down 2.9% Our forecast for 2009-2013 is for an annual average GDP growth rate of 6.1% per annum, a substantial

weakening on the 7.8% average rate achieved in the preceding five-year period We maintain some adjustments to mode-specific freight carried forecasts In road haulage, we have trimmed our forecast to

take account of the global downturn and lower freight demand We still see road-freight turnover running ahead of the general rate of economic expansion in Vietnam Air freight also faces a difficult two years

On the other hand, WTO membership has been as supportive of greater freight transport turnover relative

to GDP across all modes, but particularly so for shipping On the downside, Vietnam is expected to export less coal by sea as its domestic power needs rise The net result of this is that we expect freight carried growth across all modes, measured in mntkm, to average 6.8% a year in 2009-2013

According to our latest estimates, transport and communications GDP rose by 7.5% in 2008, 1.2

percentage points (pps) faster than overall GDP, which we estimate to have increased by 6.2% For the 2009-2013 forecast period, we expect the transport and communications sector to continue outpacing the economy as a whole It will achieve average annual growth of 7.3%, versus 6.1% for overall GDP The total value of transport and communications GDP will rise to US$6.6bn in nominal terms by 2013, representing 4.5% of Vietnam’s GDP

By modes, we project that air freight will be the fastest growing, rising by 7.6% per annum, followed by road haulage (7.5%), pipelines (7.0%), shipping (6.7%) and rail (6.6%)

Table: Freight Carried, Domestic, 2005-2013

Trade Environment

Although high tariffs, customs bureaucracy and legal inadequacies have provided significant trade

barriers, the opening up of Vietnam’s economy has been accompanied by concrete measures to meet the requirements of the WTO and other international trade organisations This means tariffs are falling in many sectors and the customs regime is being overhauled

Trade Agreements

Vietnam became a member of the WTO in 2007 It is also a member of the Association of South East Asian Nations (ASEAN) – with Brunei, Philippines, Indonesia, Laos, Myanmar, Malaysia, Singapore, Thailand and Cambodia – as well as the linked ASEAN Free Trade Area (AFTA)

A bilateral trade agreement with the US came into effect in December 2001 Vietnam is also in, or

preparing for, talks over free trade agreements (FTAs) with Japan, South Korea, Australia and New Zealand The country is also party to FTA negotiations being conducted by ASEAN, such as talks with the EU and China

Tariffs/Non-Tariff Barriers

Import tariffs are high, averaging around 18% in 2004 However, Vietnam is reducing tariffs to meet ASEAN and WTO goals, although some key sectors remain protected Vietnam has agreed to comply with ASEAN’s Common Effective Preferential Tariff (CEPT) scheme on manufactured goods within the ASEAN region, which calls for rates to be brought down to the 0-5% range

The legislation providing the framework for the trade regime is 1998’s Law to Amend the Import and Export Tariffs Law However, given the ASEAN and WTO requirements, the tariff structure is in a constant state of flux at present After a May 2005 meeting with Vietnamese officials, the WTO praised the country for speeding up the passage of legislation

At the WTO meeting, Vietnam unveiled its latest round of commitments and changes These are: a proposed revision of excise duties to end discrimination against imported motor vehicles; a similar proposal for excise duty on beer; the elimination of export subsidies that depend on export performance; a commitment to require supported products made in free zones to be subject to normal customs formalities when entering the rest of Vietnam; enquiry points on technical barriers and sanitary/phytosanitary

measures to trade to be set up; and the reduction of restrictions on trading rights to some sensitive

products such as oil, pharmaceuticals, sugar, tobacco, salt, fertilisers, rice and cultural products

Table: Value Of Imports By Category, 2005-2013 (US$mn)

2005 2006e 2007e 2008e 2009f 2010f 2011f 2012f 2013f

Mineral fuels, lubricants

and related materials 4,675 5,708 7,895 7,895 7,895 7,895 7,895 7,895 7,895

Animal and vegetable